Investment Valuation in India

Economic value Added INTRODUCTION Economic Value Added™ is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise. EVA also is the performance measure most directly linked to the creation of shareholder wealth over time. EVA = Net operating Profit After tax – (Capital Employed x Cost of Capital) Net Operating Profit After Tax (NOPAT): A company's potential cash earnings if its capitalization were unleveraged (that is, if it had no debt). NOPAT is frequently used in economic value added (EVA) calculations. Calculated as: NOPAT = Operating Income x (1 - Tax Rate) Put most simply, EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA is an estimate of true "economic" profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other s...

Economic Value Added (EVA) is another sophisticated modification of cash flow that looks at the cost of capital and the incremental return above that cost as a way of separating businesses that truly generate cash from ones that just eat it up. EVA is the financial performance measure that captures the true economic profit of an enterprise. It is also directly linked to the creation of shareholders wealth over time. Economic profit is NOPAT minus a capital charge, which represents a sort of rental fee charged to the company for its use of capital. In other words, economic profit is the profits (or returns) our company must generate in order to satisfy the lenders and shareholders who have "rented" capital to the company. Keep in mind that economic profit is a period metric, like earnings or cash flow. EVA = Net Operating Profit After Tax – (Capital Employed x Cost of Capital) Net Operating Profit After Tax (NOPAT) is calculated as follows: Net profit available to Equity S...