Economic Value Added (EVA)
Economic value added, or EVA(R) is a proprietary residual income model developed by Stern Stewart & Company. Like other residual income models, it charges a capital cost to accounting income measures. However, there are several adjustments made to the accounting figures to have them conform more closely to economic cash flows. Some of the major adjustments include:
- Capitalizing and amortizing research and development rather than expensing it immediately.
- Deferring capital charges on strategic investments not expected to have an immediate accounting payoff.
- Ignoring deferred taxes until paid.
- Adjusting capital and earnings for LIFO inventory accounting.
- Operating leases are treated as capital leases.
- Adjustments are made to non-recurring items.
Similar adjustments can be made to generic residual income models, but the outcome of the model will differ based on which adjustments the investor chooses to make.
For more information, see all articles on: Financial Statement Analysis, Investing in Stocks, Investment Returns, Valuation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
