Economic Value Added is a concept pioneered 20 years ago by United States-based consultants Stern Stewart to provide a consistent framework for measuring company success in generating shareholder wealth.
According to partner Bennett Stewart, the aim is to capture the true economic profit of an enterprise, taking into account all its
costs, including capital.
"Under conventional accounting," he explains, "most companies appear profitable but many, in fact, are not. The aim of Eva is to correct this situation by recognising that when managers employ capital they must pay for it, just as if it were a wage."
Management guru Peter Drucker underlined the point in a recent article in the Harvard Business Review.
"Until a business returns a profit that is greater than its cost of capital, it operates at a loss," he wrote. "Never mind that it pays taxes as if it had a genuine profit. The enterprise still returns less to the economy than it devours in resources ... Until then it does not create wealth, it destroys it."
