It stands for economic value added; a measure of the amount profit remaining after adjusting for the return expected by an entity’s investors. It is equal to the positive difference between total revenue generated by a business and its explicit costs and implicit costs. In other words, it is the positive difference between accounting profit and implicit costs (economic costs):

EVA = total revenue – (explicit costs + implicit costs)

EVA = accounting profit – implicit costs, where: accounting profit > implicit costs

The total costs subtracted from accounting profit to reach at EVA provide compensation to the business for risk-taking and the opportunity cost of capital. EVA is determined by economic principles and factors, taking into consideration the overall timeline view of the business/ project. In this sense, it is used to determine the proper time for market entry, exit, or stay (as opposed to accounting profit that is calculated based on accounting principles, taking into account a single accounting period, and with an overarching objective: determination of financial performance and income tax calculation).

EVA is considered an estimate of real economic profit, i.e., the amount by which earnings exceed or drop below the required minimum rate of return that can be obtained by investors somewhere else at the same level of risk:

EVA = EBIT (1-TR) – (IC x RR)

Where:

EBIT is earnings before interest and taxes, TR is tax rate (the effective or average income tax rate), IC is invested capital, and RR is required rate of return (also known as WACC).

This economic measure is also known as an economic profit.