Question

How is EVA different from net income? Why do analysts pay attention to EVA, what specific additional information does EVA provide compared to net income?

Answer 1

EVA is different from Net income in the sense that it helps understand the returns to a company in excess of it's cost of capital.

EVA = NOPAT - ( CURRENT ASSETS - CURENT LIABILITIES)*WACC

IT helps managers understand both in terms of assets and liabilities and revenue and expenses when taking decisions on the behalf of managers. EVA calculated the profit after cost of capital both debt and equity is deducted form operating profit. True profit should account for the cost of capital.

Companies with high EVA should outperform other form with negative EVA's. EVA is a critical driver of a company's stock performance. If EVA is positive but is expected to become less positive, it is not giving a very good signal. EVA captures the hidden cost that goes to investors as compensation for forfeiting the use of their cash .