What is the meaning of EVA / Residual Income?

 EVA/ Residual Income-

• Creating value for shareholders is now widely accepted as the dominant corporate objective.
• Fortune magazine called it “Today’s hottest financial idea and getting hotter”
• Management Guru Peter Druker called it “It is a measure of total factor productivity.”
• EVA is essential the surplus left after making an appropriate charge for the capital employed in the business.
• Formula-

1. EVA= NOPAT – (k_o x capital employed)
2. EVA= PAT – ke. Equity

• EVA= Capital (r – k_o)

Where,

EVA= Economic Value Added

ko= cost of capital [weighted average cost of capital]

r= return on capital

NOPAT= net operating profit after tax

PAT= profit after tax

• Steps for Implementing EVA

Develop top management commitment

Customize the definition of EVA

Identify EVA centers

Analyze the drivers of EVA

Tailor an Incentives compensation system

Train all the employees