Explain the Economic Value Added (EVA) and how it is helpful in calculating the true economic profit of an enterprise ?

Economic Value Added (EVA) is promoted by a consulting firm Stern Steward & Co., which was established in 1982 and pioneered the EVA concept in 1989. EVA is a performance measure that captures the true economic profit of an enterprise. EVA is used by over 300 successful companies. EVA is a value based financial performance measure. It is an investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. It is computed as the product of the "excess return" made on an investment or investments and the capital invested in that investment or investments. "Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise or project. It is an estimate of true economic profit, or amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk (Stewart, 1990)." EVA is net operating profit after tax less capital charge. Or, EVA = NOPAT- (Invested Capital × WACC) Where NOPAT is Net Operating profit after taxes WACC is Weighted average cost of capital Components of EVA The equation for EVA shows that there are three key components to a company's EVA: i.e. NOPAT, Capital invested, and the WACC: NOPAT can be calculated manually but is normally listed in a public company's financials. Invested Capital is the amount of money used to fund a specific project. WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction of each financial source in a company's capital structure. WACC can also be calculated but is normally provided as public record. An equation for invested capital often used to calculate EVA is = Total Assets - Current Liabilities, two figures easily found on a firm's balance sheet. In this case, the formula for EVA is: NOPAT - (Total Assets - Current Liabilities) * WACC. The cost of capital is a weighted average that reflects the cost of both debt and equity capital. Thus, EVA measures the excess of a firm's operating income over the cost of the capital employed in generating those earnings. It relates operating income to capital employed in an additive operation. This is in contrast to return on assets (ROA = operating income / capital), which compares operating income to capital employed in a multiplicative operation. EVA assesses the performance of a company and its management through the idea that a business is only profitable when it creates wealth and returns for shareholders, thus requiring performance above a company's cost of capital. EVA as a performance indicator is very useful. The calculation shows how and where a company created wealth, through the inclusion of balance sheet items. This forces managers to be aware of assets and expenses when making managerial decisions. However, the EVA calculation relies heavily on the amount of invested capital, and is best used for asset-rich companies that are stable or mature. Companies with intangible assets, such as technology businesses, may not be good for an EVA evaluation.