What do you understand by Economic Value Added ? Explain the corrective action to improve Economic Value Added.

Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. EVA is the incremental difference in the rate of return over a company's cost of capital. Essentially, it is used to measure the value a company generates from funds invested into it. If a company's EVA is negative, it means the company is not generating value from the funds invested into the business. Conversely, a positive EVA shows a company is producing value from the funds invested in it. EVA= Net Operating Profit after Taxes – (Equity Capital x % Cost of Equity Capital) Corrective action to improve EVA Operating performance with respect to operating profit margins or asset turnover ratios could be improved to generate more revenue without using more capital. The capital invested in the business might be reduced by selling under-utilized assets; this strategy will simultaneously improve operating performance through a higher asset turnover ratio, as well as a reduced capital charge against those earnings because of a reduced debt or equity debt investment. Redeploy the capital invested to projects and activities that have higher operating performance than the current projects or investments are exhibiting. If the business is not highly leveraged, change the capital structure by substituting lower cost debt for higher cost equity. Although this is the last strategy will decrease net income because of the higher interest cost, it will improve the EVA of the business because the total cost of debt and equity is reduced, and EVA measures the value created after all costs of capital (debt and equity) have been taken into account.