Economic Value Added (EVA) and Market Value Added (MVA): measuring performance through economic profit and shareholder wealth
- Graziano Stefanelli
- Aug 20
- 3 min read
Measuring financial performance goes beyond traditional accounting profit. Investors and executives increasingly focus on metrics that capture whether a company is truly generating value above its cost of capital. Economic Value Added (EVA) and Market Value Added (MVA) are two complementary measures that assess this dimension. EVA evaluates value creation at the operating level, while MVA captures the market’s long-term assessment of whether a company has increased shareholder wealth. Together, they provide a powerful framework for analyzing corporate performance and guiding capital allocation decisions.
Economic Value Added measures profit after accounting for the cost of capital.
EVA represents a company’s net operating profit after taxes (NOPAT) minus the cost of capital employed. It reflects whether the firm is earning returns greater than what investors—both equity holders and debt providers—require as compensation for risk.
The formula is:
EVA = NOPAT – (Invested Capital × WACC)
Where:
NOPAT = Net Operating Profit After Taxes
Invested Capital = Equity + Debt invested in operations
WACC = Weighted Average Cost of Capital
If EVA is positive, the company is creating value; if negative, it is eroding shareholder wealth.
This measure corrects the limitation of accounting profit, which does not consider the opportunity cost of invested funds.
Market Value Added reflects cumulative shareholder wealth creation.
MVA measures the difference between the market value of a company’s equity and debt and the capital contributed by investors. It captures the total net wealth created (or destroyed) for shareholders since the company’s inception.
The formula is:
MVA = Market Value of Debt + Market Value of Equity – Total Capital Invested
If MVA is positive, the market believes management has generated wealth above the invested funds. If negative, the market perceives that value has been destroyed.
For example:
Market value of equity = $800 million
Market value of debt = $200 million
Total capital invested = $850 million
MVA = $1,000 million – $850 million = $150 million (wealth created for shareholders).
Unlike EVA, which is a period-specific metric, MVA is cumulative, reflecting the long-term track record of value creation.
EVA and MVA provide different but complementary insights.
While EVA focuses on operating efficiency and whether annual profits exceed the cost of capital, MVA reflects market perceptions of management’s success in creating sustainable value.
Both metrics are often used together: consistent positive EVA tends to result in positive MVA over time, as markets reward firms that regularly generate economic profit.
Practical applications of EVA in corporate decision-making.
EVA is widely applied as a performance measurement tool in areas such as:
Capital budgeting: Projects with expected positive EVA increase firm value.
Incentive compensation: Linking executive bonuses to EVA aligns management with shareholders.
Resource allocation: Business units delivering positive EVA receive more capital.
By embedding EVA into decision-making, companies ensure that managerial actions focus on genuine value creation rather than accounting earnings.
Challenges in calculating EVA and interpreting MVA.
While conceptually powerful, both measures involve challenges. EVA requires careful adjustments to accounting figures, such as capitalizing R&D or adjusting depreciation policies, to reflect true economic reality. MVA, being market-driven, can fluctuate significantly with investor sentiment, interest rates, or macroeconomic shocks—sometimes independently of operating performance.
Treatment under US GAAP and IFRS.
Neither US GAAP nor IFRS formally recognizes EVA or MVA as reporting metrics, since they are non-GAAP measures. However, companies often present EVA-like figures in management discussion sections to demonstrate economic value creation. Under both frameworks, market capitalization is disclosed separately, which facilitates MVA calculation by analysts and investors.
EVA and MVA highlight the true measure of value creation.
Accounting profit alone does not indicate whether a firm is delivering value in excess of its cost of funds. By focusing on EVA, managers evaluate whether operations generate sufficient returns, while MVA reflects the market’s cumulative assessment of value creation. Together, they encourage disciplined capital allocation, accountability, and alignment of management actions with long-term shareholder wealth.
____________
FOLLOW US FOR MORE.
DATA STUDIOS
