Economic value added

Economic value added (EVA) is like a report card for a company's profits. It helps us figure out if a company is doing better or worse than other companies, and if it is actually making money or not.

Imagine you had a lemonade stand, and you had to pay for all the things you need to run the stand, like the lemons and sugar, the cups and the stand itself. And then you also had to pay yourself for your time and effort. Whatever money you have left over after paying for all these things is your profit. But did you make enough money to cover all the costs and effort? That's what EVA helps us find out.

In the same way, bigger companies also have expenses, like salaries, rent, and electricity bills. EVA helps show if the company is earning more money than it spends, and if it is efficient in using its resources to create more profits.

To calculate EVA, we use a formula that looks at how much money a company generates compared to all its expenses, including the cost of the money it borrowed. If the result is positive, it means the company is generating more profits than the cost of its expenses, which is a good thing.

So, if the lemonade stand example made more money than it spent, it would have a positive EVA. That means the lemonade stand is doing well and will be able to keep running for a long time. And the same goes for big companies too!