EVA-Valuation

The purpose of EVA-Valuation is to measure the total value added of a company´s operations, i.e. the net cash generated in excess of claimholders´ return requirements.

This document describes EVA valuation in detail and in our valuation model. If your would like to get an overview of EVA valuation in general or practical examples (numerical and graphical) about it, then you should look at our EVA valuation tutorial.

The computation of EVA is closely related to DCF. Hence, it starts with EBIT and ends with the fair value of the share. The share price potential (which the investors are interested in) is computed by comparing the fair value with the current market price of the share.

The basic formulation of EVA valuation is as follows:

• EVA is computed so that the "fair rate of return to invested capital", i.e. WACC times the invested capital, is subtracted from the Net Operating Profit Less Added Tax (NOPLAT).
• Cumulative discounted EVA is a yearly item in which all the forecast years´ discounted EVAs are summed up. Hence, the first item (current year) is the sum of all forecast years´ EVAs at present value terms.
• Value of equity EVA is divided by the number of shares outstanding to get the fair value of the company´s share.

More detailed formulation of Discounted EVA-valuation is as follows:

• Other items include associated companies´ profit/loss (after tax), taxes on goodwill amortization, minorities, extraordinary items and other income statement adjustments.
• Cost of capital means the "fair rate of return to invested capital", which goes to all claimholders. It is computed by multiplying Capital invested with WACC. Capital invested is computed as follows:

• For all forecast years except terminal year: Total equity + Interest bearing liabilities + Convertibles - Total interest bearing financial assets.
• For terminal year: (NOPLAT - Gross capital expenditure - Change in working capital + Increase in non-interest bearing liabilities - Total depreciation) / (Net sales growth * NOPLAT).

• Present value of future EVAs means the terminal value of all EVAs, i.e. the approximation of EVAs beyond the forecast horizon. It is computed as follows:
  • Last forecast year´s EVA / (WACC - Net sales growth rate).
• Present value of capital base change means the discounted capital change in invested capital after the last forecasted year:
  • Capital base change = Capital invested (terminal year) - Capital invested (last forecasted year)
  • Present value of capital base change = Discount factor (last forecasted year) x Capital base change
• Prolonged capital invested is the capital invested (according to the beginning balance sheet) that is prolonged to today. If as a discount factor were used time at the end of the year (and thus discount factor would always be integer), prolonging would not be necessary here.
• Three items after Prolonged capital invested are added so that DCF- and EVA-valuation would give same result. (In DCF-valuation these items are added so that the calculation gives the value of equity, not value of firm.)

All items except for EBIT and Taxes on EBIT the model calculates automatically. Thus, you can freely change EBIT and Taxes on EBIT (and naturally all the subitems which are blue).