ROI? ECONOMIC VALUE ADDED (EVA): Economic Value Added (EVA) term was formed & Introduce by a New York Consulting firm, Stern Steward & Co in 1982 to boost the value-maximizing behavior in corporate managers. Economic Value Added (EVA) term has been used in the book named The Quest for Value which was published in 1991. Basically EVA is a value-based measure that was designed to evaluate the business strategies, capital projects and to increase the long-term shareholders wealth. 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, and it attempts to capture the true economic profit of a company. The ECONOMIC VALUE ADDED (EVA) formula is: EVA=Net profit- Capital charge Where, Capital charge = Cost of capital * Capital employed
Return on investment (ROI):
Return on investment (ROI) measures the gain or loss generated on an investment relative to the amount of money invested. ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company's profitability or to compare the efficiency of different investments. The return on investment formula is: ROI = (Net Profit / Cost of Investment) x 100 For example, an investor buys $1,000 worth of stocks and sells the shares two years later for $1,200. The net profit from the investment would be $200 and the ROI would be calculated as follows: ROI = (200 / 1,000) x 100 = 20%
Difference between ROI and EVA:
Subject EVA ROI Meaning EVA is the residual profit after ROI is the comparison of the taking into account the capital income generated with the charge. assets employed. Measure EVA is an absolute measure. ROI is a relative measure. Measuring Tool EVA is performance measuring ROI is an accounting tool. measuring tool. Thought EVA is an advanced thought. ROI is in accordance with tradition. Way to express result EVA is in currency. ROI is described in term of percentage. Superiority Conceptually EVA is superior Conceptually EVA is superior than ROI than ROI Cost of capital Profit used for Calculation Profit before interest and tax is Profit after interest and tax is used. used. Formula for Calculation EVA = Net Operating Profit After ROI = Earnings Before Interest Tax (Operating Assets* Cost of and Tax (EBIT) / Capital Capital) Employed