CS Executive EVA (Economic Value Added) | FM June/Dec 2026

CS Executive EVA: In the CS Executive Financial Management (FM) syllabus, Economic Value Added (EVA) is a recurring topic for the ICSI. Whether you are appearing for the June or December 2026 attempt, you can expect a practical question or a critical theory note on this concept almost every alternate exam.

Economic Value Added (EVA) is a key financial metric measuring a company's value creation by deducting its cost of capital from net operating profit after tax (NOPAT). A positive EVA indicates value generation, while a negative EVA signifies value destruction. It helps assess financial performance and aligns management's focus with shareholder wealth.

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What is Economic Value Added (EVA)?

Economic Value Added (EVA) is a crucial performance metric frequently tested in examinations. It measures a company's financial performance based on the residual wealth generated, calculated by deducting its cost of capital from its operating profit. EVA helps evaluate if a company is truly creating wealth for its shareholders.

What is the Formula for Economic Value Added (EVA)?

The core formula for calculating EVA is: EVA = NOPAT - (WACC × Capital Invested)

To determine EVA, three essential components are needed:

1. NOPAT: Net Operating Profit After Tax

2. WACC: Weighted Average Cost of Capital

3. Capital Invested: The total capital deployed by the company.

Conceptually, the EVA formula can be simplified to: EVA = Return - Cost

This emphasizes that EVA quantifies the value generated after accounting for the complete cost associated with the capital used to achieve that return.

What are Components of the EVA Formula?

Here are the components of the EVA formula:

1. Capital Invested

Capital Invested represents the total amount of money a company has invested in its operations. This capital is typically sourced from equity, debt, or a combination of both.

2. WACC (Weighted Average Cost of Capital)

Capital is never free; it always incurs a cost. This cost is encapsulated by the WACC.

• For debt capital, the cost is the interest payments.

• For equity capital, the cost is the dividends or expected returns by shareholders.

WACC, or Weighted Average Cost of Capital, is the blended average cost of all the capital (both debt and equity) a company has raised. While its detailed calculation is covered in "Cost of Capital," for EVA, it is vital to understand that WACC signifies the percentage cost incurred on the capital invested.

Example:

• If Capital Invested = ₹100 Crore

• And WACC = 15%

• Then, the total Cost of Capital = ₹100 Crore × 15% = ₹15 Crore.

3. NOPAT (Net Operating Profit After Tax)

NOPAT stands for Net Operating Profit After Tax. It represents a company's operating profit remaining after taxes have been deducted. It is commonly derived from EBIT (Earnings Before Interest and Tax).

• EBIT signifies the company's profit before deducting interest expenses and tax payments.

• Since NOPAT must be after tax, the calculation is:

NOPAT = EBIT - Tax

or

NOPAT = EBIT × (1 - Tax Rate)

In some exam questions, NOPAT may be provided directly, simplifying the calculation. If not provided, it must be calculated from EBIT by subtracting the applicable taxes (Memory Tip: If NOPAT is given, use it directly. If EBIT is given, remember to calculate tax first by multiplying EBIT with the tax rate, then subtract it or multiply EBIT by (1 - Tax Rate) to get NOPAT.).

Example:

• If EBIT = ₹10 Crore

• And the Tax Rate = 10%

• Then, NOPAT = ₹10 Crore - (10% of ₹10 Crore) = ₹9 Crore.

4 M’s of EVA

This is an important theoretical framework in CS exams. It explains how a company implements EVA:

1. Measurement: Creating the most accurate financial tool for success.

2. Management: Using EVA to make better daily business decisions.

3. Motivation: Linking manager bonuses/incentives to EVA growth.

4. Mindset: Changing the corporate culture to act like "owners," not just employees

Interpreting EVA

EVA measures the surplus value a company creates.

• A positive EVA indicates that the company is generating returns that surpass its cost of capital, thus creating value for shareholders.

• A negative EVA suggests that the company is not even covering its cost of capital, thereby destroying value.

Using the previous examples:

• Return (NOPAT) = ₹9 Crore

• Cost (WACC x Capital Invested) = ₹15 Crore

• EVA = ₹9 Crore - ₹15 Crore = -₹6 Crore

This negative EVA of ₹6 crore indicates that the company has diminished its value.

Advantages and Disadvantages of EVA

Using EVA as a performance metric offers both benefits and drawbacks.