Economic Value Added � : A critical analysis

Abstract

This article discusses economic value added (EVA), a financial measure introduced by the consulting firm Stern Stewart & Company., which claims that EVA is the only true indicator of business and management performance. The article briefly explains how EVA is calculated and demonstrates that EVA is identical to residual income, an older financial measure largely abandoned by U.S. companies years ago. Yet EVA is by no means the panacea that some authors have suggested. This is demonstrated by showing inconsisten-cies in definitions of EVA and various general limitations of using EVA. Companies that use EVA should understand the inconsistencies involved, then take the limitations of EVA explicitly into account. © 2001 John Wiley & Sons, Inc.