Investor's Guide to EVA
Many investment analysts have fallen into the trap of judging share prices with an ―accounting model of value, that is, by analyzing and capitalizing reported earnings and earnings-per-share, and variants like ROE and EBITDA. Yet profit measured according to generally accepted accounting rules is almost always a highly unreliable indicator of a firm’s real value.
The solution is as revolutionary as it is necessary. The Wall Street community, along with the financial media and corporate bosses, would be far better served by a fundamentally new valuation paradigm, one that is based on reporting, analyzing, projecting, valuing and discounting a firm’s underlying economic profit rather than its bookkeeping profit. Unlike accounting profit, economic profit -- which we call EVA®, standing for "economic value added" -- deducts the "cost" of giving shareholders a minimum acceptable return on their equity investment in the firm.