EVA and Keppel Corp

Quiet - my 4.30pm picnic lunch on Friday last

What is EVA?
Economic value-added (EVA) is after-tax operating profit minus the dollar cost of capital employed. It is measured in dollar figures, and not a percentage rate of return.

EVA = after-tax operating profit - [weighted average cost of capital X total capital employed]

EVA is positive as long as the residual income is positive. EVA is used to avoid situation where an investment that is profitable for the Group is given a miss by the responsible division, whose performance is measured on ROI.

Keppel Corporation is a key user of EVA. I quote the paragraph from their latest financial report.

"We have been reporting positive EVA since 2004, achieving a record $604 million in 2007.

This positive EVA was due mainly to the improvement in Net Operating Profit After Tax (NOPAT), an efficient capital structure, stringent investment criteria and strong cashflow.

The improvement in EVA by $181 million was attributed largely to higher NOPAT partially offset by higher Capital Charge. NOPAT increased by $216 million due to an increase in after-tax profit of $172 million. Capital Charge increased by $35 million due to a higher Weighted Average Cost of Capital (WACC) partially offset by lower EVA Capital. WACC increased from 6.5% to 6.99% attributed largely to a higher unlevered beta. Average EVA Capital decreased by $132 million from $9.08 billion to $8.95 billion.

In all, total EVA growth was $405 million over the last two years."