EVA: EVA is Economic Value Added, a measure of economic profit.

It is calculated as the difference between the Net Operating Profit After Tax and the opportunity cost of invested Capital. This opportunity cost is determined by the weighted average cost of Debt and Equity Capital (WACC) and the amount of Capital employed. Economic Value Added or EVA is an estimate of economic profit, which can be determined, by making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. The concept of EVA is in a sense nothing more than the traditional, "profit," however, the utility of having a separate and more precisely defined term such as EVA or Residual Cash Flow is that it makes a clear separation from dubious accounting adjustments that have enabled businesses such as Enron to report profits while in fact being in the final approach to becoming insolvent. EVA can be measured as Net Operating Profit After Taxes (or NOPAT) less the money cost of capital. The EVA is a registered trademark by its developer, Stern Stewart & Co. Economic Value Added is a way to determine the value created, above the required return, for the shareholders of a company. The basic formula is: EVA = (r-c).K = NOPAT - c.K Where r = NOPAT/K, called the Return on Invested capital is the firm's return on capital, NOPAT is the Net Operating Profit After Tax, c is the Weighted Average Cost of Capital (WACC) and K is capital employed. To put it simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. What separates EVA from other performance metrics such as EPS, EBITDA, and ROIC is that it measures all of the costs of running a businessoperating and financing. This makes EVA the soundest performance metric, and the one most closely aligned with the creation of shareholder value. Given the usefulness of the measure, many companies have adopted it as part of a comprehensive management and incentive system that drives their decision processes. They strive to increase their EVA by:

Increasing the NOPAT generated by existing Capital Reducing the WACC Investing in new projects where the Return on Capital exceeds the WACC Divesting Capital where the Return on Capital is below the WACC

In addition to EVA performance measurement, Stern Stewart & Co. has developed several other proprietary concepts related to dissecting the components and drivers of valuation:

MVA (Market Value Added) measures the difference between the market value of the firm (Debt and Equity) and the amount of Capital invested. Equivalently, MVA equals the present value of future expected EVA. Firms that trade at premiums to invested Capital have positive MVA, while those trading below invested Capital have negative MVA. Stern Stewart & Co. has compiled MVA Rankings to tally wealth creation across the universe of publicly traded firms. FGV (Future Growth Value) measures the portion of market value attributed to EVA growth. FGV can be driven by market expectations of productivity improvements, organic growth, and value-creating acquisitions. Companies can calibrate their incentive plan to performance targets tied to the annual EVA growth implied by FGV. Furthermore, the FGV component can be a useful tool in benchmarking against the growth plan of competitors and evaluating investors assessment of the wealth creation potential of new strategies and opportunities. COV (Current Operations Value) measures the portion of market value attributed to the existing level of profitability and assets at the firm. It equals the present value of current EVA in perpetuity, plus Capital in place. Alternatively, it can be calculated as NOPAT divided by the WACC. The market value split between COV and FGV is often homogenous within sectors. For example, the COV portion of Market Value tends to be very high in mature markets such as food processing and tobacco, and relatively low in growth markets such as technology.

EPS:Earnings Per Share: Basic vs. Diluted Earnings per Share When you analyze a company, you have to do it on two levels, the whole company and the per share. If you decide ABC, Inc. is worth $5 billion as a whole, you should be able to break it down by simply dividing the $5 billion price tag by the number of shares outstanding. Unfortunately, it isnt always that simple. Think of each business you analyze as a cherry pie and each share of stock as a piece of that pie. All of the companys assets, liabilities, and profits are represented by the pie as a whole. ABCs pie is worth $5 billion. If the baker (management) slices the pie into 5 pieces, each piece would be worth $1 billion ($5 billion pie divided into 5 pieces = $1 billion per slice). Obviously, any intelligent connoisseur of pastries would want to keep the baker from making too many slices so his or her piece was as big as possible. Likewise, an ambitious investor hungry for returns is going to want to keep the company from increasing the number of shares outstanding. Every new share management issues decreases the investors piece of the assets and profits a tiny bit. Over time, this can make a huge difference in how much the investor gets to eat (in this case, take out in the form of cash dividends).

How can management increase the number of shares outstanding? you ask. There are four big knives (perhaps cleavers would be a more appropriate term) in any managements drawer that can be used to increase the number of shares outstanding: stock options, warrants convertible preferred stock, and secondary equity offerings All four of these sound more complicated than they are. Stock options are a form of compensation that management often gives to executives, managers, and in some cases, regular employees. These options give the holder the right to buy a certain number of shares by a specific date at a specific price. If the shares are exercised the company issues new stock. Likewise, the other three cleavers have the same potential result the possibility of increasing the number of shares outstanding. This situation leaves Wall Street with the problem of how much to report for the earnings per share figure. In response, the accountants created two sets of EPS numbers: Basic EPS and Diluted EPS. The basic EPS figure is the total earnings per share based on the number of shares outstanding at the time. The diluted EPS figure reveals the earnings per-share a business would have generated if all stock options, warrants, convertibles, and other potential sources of dilution that were currently exercisable were invoked and the additional shares printed resulting in an increase in the total shares outstanding. The percentage of a company that is represented by these possible share dilutions is called hang. Although ABC may have 5 shares outstanding today, it may actually have the potential for 15 shares outstanding during the next year. Valuation on a per-share basis should reflect the potential dilution to each share. Although it is unlikely all of the potential shares will be issued (the stock market may fall, meaning a lot of executives wont exercise the stock options, for example), it is important that you value the business assuming all possible dilution that can take place will take place. This practiced conservatism can mean the difference between mediocre and spectacular returns on your investment. At the bottom of the page is an excerpt from Intels 2001 income statement. In 2000, the difference between Intels basic and diluted EPS amounted to around $0.06. If you consider the company has over 6.5 billion shares outstanding, you realize that dilution is taking more than $390 million in value from current investors and giving it to management and employees. That is a huge amount of money.