Economic value added

Understanding Economic Value Added

Economic value added, or EVA, is a measure of a company's financial performance that reflects the real profit exceeded beyond its required return of shareholders. EVA is calculated by subtracting the cost of capital from the company's net operating profit after tax (NOPAT). This concept helps investors determine how much value is being created or destroyed within a company, guiding better investment decisions.

Why Economic Value Added Matters in Financial Factoring

In the context of financial factoring, understanding the concept of EVA is crucial. Factoring allows businesses to sell their receivables to a third party, called a factor, to improve cash flow. The factor then takes on the responsibility of collecting the receivables. With improved cash flow, a company can reinvest in its operations, potentially increasing its EVA by generating returns greater than its cost of capital.

Calculating Economic Value Added

To calculate EVA, you need to know the operating profits and the capital used in the business. The formula is as follows:

EVA = Net Operating Profit After Taxes (NOPAT) - (Capital Invested x Weighted Average Cost of Capital (WACC))

Where NOPAT is the company profits before interest and after taxes, and WACC represents the average rate of return a company is expected to pay its security holders to finance its assets.

Importance for Investors

For investors and lenders involved in financial factoring, EVA serves as an indicator of a company's financial health and its ability to create wealth. If a business shows a positive EVA, it implies that it is generating returns above the cost of its capital, a sign of effective use of resources and a potentially attractive option for factoring arrangements.

Benefits of High Economic Value Added

A high EVA indicates that a business is efficiently generating profits, which is especially important in financial factoring. It means that the business is likely to continue operating successfully and be able to repay the factor. Additionally, it can afford better negotiation terms with factors, potentially leading to more favorable factoring agreements.

Conclusion: Economic Value Added and Financial Factoring

So, EVA is more than just a number. In the realm of financial factoring, it represents a business's ability to produce wealth and ensure steady cash flow. Businesses seeking factoring services should aim to increase their EVA to indicate strong profitability and reliability to factors.