How do you know if a business is truly creating value? In 2025, more Australian companies and investors are turning to Economic Value Added (EVA) to answer that question. EVA moves beyond traditional profit metrics, helping leaders see whether their ventures are genuinely outperforming their cost of capital. Let’s break down why EVA matters now more than ever—and how it’s influencing Australian boardrooms and portfolios.
What Is Economic Value Added (EVA)?
EVA is a financial performance metric that calculates the value a company generates from its invested capital after subtracting the cost of that capital. Put simply, EVA tells you if a business is earning more than it costs to fund its operations. The formula is:
- EVA = Net Operating Profit After Tax (NOPAT) – (Capital Invested × Cost of Capital)
This approach pushes companies to focus on value creation, not just accounting profits. If EVA is positive, the business is generating value for shareholders. If it’s negative, it’s destroying it—even if headline profits look healthy.
Why Is EVA Gaining Momentum in Australia in 2025?
The Australian business landscape is evolving rapidly. With rising interest rates, increased investor scrutiny, and a renewed focus on sustainable growth, companies are under pressure to prove their worth. EVA is gaining traction for several reasons:
- Alignment with Shareholder Interests: EVA forces executives to consider the real cost of capital, ensuring decisions benefit shareholders in the long term.
- Regulatory Push: In 2025, the ASX and ASIC have signaled stronger expectations around transparent performance reporting, making EVA a favored tool for demonstrating value creation.
- Investor Demand: Superannuation funds and institutional investors are increasingly using EVA in their analysis to screen companies for true value generation, not just surface-level profitability.
For example, several leading ASX-listed firms, including major banks and resource companies, have begun highlighting EVA in their annual reports—sometimes linking executive bonuses directly to EVA improvement targets.
How to Calculate EVA: A Practical Example
Let’s consider a mid-sized Australian manufacturer in 2025:
- Net Operating Profit After Tax (NOPAT): $20 million
- Total Capital Invested: $150 million
- Weighted Average Cost of Capital (WACC): 9%
EVA = $20 million – ($150 million × 9%) = $20 million – $13.5 million = $6.5 million
This positive EVA means the company generated $6.5 million in true economic profit after covering the costs of its borrowed and equity capital. If the EVA had been negative, it would signal the need for a strategic rethink—despite any accounting profits shown on the books.
Benefits and Challenges of Using EVA
- Benefits:
- Clearer picture of value creation
- Better capital allocation decisions
- Encourages long-term thinking over short-term gain
- Facilitates performance-based executive compensation
- Challenges:
- Requires accurate calculation of WACC, which can fluctuate in volatile markets
- May need cultural change within organisations accustomed to traditional accounting metrics
- Complex adjustments to NOPAT and capital for non-cash items or one-off events
Despite these challenges, Australian companies adopting EVA are finding it a robust framework for decision-making and transparent communication with investors.
EVA in the 2025 Financial Policy Landscape
Recent 2025 policy updates have further boosted the prominence of EVA in Australia:
- ASIC’s Enhanced Disclosure Guidelines: Companies must now provide more detail on how they measure and report value creation, with EVA highlighted as a best practice example.
- Superannuation Performance Benchmarks: APRA’s updated performance test encourages super funds to assess underlying portfolio companies using EVA or similar metrics to ensure members’ money is working efficiently.
- ESG Integration: Increasingly, investors are combining EVA with environmental and social performance indicators to evaluate sustainable value creation.
These shifts are pushing companies to not just talk about value—but prove it quantitatively.
Conclusion: Is EVA Right for Your Business or Portfolio?
In 2025, Economic Value Added is more than a buzzword—it’s a powerful lens for seeing beyond the accounting fog. Whether you’re a business leader, investor, or adviser, understanding and applying EVA can reveal the real story behind the numbers. As the Australian financial landscape continues to evolve, those who embrace EVA will be better equipped to make smarter, value-driven decisions.
