Economic Value Added (EVA): A Simple Guide to Measuring Real Business Profit
If you’ve ever wondered how to know if your business is really profitable, EVA—Economic Value Added—is one of the simplest tools to measure true value creation.
When you run a business, you’ve got to make enough money to cover your bills and make your investors happy.
That’s where economic profit comes in—it’s a way to measure if your business is truly creating value.
Two Kinds of Costs
Understanding these costs is essential for anyone searching for ways to grow their business or improve overall business performance.
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Operating costs:
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These are the obvious expenses you pay to keep things running, like rent, wages, software subscriptions (like Zoom or Shopify), and supplies. These are (mostly) real cash payments that come out of your bank account.
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Cost of capital:
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This is what you owe the people who gave you money to start or grow your business, like banks charging interest on loans or shareholders expecting a return on their investment. Think of it as the “rent” you pay for using their money. This cost is often called a capital charge, and it’s calculated based on how much your investors expect to earn (say, 10% a year on their investment).
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Two Ways to Measure Profit
These costs lead to two different ways to look at profit:
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Accounting profit:
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This is the money your business makes (revenue) minus your operating costs. If your coffee shop brings in $100,000 and you spend $60,000 on rent, coffee beans, and barista wages, your accounting profit is $40,000. But accounting profit alone doesn’t tell you whether the business is creating value for owners or investors. That’s where economic profit comes in.
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Economic profit (aka Economic Value Added):
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This takes your accounting profit and subtracts the capital charge—the return your investors expect. If your investors put in $200,000 and expect a 10% return ($20,000), your economic profit is $40,000 (accounting profit) minus $20,000 (capital charge) = $20,000. If you can’t cover that $20,000, your economic profit is negative, meaning you’re not earning enough to justify their investment.
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Why Does This Matter?
Economic profit tells you if your business is creating real value for the people who funded it.
It’s one of the most useful business valuation metrics because it shows whether your company is creating or destroying value.
A positive accounting profit means you’re covering your bills, but a positive economic profit means you’re also beating the expectations of your investors.
If your economic profit is negative, it’s a red flag—a third party might be better off investing their money elsewhere, like in a different business or even a savings account with a guaranteed return.
This is why EVA is considered one of the most powerful financial metrics for business owners and small business decision-makers.
It matters because businesses with positive economic profit are more likely to grow, attract more investors, and increase their value over time. Investors want to put their money where it earns more than the minimum they expect.
A recent study appeared to demonstrate that intrinsic value of a stock may be approximately estimated using the following equation:
Book value of equity (which is the liquidation value of physical assets) + Estimated present value of future economic profits
In simple terms, EVA helps you answer a foundational question: Is my business actually generating value beyond its costs?
Investors love businesses with positive economic profit because it shows the company is earning more than the minimum return they expect. This makes the business more attractive for funding, which can fuel growth. A negative economic profit suggests the business isn’t the best use of money, which could hurt its chances of growing or even surviving.
Understanding EVA gives entrepreneurs one of the clearest business growth tools for evaluating performance and guiding smarter decisions.
For Further Reading, Check Out:
Buying a Business vs. Investing: Should You Buy a Business in 2026?
How to Make Extra Income and Achieve Financial Freedom Faster
How to Start a Side Business While Working Full-Time