Lesson 4 of 6
EVA, the operating version
Economic value added charges the whole capital base, not just equity. See both numbers computed on one filing, and why they differ by billions.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Economic value added is the operating twin of residual income: after-tax operating profit less a charge on all the capital in the business.
- It charges debt and equity together at a blended rate, so it answers a different question from the equity version and is not comparable with it.
- The adjustments that come with it are optional, numerous and rarely disclosed, which is where most of the arguing happens.
Residual income charges for equity. Economic value added charges for everything: the debt as well as the equity, at a blended rate. It measures the operating business before deciding who financed it, which makes it useful for comparing two companies with different amounts of borrowing.
Two charges on one filed year, and the gap between them
- Residual income, equity charged at 8 percent11,119$m
- Economic value added, all capital charged at 7 percent6,541$m
Building it from the filing
Four steps, all from one 10-K
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Take operating income: 13,762 million dollars for fiscal 2025.
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Tax it at the company's own effective rate. Income tax of 2,861 against pre-tax income of 15,998 is 17.9 percent, so after-tax operating profit is 13,762 multiplied by 0.8212, or 11,301.
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Add up the capital that funds the business: equity of 32,169, noncontrolling interests of 2,106, and debt of 43,997, less cash of 10,270. That is 68,002.
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Charge it. At an illustrative 7 percent the charge is 4,760, so economic value added is 11,301 less 4,760, or 6,541.
Why the two numbers disagree
The equity version returned 11,119 for the same year and this one returns 6,541. Neither is wrong. They measure different things: residual income asks what was left for shareholders after charging their equity, and economic value added asks what was left after charging every dollar in the business, including the 44 billion of debt that the equity version never touches.
The practical consequence is that you cannot put them in the same table, and you cannot compare one company's residual income with another's economic value added. State which one you computed, every time.
There is a second consequence, and it decides which measure to reach for. The equity version moves when a company borrows, because borrowing raises the return on a smaller equity base without raising the charge on it. The operating version does not, because the new debt joins the capital being charged. If you are comparing two companies that finance themselves differently, the operating version is the one that answers the question you are asking. If you are valuing the shares of one company, the equity version leads directly to a value for the equity and the operating version needs the debt subtracted afterwards.
The adjustments, and whether they earn their keep
The published versions of this measure come with a list of adjustments to the accounting figures: capitalising research spending, undoing goodwill amortisation, treating operating leases as debt, adding back deferred tax movements. Each one has a defensible argument behind it. Together they have a cost that is rarely stated.
A rough check is available here. This site publishes a return on invested capital of 16.4 percent for this company from its own gate and its own definition. The hand computation above gives 11,301 divided by 68,002, or 16.6 percent. Two careful definitions, two tenths of a point apart, and that gap is the small one. A definition that capitalised research spending or excluded goodwill would move it by several points.
Check yourself
What does economic value added charge for that residual income does not?
- Taxes
- The debt financing the business, alongside the equity
- Dividends
Show the answer
Answer: B.
Residual income charges only the equity. Economic value added charges the whole capital base at a blended rate, so the two answer different questions.On the filed year above, what is after-tax operating profit?
- 13,762
- 11,301
- 13,107
Show the answer
Answer: B.
Operating income of 13,762 taxed at the company's own effective rate of 17.9 percent leaves 11,301 million dollars.What is the main cost of the long list of adjustments published with this measure?
- They always lower the answer
- They are choices nobody can verify from a filing, so two analysts produce two capital bases
- They are forbidden under US accounting rules
Show the answer
Answer: B.
Each adjustment is defensible on its own and unverifiable from the outside. The comparability the measure was built for is what they spend.Sources
- The Coca-Cola Company, Form 10-K for fiscal 2025, filed 2026-02-20, accession 0001628280-26-010047. Operating income, tax, pre-tax income, equity, noncontrolling interests, debt and cash read from the SEC XBRL company facts API on 2026-09-13.
- This site's own published return on invested capital for the same company, from the company catalogue built 2026-09-16.
- Mauboussin and Rappaport, Expectations Investing, 2001, on economic profit and what the market price already contains.
What this leaves out
- The 7 percent blended rate and the 8 percent cost of equity are illustrative and are not filed figures.
- The capital base here is equity plus noncontrolling interests plus debt less cash. Other defensible definitions include marketable securities, capitalised research or pension deficits, and each changes the answer.
- No adjustment has been applied to the accounting figures, so this is the unadjusted version of the measure.
- Nothing here is advice about any security.