EPS vs. EVA

Attribute	EPS	EVA
Definition	Earnings per share	Economic value added
Calculation	Net income / Average number of shares outstanding	Net operating profit after tax - (Capital * Cost of capital)
Focus	Profitability per share	Value creation for shareholders
Use	Measure of company's profitability	Measure of company's value creation

Introduction

Earnings per share (EPS) and Economic Value Added (EVA) are two important financial metrics used by investors and analysts to evaluate a company's performance. While both metrics provide insights into a company's profitability, they have distinct differences in terms of calculation, focus, and interpretation.

Calculation

EPS is calculated by dividing a company's net income by the number of outstanding shares. It is a simple and widely used metric that shows how much profit a company generates for each share of its stock. On the other hand, EVA is a more complex metric that takes into account the cost of capital. It is calculated by subtracting the company's cost of capital from its net operating profit after tax (NOPAT).

Focus

EPS focuses on the profitability of a company from the perspective of its shareholders. It shows how much profit is generated for each share of stock, which is important for investors looking to assess the company's ability to generate returns. EVA, on the other hand, focuses on the economic value created by a company. It takes into account the cost of capital and aims to measure how much value a company adds above and beyond its cost of capital.

Interpretation

EPS is a straightforward metric that is easy to understand. A higher EPS indicates higher profitability per share, which is generally seen as a positive sign for investors. However, EPS can be manipulated by factors such as share buybacks or stock splits, so investors should be cautious when relying solely on this metric. EVA, on the other hand, provides a more holistic view of a company's performance. A positive EVA indicates that a company is creating value for its shareholders, while a negative EVA suggests that the company is not generating enough returns to cover its cost of capital.

Advantages and Disadvantages

One advantage of EPS is its simplicity. It is a widely used metric that is easy to calculate and understand. However, EPS does not take into account the cost of capital, which can be a significant drawback for investors looking for a more comprehensive measure of a company's performance. EVA, on the other hand, provides a more complete picture of a company's profitability by considering the cost of capital. It helps investors assess whether a company is creating value above and beyond its cost of capital, which is crucial for long-term sustainability.

Use in Decision Making

EPS is often used by investors to compare the profitability of different companies within the same industry. It is a useful metric for evaluating a company's financial performance over time and making investment decisions. EVA, on the other hand, is more commonly used by managers to evaluate the performance of their business units. It helps them identify areas where value is being created or destroyed and make strategic decisions to improve overall profitability.

Conclusion

While EPS and EVA are both important financial metrics, they serve different purposes and provide different insights into a company's performance. EPS focuses on profitability per share, while EVA measures the economic value created by a company. Investors should consider using both metrics in conjunction to get a more comprehensive view of a company's financial health and make informed investment decisions.