EVA vs Residual Income income, economic

AnalystAlan

Will EVA & Residual Income ALWAYS be the same since they're both conceptually measuring economic income?

stalkey

Conceptually, they are the same, or rather more precisely: EVA is a specific implementation, as defined by its inventor Stern Stewart, of the Residual Income Valuation methodology.

There are many slightly different definitions of RI formulas, but in general, the accounting numbers are not manually adjusted in those formulas. In EVA, however, NOPAT and Total Invest Cap need to be manually adjusted.

yospaghetti

EVA - Uses wacc; measures return to all shareholders
RI - Uses ke; measures return to equity holders

FinancialAnaly

jdane416, that's not accurate.

EVA (aka Economic Profit) measures the return above and beyond what is required by both debt and equity holders. It does not measure the "return to all shareholders". That would be a claims valuation-type of approach. The present value of EVA is MVA, Market Value Added. It's the value that management adds above what is required by both debt and equityholders.

RI, on the other hand, measures the amount leftover after equity holders have had their share. Implicit in the NI is also the fact that debtholders have had their share as well.

So, it's pretty much the same.