Paradox of EVA

• EVA is completely correct with valuations but similarly it can have some accounting distortions
• This might sound a little paradoxical, but it has a simple explanation:
  • Look at the terms of EVA valuation formula:
    • Market value of a company =
      
      
    • Book value of equity + current value of future EVA
• EVA valuation formula has two interacting components (book value and future EVA). By increasing book value we decrease the future EVA values through increased capital costs (and vica versa).
• Actually we can show that component “book value” cancels de facto out of valuation calculations and thus in EVA valuation formula the only thing that remains is cash flow. Book value has no meaning to the value.