What is the difference between EVA and FCF?

Hi Zarina..............EVA is actually Economic Value Added and FCF is Free Cash Flow


Well, Economic Value Added or EVA is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. EVA can be measured as Net Operating Profit After Taxes(or NOPAT) less the money cost of capital. Money cost of capital refers to the amount of money rather than the proportional rate (cost of capital). The amortization of goodwill or capitalization of brand advertising and other similar adjustments are the translations that occur to Economic Profit to make it EVA.

A measure of a company's financial performance is based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".)

Hmmm.........The formula for calculating EVA is :

= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)

This measure was devised by Stern Stewart & Co. Economic value added attempts to capture the true economic profit of a company.


In corporate finance, Free Cash Flow or FCF is a cash flow available for distribution among all the security holders of a company. They include equity holders, debt holders, preferred stock holders, convertibles holders, and so on. It is cash that is left after financing all the NPV-positive projects

Free Cash Flow
The cash flow that remains after taking into account all cash flows including fixed-asset acquisitions, asset sales, and working-capital expenditures. The definition of free cash flow varies depending on the purpose of the analysis for which it is being used.

A measure of financial performance calculated as operating cash flow minus capital expenditures. In other words, free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.


It can also be calculated by taking operating cash flow and subtracting capital expenditures.

Some believe that Wall Street focuses myopically on earnings while ignoring the "real" cash that a firm generates. Earnings can often be clouded by accounting gimmicks, but it's tougher to fake cash flow. For this reason, some investors believe that FCF gives a much clearer view of the ability to generate cash (and thus profits).

It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.

EVA is a refined FCF