A metric that helps measure a company’s economic performance defined as change in economic profit over time. As a result, it helps investors determine whether the company is creating value for its shareholders.
Developed by Bennet Stewart of EVA Dimensions, co-creator of EVA (Economic Value Added).
EVA momentum is the change in the business’ EVA divided by the prior period’s sales, or:
EVA Momentum = (This year’s EVA – Last Year’s EVA)/Last Year’s Sales
EVA momentum has a few key strengths. Since the metric is based on the percentage change in profit rather than the level, companies of various sizes may be compared. Also, since the level of assets is included in the level of EVA, companies with moats or inherent advantages are not at an advantage to those that don’t, providing an objective way to compare managements of vastly different businesses.
For EVA Momentum to increase, the economic value of the business must grow while maintaining or improving the economic profit margins. This is much easier said than done. The long-run EVA momentum for companies in the Russell 3000 is just 0.2%, with the 75th percentile being 1% and the 90th percentile 3%.
To learn more about EVA Momentum, you can download a whitepaper here.