At its core, Economic Value Added (EVA) is a performance measure consisting of just three lines:

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EVA = Sales - Operating Charge - Capital Charge

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The presence of capital charge, which includes shareholders charge, is what makes EVA particularly stands above other performance measure. EVA says a company is not profitable unless it could cover the charge from its debtholders and shareholders. It is a difficult number to beat by management, and unsurprisingly, investors do not settle for less.

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How EVA connects with market value is surprisingly simple:

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Market Value = Invested Capital + MVA (NPV),

where MVA (NPV) is the present value of EVA

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Market Value consists of debt value and equity value (stock price) minus excess cash. That means EVA is the one metric that best explains stock prices, not in just theory, but also in practice. What is more, EVA tells the story how value creation changes from time to time.