We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is Economic Value Analysis?

By Osmand Vitez
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Economic value analysis is a wealth metric companies use as opposed to accounting income or profit. The most common analysis tool for this process is economic value added, a standard form created several years ago. The use of economic formulas to value a company helps stakeholders determine the true physical value of a business. In short, the balance sheet is often the more important financial statement than the income statement. Consultants are often necessary to help a company complete economic value analysis.

Accounting is a method companies use to keep score, tracking the movement of dollars in the company. The higher the dollars — in terms of profit — the better the score for the business in the current market. The biggest issue here, however, is that accounting profit is simply a made-up number. It only represents the difference between sales revenue, cost of goods sold, and expenses, with the final figure having no physical representation. A company’s true wealth can only be measured from the use of this type of analysis.

No single formula exists to compute a company’s economic wealth. A basic formula may be total assets less total liabilities; the difference is the actual wealth a company retains for itself. Other formulas or metrics may apply to other parts of the physical assets of the business. In fact, a company’s economic wealth as determined by economic value analysis may be closely related to its market value. The market value of a company is often the figure that a willing party would buy the company for in the open market.

Cash flow is typically a big part of a company’s economic value analysis. Not only is cash king in business, but it is also the biggest wealth factor a company generates through normal operations. Economic profit uses cash flow as its primary measurement tool for keeping score. Discounted cash flow models, net present value formulas, and free cash flow all work their way into economic value analysis. Those who compute economic profit or wealth attempt to value all cash flows in current value to assess a company’s true value.

It can be difficult for a company to accurately assess its economic wealth on its own. The formulas used may be foreign to internal stakeholders, or the processes are simply too complex to figure out without proper education. Consultants can help take an objective look at a company and use the proper formulas for economic value analysis. Consultants may also have benchmarks so they can compare one company’s performance against another. Either way, the objective look can provide a true figure for economic wealth.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.