In one sentenceNet operating profit after tax minus the cost of the capital invested; it measures whether the business earned more than its financing costs it.
Simply put
A business may make a profit in the books, but if that profit is less than the cost of the funds used by owners and lenders, it is destroying value rather than adding it.
A positive value means the business earned above its cost of financing, and a negative one is a warning even if the income statement shows a profit.
Worked example
A trading company with net operating profit after tax of 500,000 SAR, invested capital of 3,000,000 SAR and a cost of capital of 14% (an assumed rate for illustration).
Cost of capital in SAR3,000,000 × 14% = 420,000 SAR
Net operating profit after tax500,000 SAR
Economic value added500,000 − 420,000 = 80,000 SAR
Formula: Net operating profit after tax − (invested capital × cost of capital)
Don't confuse it with
Net profitNet profit does not deduct the cost of the owners' funds, while economic value added does.