Economic Value Added or EVA is a metric developed by Stern Stewart & Company that depicts how effectively a company is creating wealth for its stockholders. EVA is used by investors and some of the world’s premier firms. EVA analyses show that Churchill Downs, Inc. and Penn National Gaming, Inc. rate highly as wealth creators, not only in the gaming industry but across all industries.

The basic concept of EVA is that a company is building wealth whenever its operating income exceeds its cost of capital. The difference between EVA and conventional measures of financial results–such as net profit and earnings per share–is that EVA indicates what gains (or losses) remain once a company’s combined cost of capital on debt and equity is deducted from its operating profits.

Investopedia summarizes EVA, as follows: “…EVA charges the company rent for tying up investors’ cash to support operations. There is a hidden opportunity cost that goes to investors to compensate them for forfeiting the use of their own cash. EVA captures this hidden cost of capital that conventional measures ignore.” A company, for example, might show an accounting net profit but when the cost of capital is factored in, the true return to investors may be negative.

The Motley Fool recently looked at the EVA metrics of U. S.-based resorts and casino corporations in the Russell 3000 Index. (This index encompasses the largest publicly traded American companies that comprise about 98 percent of the U. S. equity market.) Of the eight leading EVA-performing resorts and casino companies, Churchill Downs ranked fifth and Penn National Gaming ranked eighth. Churchill Downs’ EVA metrics are 8% for the past quarter, 3.7% for the past year, and 0.7% for the past three years. Penn National Gaming’s EVA numbers for the same time frames are 3.4%, 5.7%, and -0.6%. These numbers placed Churchill Downs in the lofty 79th percentile of the entire Russell 3000 and Penn National Gaming in the 64th percentile.

Enterprises doing business in leisure markets like gaming and horse racing are especially vulnerable to economic slumps that dampen discretionary spending. The fact that Churchill Downs and Penn National Gaming are among the top eight resorts and casinos on EVA returns is laudable. What is more impressive is that their EVA metrics also rank highly among the broad swath of industries and companies in the Russell 3000.

Upper management in Churchill Downs and Penn National Gaming have skillfully deployed capital and cultivated wealth for their shareholders in spite of an unfavorable economy.

Copyright © 2011 Horse Racing Business

Originally published in the Blood-Horse. Used with permission.