Warren Buffett's partner, Charlie Munger, once said, "I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."

When corporate boards use bad incentives for management's pay, disaster often ensues. (Think Lehman Brothers.) Incentives based on singular metrics such as revenue growth, EBITDA, ROE, or earning per share are easily manipulated and gamed. Fortunately, there is a better way: EVA momentum.

Creator Bennett Stewart of EVA Dimensions, who also co-created EVA (economic value added), calls EVA momentum "the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."

So what does this mean for investors? A positive reading on EVA momentum means a company has created value by increasing its EVA, a negative EVA momentum means that EVA, and thus value, has decreased. EVA momentum is one of the few, if not the only, performance measures with such a clear dividing line between good and bad performance.

The best companies, then, create value in excess of their cost of capital, as reflected by positive EVA momentum. The higher the EVA momentum, the more value management's creating.

Let's look at Merit Medical Systems (Nasdaq: MMSI) and three of its medical supplies industry peers to see how effectively they create value. Here are the trailing four quarters' worth of EVA momentum figures for each company over the past three years, and rankings versus the Russell 3000 for the past 12 months' EVA momentum.

Related Companies

2008*

2009*

2010*

Russell 3000 Percentile

Merit Medical Systems 2.4% 0.7% (1.4%) 23
Boston Scientific (NYSE: BSX) 0.8% 1.2% (1.8%) 22
C.R. Bard (NYSE: BCR) 2.1% 1.4% 1.4% 51
Abiomed (Nasdaq: ABMD) (10.9%) 3.1% 15.2% 95

Source: EVA Dimensions LLC. *Trailing four quarters as of third quarter of year indicated.

With a negative EVA momentum of (1.4%), Merit Medical System's econo mic value added decreased year over year, placing it in the 23rd percentile of all companies in the Russell 3000. Boston Scientific also had negative EVA momentum, while the remaining two both had positive EVA momentum over the past 12 months. C.R. Bard has consistently increased EVA over the past three years. Although growth in Merit Medical System's economic value added has slowed, it could resume in the future.

Businesses with high EVA momentum are effectively creating value. It will be interesting to see how useful this extremely new metric proves for companies and investors. If it lives up to its promise, EVA momentum will be an essential tool in investors' arsenals.

Another tool for better investing
Most investors don't keep tabs on their companies' fundamental value. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide
the market's best returns.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. He does not hold any of the stocks mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.