Reading the accounts
Economic profit
Also called EVA or Residual income
Profit left after charging for the cost of the capital used to generate it.
How it works
Accounting profit charges for debt but not for equity. Economic profit charges for both, which is why a company can be profitable on paper and still be destroying value.
Formula
Economic profit = invested capital × (ROIC − WACC)Related terms
- Return on invested capitalOperating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
- WACCThe blended cost of a company’s debt and equity funding, weighted by how much of each it uses.
- Net incomeWhat is left after every cost, including interest and tax — the profit belonging to shareholders.
More in Reading the accounts
- Fixed costs
- Earnings per share
- Free cash flow
- Earnings growth
- GAAP and IFRS
- EBITDA
- Going concern
- DuPont analysis
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.