Finance
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Economic Profit Calculator.
Calculate NOPAT minus invested capital multiplied by WACC.
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FAQs
How is Economic Profit calculated?
Tax, invested-capital, and WACC definitions are explicit inputs.
Use Cases
Performance Evaluation
Assess whether a company or division is truly creating value beyond its cost of capital, complementing traditional accounting profit measures.
Example: Compare economic profit across business units to identify which ones generate value above the required return.
Investment Decision Support
Use economic profit to evaluate potential projects or acquisitions by estimating whether they will generate returns above the cost of capital.
Example: Estimate the economic profit of a new project to decide if it meets the company's value-creation threshold.
Frequently Asked Questions
- What is economic profit?
- Economic profit measures the value created above the cost of capital. It is calculated as NOPAT (net operating profit after tax) minus the capital charge (invested capital multiplied by the cost of capital). A positive economic profit indicates value creation, while a negative one suggests value destruction.
- How is the capital charge calculated?
- The capital charge is the product of the company's invested capital and its cost of capital (often the weighted average cost of capital, WACC). It represents the minimum return required by investors for providing capital.
- What does a negative economic profit mean?
- A negative economic profit means the company's NOPAT is insufficient to cover the capital charge, indicating that it is not earning enough to compensate investors for the risk and opportunity cost of capital. This suggests value is being destroyed.
Tips & Common Mistakes
Tips
- Ensure NOPAT is calculated after taxes but before financing costs, as it represents operating profit available to all capital providers.
- Use a consistent cost of capital (e.g., WACC) that reflects the risk of the business and the market conditions.
- Invested capital should include both equity and debt, minus excess cash, to accurately represent the capital employed.
- Regularly recalculate economic profit as NOPAT and capital costs change to track value creation over time.
Common Mistakes to Avoid
- Using net income instead of NOPAT, which includes financing effects and can distort the economic profit calculation.
- Using the cost of equity instead of the weighted average cost of capital, ignoring the cost of debt and its tax shield.
- Forgetting to adjust invested capital for non-operating assets or excess cash, leading to an inaccurate capital charge.
Last updated: August 13, 2026