Economic profit is the amount left after subtracting the cost of all capital employed from operating profits. It is calculated in Strategic Focus.
The cost of equity capital affects profits. Accounting profits exclude this influence whilst economic profit includes it providing a better indication to anyone investing in the entity of profit after taking into consideration all costs associated with that investment including the opportunity cost of capital. Strategic Focus financial analysis uses economic value added (economic profit) as a performance measure. Business valuations are calculated using this measure and free cash flow. This enables management to consider their business from an investor’s viewpoint. It also
enables organizations to filter out strategies that reduce or destroy value; if EP is projected to be negative, value is going to be destroyed
“Economic Value Added” (EVA®) is a registered trademark of Stern Stewart & Co.