Economic profit (ROIC vs WACC)

Also called: wacc, cost of capital, eva, value creation

Whether a company earns more on the money tied up in it than that money costs. Return on invested capital minus the weighted average cost of capital.

Formula

Economic profit = (ROIC − WACC) × Invested capital

Worked example

1. Example plc: ROIC 14% − WACC 9% = 5 points
2. × invested capital $11bn = $0.55bn a year

Result: +5 points: creates value

How to read it

A lasting positive gap is the clearest sign of a competitive advantage. Growth only helps owners when the gap is positive.

See it with real numbers: Any company page → (free account)