Economic value added

The profit left after charging for all the capital used, computed as invested capital multiplied by the spread between return on invested capital and the cost of capital.

A company with ₹3,600 crore of invested capital earning 20% against an 11.5% cost of capital creates ₹306 crore of economic profit in the year.

The idea corrects the central blind spot of accounting profit, which charges for debt through interest but charges nothing at all for equity. A business reporting ₹615 crore of net profit on ₹3,300 crore of equity that costs 13.5% has earned ₹615 crore and consumed ₹445 crore of equity cost, leaving far less value creation than the headline suggests.

Rising economic profit, rather than rising earnings, is the objective a good capital allocator optimises.

Track the rupee amount, not only the percentage spread. Both move.