The difference between the return on shareholders’ funds (capital provided by shareholders/ owners) and the cost of these funds (cost of capital). Economic profit can be calculated as a percentage using the following formula:

Economic profit= (return on capital – cost capital)/ cost of capital

Economic profit can also be expressed as the spread between return on invested capital (ROIC) and cost of capital (WACC) multiplied by invested capital:

Economic profit= (ROIC – WACC) x invested capital

Invested capital is calculated according to the following formula:

Invested capital = fixed assets + net working capital (NWC) + acquired intangibles + goodwill

If the return on invested capital (ROIC) is larger than the cost of capital (WACC), the economic profit will be positive and hence an entity is said to be creating positive shareholder value, and vice versa (economic loss).

Economic profit, as a measure of profitability, can also be expressed as follows:

Economic Profit = NOPAT – (average invested capital × WACC)

Where: NOPAT denotes net operating profit after tax. It is an entity’s after-tax operating income assuming that it had no debt in its capital structure.