Economic profit ( Engl. Economic profit ) - this is the profit remaining at the enterprise after deducting all costs , including opportunity costs of distributing the owner’s capital [1] . In case of a negative value of economic profit, the option of leaving the enterprise from the market is considered [2] .
Economic profit is the difference between the return on invested capital (the material expression of which is net operating assets ) and the weighted average cost of capital multiplied by the amount of invested capital.
Economic profit makes it possible to compare the return on invested capital of the enterprise with the minimum necessary to meet the expectations of investors , as well as express the difference in monetary units.
Economic profit differs from the indicator of accounting profit in that when it is calculated, the cost of using all long-term and other interest-bearing liabilities is taken into account, and not only the cost of paying interest on borrowed funds, as is the case when calculating accounting profit. That is, accounting profit exceeds economic by the amount of opportunity costs or costs of rejected opportunities. Economic profit serves as a criterion for resource efficiency. Its positive value shows that the company earned more than is required to cover the cost of the resources used, therefore, additional value was created for investors, founders.
In the case of the opposite situation, this indicates that the organization was unable to cover the cost of using the attracted resources. Lack of economic profit can cause the outflow of capital from the enterprise.
From the point of view of evaluating efficiency, the indicator of economic profit allows you to get a more complete, compared with the indicator of accounting profit, idea of the effectiveness of the enterprise using the available assets , by virtue of comparing the financial result obtained by a particular enterprise with the result that will ensure that it actually saves the investment funds.
Therefore, the indicator of economic profit is more capacious and useful when investors make decisions about their actions in relation to the securities of the enterprise.
Notes
- ↑ I.K. Stankovskaya, I.A. Sagittarius. Economic Theory: A Complete MBA Course . - Moscow: Reed Group, 2011 .-- ISBN 978-5-9614-2947-3 .
- ↑ L.I. Lopatnikov. Economics and mathematics dictionary: Dictionary of modern economics . - Moscow: Case, 2003. - ISBN 5-7749-0275-7 .
Links
- L. Kurakov. Economics and law: dictionary.
- Under the general editorship of prof. Chepurina M.N., prof. Kiseleva E.A. The course of economic theory.