About the Tutorial
The goal of this tutorial is to introduce the reader to the concept of Economic Profit, and its validity as an economic metric with which to measure business performance. The tutorial will show in detail how Economic Profit can be used to make value-creating business decisions and why it is a superior metric to more traditional business performance measures. A comparison will also be made between Economic Profit and Free Cash Flow to show the relevant differences between these two metrics.
The first part of the tutorial will address the various component parts that make up the Economic Profit metric, including net operating profit after taxes, capital charge, and cost of capital. Following this will be a discussion of the relationship between a company’s market value and Economic Profit. Next, Economic Profit will be compared with both net income and return on investment as business performance metrics, and the key differences will be noted. This will be followed by an examination of the various approaches that can be used to enhance Economic Profit. Following this discussion will be a description of how the Economic Profit metric can be disaggregated into its components parts in order to facilitate analysis of business performance. Finally, the unique strengths of Economic Profit will be introduced in order to show how this metric can, under certain circumstances, provide even greater insights into business performance than does the Free Cash Flow metric.
Who Should Take This Tutorial
Chief Executive Officers
Chief Financial Officers