What is Economic Profit?
Economic profit is the profit a company earns after subtracting the cost of all capital — debt and equity — used to generate it. Unlike accounting profit, which deducts only interest, economic profit treats shareholder equity as a cost too. Positive economic profit means the company creates value; negative means it destroys value.
How It Works
- Formula: Economic profit = NOPAT − (Capital × WACC)
- NOPAT = Operating profit × (1 − Tax rate)
- Capital = Equity + Debt employed in operations
- WACC = Weighted average cost of capital
- Also known as Economic Value Added (EVA)
Saudi Context
Saudi listed companies and PIF portfolio companies increasingly use economic profit (EVA) for executive compensation and capital-allocation decisions. It pushes managers to chase value creation, not just reported earnings growth.
Example
A Saudi industrial company earns NOPAT of SAR 600M on capital of SAR 5,000M; WACC is 10%. Economic profit = 600 − (5,000 × 10%) = SAR 100M. Even though accounting profit looks fine, economic profit highlights that the business barely clears its cost of capital.