Corporate Finance – Measuring Business Performance – Economics Profit

The ultimate goal of any business is the creation of value for the owners of that business, whether that business is privately held by one owner or is publicly held with a multitude of owners/shareholders. This course 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 (FCF) to show the relevant differences between these two concepts.


    On completion of this course, you will be able to:

    Describe the use of economic profit as an economically valid business performance measurement tool and how it can help view value creation within a company

    Recast the income and balance sheet statements in order to create a NOPAT statement that reflects the economic operating inflows and outflows and an invested capital statement that represents the Economic investment made by the capital contributors

    Compare the economic profit and FCF approaches in order to show the relevant differences between the two metrics


    Topic 1: Economic Profit

    What is Economic Profit

    Economic Profit – Alternative Formula

    Economic Profit – Calculation Example

    Interpretation of Economic Profit

    Relationship Between Market Value & Economic Profit

    o Positive Economic Profit Prospect

    o Negative Economic Profit Prospect

    o Zero Economic Profit Prospect

    Economic Profit vs Earnings

    Economic Profit vs Return on Assets

    Enhancing Economic Profit

    o Improve Return on Capital

    o Invest Capital Where Return on Capital > cost of Capital

    o Remove Capital Where Return on Capital < Cost of Capital

    o Minimize Cost of Capital

    Topic 2: Financial Statement Adjustments

    Financial Statement Adjustments – Overview

    Adjustments to NOPAT and Invested Capital Statements

    Topic 3: Comparison of Economic Profit & Free Cash Flow

    Free Cash Flow Analysis – Overview

    o Free Cash Flow Analysis – Positive FCF

    o Free Cash Flow Analysis – Negative FCF

    Free Cash Flow Analysis  - Conclusion

    Economic Profit Analysis

    FCF Vs Economic Profit

    o FCF Vs Economic Profit – Example 1

    o FCF Vs Economic Profit – Example 2

    o FCF Vs Economic Profit – Example 3

    o FCF Vs Economic Profit – Example 4

    Economic Profit Analysis - Conclusion

    Relationship between Market Value & Economic Value



    75 Minutes

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