Residual Income Calculator
Calculate residual income (also known as Economic Value Added or EVA) to measure a company's economic profitability after accounting for the cost of capital. Residual income represents the true economic profit generated by a business.
Financial Metrics
Residual Income Results
Residual Income (EVA):
$0.00
Capital Charge:
$0.00
Value Creation:
N/A
Performance Analysis
Economic Profitability:
N/A
ROCE vs WACC:
N/A
Shareholder Value:
Business Insights
Capital Efficiency:
N/A
Competitive Advantage:
N/A
Strategic Performance:
N/A
Understanding Residual Income
Residual income, also known as Economic Value Added (EVA), measures the true economic profit of a company after deducting the cost of all capital employed. Unlike accounting profit, residual income accounts for the opportunity cost of capital, providing a more accurate measure of value creation.
Residual Income Formula
Basic Formula
- Residual Income = Net Income - Capital Charge
- Capital Charge = Capital Employed × Cost of Capital
- Positive RI = Value creation
- Negative RI = Value destruction
EVA Formula
- EVA = NOPAT - (Capital Employed × WACC)
- NOPAT = Net Operating Profit After Tax
- WACC = Weighted Average Cost of Capital
- More precise economic profit measure
Residual Income Interpretation
Performance Assessment
What residual income tells us about performance
Positive Residual Income
- Company creating economic value
- ROCE > Cost of capital
- Shareholder wealth increasing
- Sustainable competitive advantage
Zero Residual Income
- Breaking even economically
- ROCE = Cost of capital
- No value creation or destruction
- Market rate returns
Negative Residual Income
- Company destroying economic value
- ROCE < Cost of capital
- Shareholder wealth decreasing
- Strategic or operational issues
Advantages of Residual Income
| Advantage | Why It Matters | Benefit |
|---|---|---|
| Economic Perspective | Considers cost of capital | True profitability measure |
| Value Creation Focus | Measures wealth creation | Shareholder-oriented |
| Performance Driver | Links to ROCE improvement | Better decision making |
Residual Income vs Accounting Profit
Accounting Profit
- Revenue minus explicit costs
- GAAP/IFRS compliant
- Historical cost basis
- Tax and regulatory focused
Residual Income
- Accounting profit minus capital costs
- Economic value creation
- Opportunity cost included
- Shareholder wealth focused
Applications in Valuation
Dividend Discount Model
- Residual income as dividend source
- Terminal value calculation
- Multi-stage growth models
- More accurate than dividend models
Economic Profit Models
- Present value of future EVA
- Market value = Book value + PV of EVA
- Links accounting to market value
- Superior to residual income valuation
Factors Affecting Residual Income
ROCE Drivers
- Operating margin improvement
- Asset turnover increase
- Working capital efficiency
- Capital structure optimization
Cost of Capital
- Interest rate environment
- Business risk profile
- Capital structure changes
- Market expectations
Key Takeaways for Residual Income
- Residual Income = Net Income - (Capital Employed × Cost of Capital) measures true economic profit
- Positive residual income indicates value creation, negative indicates value destruction
- Residual income provides a more accurate measure of profitability than accounting profit
- EVA (Economic Value Added) is a specific form of residual income calculation
- Residual income is used in valuation models like the dividend discount model
- Companies with consistently positive residual income tend to create shareholder wealth
- Residual income focuses management attention on capital efficiency and ROCE improvement
- Compare residual income trends over time rather than absolute values