The goal of all companies is to create value for the shareholder. But how is value measured? The performance metric we use to evaluate performance is Economic Profit. Economic Profit is based on classic financial theory and is not entirely different from traditional free cash flow measures. The conceptual pillar to support economic profit is the fact that access to equity capital is an expense and is not free. The company does not create value until a threshold level of return is generated for shareholders after the cost of equity capital is deducted. A company can earn an accounting profit (net income) but not necessarily an economic profit.
Economic profit boils down a set of adjustments that translate an accrual-based earning (net income) into a cash-based earning. The idea is simple but rigorous, true profits should account for the cost of capital. This is exactly how companies make internal decisions to allocate their own limited resources based on money generated versus money invested. Successful companies do not make internal decisions how to allocate their own resources based on net income but rather on an economic profit basis. This service offers you the opportunity to invest the same way successful companies invest.