Economic profitability

Economic profitability (or economic return) measures a company's ability to generate returns above the cost of capital employed in its operations. The key ratio is ROCE (Return on Capital Employed) = NOPAT / Capital Employed, compared to the WACC. When ROCE exceeds the WACC, the company creates economic value; when ROCE falls below the WACC, it destroys value — regardless of whether it reports accounting profits. Economic profitability is central to EVA-based valuation models and to assessing the long-term sustainability of a business's competitive advantage.

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Example: a Swiss industrial company presents a ROCE of 13.5% against a WACC of 9.5% — a positive spread of 4.0% applied to CHF 15.0 million of capital employed generates annual economic value added (EVA) of CHF 600,000. This positive EVA is capitalised in the residual income valuation model, adding approximately CHF 6.3 million of value above the book capital invested — a supplement directly attributable to the company's sustained competitive advantage.

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Hectelion analyses economic profitability and EVA as core value creation indicators in business valuation and strategic advisory mandates.