Excess profit

Excess profit (surprofit) is the portion of a company's earnings that exceeds the normal, competitive return on the capital employed — the residual profit attributable to an identifiable competitive advantage: brand, technology, customer loyalty, proprietary processes or key personnel. In business valuation, excess profits are the foundation of the residual income or EVA approach: value = book capital + NPV of expected excess profits. In intangible asset valuation, the excess earnings method builds directly on this concept to isolate the contribution of each asset.

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Example: a Swiss specialty chemicals company earns a ROCE of 18.0% against a WACC of 10.0%. On CHF 20.0 million of capital employed, the annual excess profit is CHF 1.6 million (8.0% × CHF 20.0 million). Capitalised at the WACC of 10.0%, this excess profit generates CHF 16.0 million of value above the invested capital — reflecting the competitive advantage embedded in the company's proprietary formulations and customer relationships.

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Hectelion uses excess profit analysis to identify the sources of a company's competitive advantage and translate them into a defensible value premium in transaction and litigation contexts.