Residual Income Calculator
Calculate residual income (economic profit) to evaluate true company profitability after deducting all capital costs
Calculate Residual Income
Company's accounting net income from income statement
Total stockholders' equity from balance sheet
Required return rate for equity investors (often calculated using CAPM)
Residual Income Results
Formula used: Residual Income = Net Income - (Equity Capital × Cost of Equity)
Calculation: $0.00 - ($0.00 × 0%) = $0.00
Interpretation: The company exactly covers its cost of equity capital.
Performance Analysis
Example Calculation
Company Alpha Example
Net Income: $80,520,000
Equity Capital: $800,000,000
Cost of Equity: 12.3%
Calculation
Equity Charge = $800,000,000 × 12.3% = $98,400,000
Residual Income = $80,520,000 - $98,400,000
Residual Income = -$17,880,000
Key Financial Metrics
Residual Income
Economic profit after all capital costs
Net Income - Equity Charge
Equity Charge
Cost of equity capital
Equity × Cost of Equity
Return on Equity
Profitability on equity
Net Income / Equity
Residual Income Tips
Positive residual income indicates value creation
Consider industry benchmarks for comparison
CAPM is commonly used for cost of equity
Use for investment and valuation decisions
Understanding Residual Income
What is Residual Income?
Residual income represents the economic profit of a company - the income remaining after deducting all capital costs, including both debt and equity costs. Unlike accounting profit (net income), which only considers the cost of debt through interest expenses, residual income accounts for the opportunity cost of equity capital.
Why is it Important?
- •Reflects true economic profitability
- •Better measure than accounting profit
- •Useful for investment decisions
- •Aligns with shareholder value creation
Formula Explanation
Residual Income = Net Income - (Equity Capital × Cost of Equity)
- Net Income: Company's accounting profit
- Equity Capital: Total stockholders' equity
- Cost of Equity: Required return rate for equity investors
- Equity Charge: Dollar cost of equity capital
Note: Cost of equity is often calculated using CAPM (Capital Asset Pricing Model)