What is Residual Income?
Residual income, also known as economic profit or economic value added (EVA), is a financial performance measure that evaluates the profitability of a company's operations by considering the cost of equity capital. Unlike traditional accounting measures like net income, which only considers revenues and expenses, residual income takes into account the opportunity cost of equity capital.
The concept behind residual income is that a company creates value for its shareholders only when it generates returns above the cost of equity capital. In other words, residual income measures the profit that remains after deducting the cost of equity from the net operating profit of the business.
If the residual income is positive, it indicates that the company has generated returns above the cost of equity capital, creating value for shareholders. A negative residual income suggests that the company has not generated sufficient returns to cover the cost of equity, thereby destroying shareholder value.
How to Calculate Residual Income?
Residual Income calculator uses Residual Income = Operating Income-Minimum Required Rate of Return*Average Operating Assets to calculate the Residual Income, The Residual Income is a financial metric used by companies to determine the economic feasibility of a project and decide whether to pursue the project. Residual Income is denoted by RI symbol.
How to calculate Residual Income using this online calculator? To use this online calculator for Residual Income, enter Operating Income (OI), Minimum Required Rate of Return (MRRR) & Average Operating Assets (AOA) and hit the calculate button. Here is how the Residual Income calculation can be explained with given input values -> 400000 = 420000-0.4*50000.