AdvancedMAD Academy0:46Valuation

Profit After Charging for Capital

Residual income subtracts a charge for the equity used, which is why a profitable company can still be destroying value.

0:46 · 6 scenes

This lesson is part of a MAD Academy plan.

What the Lesson Covers

  1. 0:00A company can report a profit and still be destroying value.
  2. 0:05The missing cost. Accounting profit charges for debt interest and nothing for shareholders' capital.
  3. 0:14The arithmetic. Eighty million of profit on a billion of equity, at a nine percent cost, is negative.
  4. 0:24Why it matters for growth. Growing a business that earns below its cost of capital makes the problem larger.
  5. 0:33The soft input. The cost of equity is estimated, so the answer inherits that uncertainty.
  6. 0:41Charge for the equity, then ask whether growth is helping.
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Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
Profit After Charging for Capital — MAD Academy Training Video · MadStockAlerts