Economic Earnings

Metrics are only as good as the data that drive them. The best fundamental data in the world drives our metrics. Here’s proof from some of the most respected public & private institutions in the world.

Economic earnings represent the true earnings for shareholders and are very different from accounting earnings. GAAP accounting data was not originally designed for equity investors, but for debt investors.

Learn more about the best fundamental research

To derive economic earnings, 30+ adjustments must be made to accounting earnings. These adjustments remove items hidden in the footnotes and MD&A of annual filings and close loopholes within GAAP accounting.

The formulae for economic earnings are in Figure 1.

Figure 1: How To Calculate Economic Earnings

NOPAT – WACC * Invested Capital

Or

(ROIC – WACC) * Invested Capital

Sources: New Constructs, LLC and company filings

Economic earnings are better than accounting earnings because

  1. They are based on the complete set of financial information available
  2. They are normalized for all companies
  3. They are a more accurate representation of the true underlying cash flows of business.

If a company is not generating positive economic earnings, it is not creating shareholder value. Figure 2 shows which companies are creating and destroying the most value.

Not a member yet? You need a Stock Tracker 50 Membership or higher to view the content on this page.

Already a member?

Want to learn more about New Constructs? Join our mailing list here.

Want To Learn More?

Sign up to receive free alerts about all our new research reports including Long Ideas and Danger Zone picks.


Get Investment Research That Reads the Fine Print