Residual profit

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The economic key figure of residual income (or "excess profit "; English residual income ) describes the profit that exceeds the performance gain and covers the cost of capital of a company . In negative terms, residual profit or "residual profit" is the portion of profit that remains after the cost of capital has been deducted.

General

Equity and borrowed capital , which are made available for operational purposes, cause capital costs that have to be earned through the production process. These capital costs are made up of interest expenses (for debt) and dividends (for equity). While the interest expense reduces the profit, the dividend payment is already a use of profit. The aggregate of the residual profit is a quantity that is intended to indicate whether, in addition to the profit generated from the production process (performance gain), additional profits were made that cover these capital costs. Conclusions about whether an investment has created “value” for the company can only be drawn from the residual profit. According to this empirical principle, a company only works successfully if the interest claims of all investors are satisfied. The higher the “excess profit” over and above the cost of capital, the more successfully the company operated.

The term "residual income" was first used by General Electric in 1955 to give incentives to managers . This US group was already using the “residual income” as a performance management standard for managers by avoiding disadvantages such as not taking into account the cost of capital. Previously, Gabriel Preinreich had succeeded in proving in 1938 that the capital value of an investment corresponds to the present value of all residual profits under certain premises . This theorem has become known in German-language literature as the Preinreich-Lücke theorem .

detection

Residual profit occurs when the return on total capital is greater than the company's cost of capital. The residual profit (RG) is obtained by subtracting the depreciation (Ab) from the operative cash flow (OCF) of a period and multiplying the discount rate k with the capital employed (BIK) of the previous period:

The cost of capital includes both the interest paid on borrowed capital and the paid or imputed return on equity (dividend). From the components of the equation it can be seen that the data is available from external accounting .

purpose

A value-oriented corporate management can be operated on the basis of the residual profit. A company or one of its segments creates added value when a residual profit has been generated. However, the residual profit can only provide a well-founded statement about the increase in the company's value in rare exceptional cases , namely if there is no recognized goodwill , no positive residual profits will be generated in the future and the market value added increases in line with the cost of capital. Further developments of the residual profit are the market residual profit, the Economic Value Added (EVA) conceived by Stern Stewart & Co in 1991 , the Cash Value Added (CVA) or the Earnings less Riskfree Interest Charge (ERIC).

Passive residual income

This section needs to be revised: Better to outsource it to a separate article. Residual profit and passive income are different things.
Please help to improve it , and then remove this flag.

The term “residual residual income ” is also used for one-off investments or work that regularly generates income over a long period of time without the need for repetitive work. Specifically, this covers all forms of copyrights / patents / licenses that, by virtue of the law, secure the rights holder's income from royalties during his life (and also for his heirs) . In music in particular, Paul McCartney and ABBA are among the top earners from passive residual incomes, since as composers they no longer have to do anything (remain passive) to generate this income, because it is automatically triggered by the sale of the phonograms and public performance. Interest or rental income, however, does not belong to the passive residual income, as the provision of capital and rental must be maintained permanently. The contrast is active income , which requires repetitive work to be achieved.

Individual evidence

  1. ↑ a b Peter Hahne / Florian Geyer, Wertorientierte Unternehmensführung , 2002, p. 56.
  2. ↑ a b David Stüker, Evaluation and Management of Customer Relationships from the Perspective of Corporate Value-Oriented Controlling , 2008, p. 107 f.
  3. ↑ David Stüker, Evaluation and Control of Customer Relationships from the Perspective of Corporate Value-Oriented Controlling , 2008, p. 117.