Definition Residual Income. Description.
Residual Income is the generic financial term for after-tax
profit less an imputed interest charge for the opportunity cost of capital
employed by the business. It is important to take the cost of capital into
account, because otherwise indications of corporate performance are unreliable.
These indications are used for many purposes including setting organizational
goals, measuring the performance of a corporation, determining management
bonuses, etc.
Economic Value Added,
Cash Value Added and
CFROI are all examples of residual income
measures.
EBIT,
EBITDA and Earnings
per Share are examples of measures that do not include the opportunity
cost of capital employed and are therefore unreliable when it comes to judging
organizational performance.
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Compare also: WACC
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