Residual Income

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Description of Residual Income. Explanation.

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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