Value Added as a Measure of Economic Profit

Silvije Orsag; Ante Džidić

doi:10.7251/ACE1829009O

Authors

Silvije Orsag University of Zagreb, Faculty of Economics and Business – Zagreb http://orcid.org/0000-0002-8151-0656
Ante Džidić Faculty of Economics University of Mostar http://orcid.org/0000-0002-0869-7864

DOI:

https://doi.org/10.7251/ACE1829009O

Keywords:

accounting profit, normal profit, economic profit, the cost of capital, value added

Abstract

Economic profit is the concept immanent for the value added. It is an attempt to analyze properly the business success in terms of contribution of profit to the increase in the company value and the stockholders’ wealth. Fundamentally, value added is a measure of the business success where all standard costs and the costs of invested capital are excluded from the realized revenues. Profit as a traditional measure of business success ignores the cost of equity, although equity is the most expensive form of capital. To illustrate better this concept, we made an analysis of the most profitable corporations in Bosnia and Herzegovina listed on Banja Luka and Sarajevo stock exchanges. The analysis showed that the majority of these corporations operate poorly because they do not meet the implicit cost of capital, essentially losing the value of capital entrusted to them by their stockholders. Also, this analysis questioned the importance of the industries which are usually considered to be the most important in BiH economy.

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