Economic profit is a measure of what a company generates above a pre-determined hurdle rate. While the hurdle rate may feel arbitrary, commonly called either the cost of equity or cost of capital, it measures the implied return a stock should offer based on the risk associated with it. Companies are creating value for shareholders when they generate value above their hurdle rates – companies with positive and/or accelerating economic profit are typically associated with companies that have rising share-prices. In contrast, companies with decelerating Economic Profit are usually associated with companies who experience a deceleration in the increase of their share-price or exhibit falling share-prices.
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