Economic profit

Economic profit converts the return-on-capital story into dollars: it is the spread between ROIC and WACC, multiplied by the average invested capital base. A business with a 17-point spread and $50 billion of invested capital creates $8.5 billion of economic profit annually; a business with a 0-point spread creates none, regardless of how big its accounting profit looks. Economic profit is our preferred metric for quantifying moat strength because it converts a percentage spread into the size of the cumulative value-creation engine. Buffett's 'economic goodwill' concept is essentially a discounted-cash-flow valuation of forward economic profit. We track five-year economic-profit trends as a moat-durability signal: businesses with rising economic profit and a rising economic-profit margin (economic profit divided by revenue) are widening their moat; businesses with flat or falling economic profit despite revenue growth are scaling without compounding, which usually precedes a multiple compression.