Economic Margin (EM)

What is Economic Margin (EM)?

Economic margin (EM) is a financial metric that measures a company's profitability after accounting for all of its costs, including both its explicit and implicit costs. It is a measure of the excess return that a company generates over and above its opportunity cost of capital.

Explicit costs are the direct costs that a company incurs in order to produce and sell its products or services, such as raw materials, labor, and other direct expenses. Implicit costs, on the other hand, are the opportunity costs that a company incurs as a result of using its own resources, such as the time and effort of its employees, or the use of its own equipment.

To calculate economic margin, a company must first determine its net income, which is its revenue minus its explicit costs. It must then subtract its implicit costs, which are often referred to as the "economic profit." The resulting value is the company's economic margin.

Economic margin is an important metric for investors and analysts because it provides a more comprehensive view of a company's profitability than other financial metrics, such as gross margin or net profit margin, which only consider explicit costs. It is also a useful metric for comparing the profitability of different companies or industries, as it takes into account both explicit and implicit costs.

Overall, economic margin is a valuable tool for understanding a company's profitability and its ability to generate excess returns for its shareholders.