Reflection on Ruralco’s economic profit

ECONOMIC PROFIT (EP)

    2015 2014 2013 2012
Economic profit (RNOA – cost of capital) x net operating assets (NOA) (7,687.3) (12,084.5) (19,537.5) (8,311.7)

It was interesting to analyse Ruralco’s economic profit over the past four years as they all were large negative numbers. Even though all the economic profit measures were in negative the highest one was in 2015 which was -$7,687.3 and followed by -$8,311.7 in 2012. Then there were the very least economic profit measures which was – $12,084.5 in 2014 and -$19,537.5 in 2013.

In addition, in 2015 the company had a negative economic loss of -$7,687.3 due to the return on net operating assets (RNOA) being low at 7.29% which is less than the opportunity cost of capital. Having to take 10% for the cost of capital from this balance then multiplying by the net operating assets gave a negative figure.  The same reason went along for 2014 (5.82%), 2013 (1.67%) and 2012 (6.75%) because they all had the lowest net operating assets (RNOA) when compared to 2015 and they were all lower than the cost of capital of 10% as well. Moreover, another reason which would have lead the economic profit to be in negative would be that the price level could have been set below average total cost’s (ATC) minimum. Then as a result, there are negative economic profit through out the four years. It could also be that the cost of equity capital exceeded the accounting profit and resulting as a negative economic profit. This means that Ruralco can have a positive accounting profit and a negative economic profit simultaneously.

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