Residual Income Calculator — Economic Value Added
Residual income tells you how much profit a business earns above and beyond the minimum return its investors require. A positive RI means the company is creating value; a negative one means it is destroying it, even if net income is positive.
%
Value created above the cost of equity
Value
70,000Equity charge
53.3%
Residual income
46.7%
- 1
Equity charge
800,000 × 10% ÷ 100 = 80,000The minimum profit investors require on the equity capital deployed. - 2
Residual Income
150,000 − 80,000 = 70,000
How does this calculator work?
Residual Income = Net Income − (Equity Capital × Required Rate of Return). A positive result means value created beyond the equity charge; a negative result means value destruction despite any reported profit. Enter your net income, equity book value, and cost of equity to see the RI and spread between actual ROE and the required rate.
Formula
How this is calculated
Residual income (RI) adjusts accounting profit for the opportunity cost of equity. Shareholders expect a minimum return on the capital they have invested — the required rate of return, or cost of equity. Multiplying equity capital by that rate gives the equity charge: the minimum profit the business must earn just to satisfy investors. Subtracting the equity charge from net income yields RI. A positive RI signals genuine value creation; a zero RI means investors are exactly compensated; a negative RI means the business is consuming value even if it reports a profit.
RI is closely related to Economic Value Added (EVA), which uses the full weighted-average cost of capital (WACC) rather than just equity cost, and starts from after-tax operating profit rather than net income. This calculator focuses on the equity-only version, which is commonly used in investment analysis, divisional performance appraisal, and the residual-income stock-valuation model (RI = Earnings − r × Book Value per share).
Key assumptions: net income here is after tax but before financing costs (equivalent to NOPAT in a purely equity-financed firm). The required rate of return is an estimate — the Capital Asset Pricing Model (CAPM) is the standard method for deriving it from market risk data, but any target return figure works. Both inputs are editable so you can model different scenarios.
Frequently asked questions
A negative RI means the company earns less than the minimum return shareholders require on their investment. Even if net income is positive, the business is not covering its full cost of capital and is therefore destroying economic value.
Net income deducts interest paid on debt but ignores the cost of equity capital. Residual income goes further by subtracting the equity charge — the return shareholders expect — revealing whether the firm genuinely creates value above all its capital costs.
The most common approach is CAPM: Required return = Risk-free rate + Beta × Market risk premium. Typical values range from 8–15% for listed equities. For internal hurdle rates, companies often use their weighted-average cost of capital (WACC).
Also known as
TG we-Calculate Editorial Team. (2026). Residual Income Calculator — Economic Value Added [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/residual-income-calculator
TG we-Calculate Editorial Team. "Residual Income Calculator — Economic Value Added." TG we-Calculate. 2026. https://we-calculate.com/calculator/residual-income-calculator.
TG we-Calculate Editorial Team, "Residual Income Calculator — Economic Value Added," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/residual-income-calculator
@misc{wecalculate_residual_income_calculator, title = {Residual Income Calculator — Economic Value Added}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/residual-income-calculator}}, year = {2026}, note = {TG we-Calculate} }
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