It is used to evaluate the margins from an economic perspective and it goes beyond the account-based analysis. It clears the distortion which was made due to structure of capital, life of the asset, off-balance sheet items etc.
Here the capital charge is the return on capital.
EM = Operating Cash Flow – Capital Charge
Invested Capital
Operating cash flow (-) capital charge is the economic profit by which managers can create value. Here operating cash flows also include the depreciation and amortization, unlike EBITDA.
Economic margin is basically a link between EVA (Economic Value Added) and CFROI (Cash flow return on Investment).
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