Definition for : Economic indicators of value creation
Economic indicators emerged with the realisation that Profitability (see Accounting criteria of value creation) per se cannot fully measure value because they do not Factor in risks. To measure value, Returns must also be compared with the cost of Capital employed. Using the Weighted average cost of capital, it is possible to assess whether value has been created (i.e. when Return on Capital employed is higher than the cost of Capital employed) or destroyed (i.e. Return on Capital employed is lower than the cost of Capital employed). Also the absolute amount of Value creation is used under the name of economic Value added. The best indicator, though, is the NPV (see Net present value), with the problem of calculating it over several periods. These indicators measure the past year's performance.
(See Chapter 28 investment criteria of the Vernimmen)
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