DEFINITION of 'Economic Spread'

1. A performance metric that is equal to the difference between a company's weighted average cost of capital (WACC) and its return on invested capital (ROIC).

2. The difference between the real rate of return on an investment and the rate of inflation in the economy.

BREAKING DOWN 'Economic Spread'

1. Economic spread is a measure of a company's ability to make money on its investments. If the cost of capital exceeds the return on invested capital, the company is losing money: what the company is doing with the capital is not providing enough to cover the cost of borrowing or using it.

2. Economic spread is important for evaluating the returns of a pension plan. The value of its invested funds may be increasing at what seems to be a acceptable level, but if the invested capital is not growing at a rate above inflation, the investment is actually losing its value on an annual basis. This nominal loss results from the fact that the invested capital will not be able to buy as much for the investor in the future as it can in the present time.

RELATED TERMS
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating ...
  2. Weighted Average Cost Of Capital ...

    Weighted average cost of capital (WACC) is a calculation of a ...
  3. Return On New Invested Capital ...

    A calculation used, either by a firm or investors, to determine ...
  4. Return On Capital Gains

    The return that one gets from an increase in the value of a capital ...
  5. Return

    The gain or loss of a security in a particular period. The return ...
  6. Capital Investment

    Funds invested in a firm or enterprise for the purposes of furthering ...
Related Articles
  1. Trading

    Find Quality Investments With ROIC

    Return on invested capital is a great way to measure the true value produced by a company. Learn to use the ROIC metric and increase your chances of finding successful investments.
  2. Investing

    The Return On Invested Capital (ROIC)

    Return on Invested Capital, or ROIC, is a fundamental method of determining a company's financial performance. It is used to measure how well a company is investing its capital. ROIC is calculated ...
  3. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  4. Investing

    Investors Need A Good WACC

    Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality.
  5. Insights

    What's a Return of Capital?

    A return of capital is an investment return that is not considered income.
  6. Insights

    What's a Real Rate of Return?

    A real rate of return is an annual percentage investment return that’s adjusted for inflation, taxes or other factors.
  7. Small Business

    Understanding Capital Investment

    Capital investment is a term that describes a company’s expenditures for long-term assets used in the operation of its business.
  8. Investing

    How to Calculate Required Rate of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  9. Small Business

    Understanding Capital

    Capital has a variety of meanings, but it generally refers to financial resources.
  10. Investing

    How Interest Rates Affect Property Values

    When interest rates fall, real estate prices tend to increase. Why? Find out here.
RELATED FAQS
  1. What is the difference between the cost of capital and required return?

    Take a look at the primary conceptual differences between an investor's required rate of return and an issuing company's ... Read Answer >>
  2. What is the lowest capitalization rate before an investment becomes unprofitable?

    Learn about different levels of profitability associated with investments featuring similar capitalization rates. Explore ... Read Answer >>
  3. What does a high weighted average cost of capital (WACC) signify?

    Find out what it means for a company to have a relatively high weighted average cost of capital, or WACC, and why this is ... Read Answer >>
  4. What are some examples of return on investment capital?

    Read about some basic examples of return on investment capital for publicly traded companies and companies that have a handful ... Read Answer >>
  5. How do interest rates affect the weighted average cost of capital (WACC) calculation?

    The interest rate is one of many external factors that can change the inputs in the weighted average cost of capital (WACC) ... Read Answer >>
  6. How do you calculate the ratio between debt and equity in the cost of capital

    Discover how to calculate the ratio between debt and equity when making cost of capital estimations using the weighted average ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center