Economic Spread

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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.

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