Formats and related files
Ernst & Young (EY) was commissioned by the Crown Ownership Monitoring Unit (COMU), precursor to the Treasury's Commercial Operations group, to undertake an economic profit analysis of commercial priority portfolio state enterprises (all operational SOEs plus Air NZ, Public Trust and TVNZ) for the 10-year period to June 2011. EY's report was completed in November 2011.
Economic profit is a measure of profit that takes into account the opportunity cost of capital tied up in a business. In an environment where Crown capital is subject to competing demands, state enterprises must not only break even on an accounting basis, but also have sufficient earnings to cover the cost of the capital used in financing their operations.
There is no "standard" methodology for economic profit. It is generally calculated by subtracting Capital Charge from Net Operating Profit after Tax (NOPAT), where Capital Charge equals Invested Capital multiplied by Weighted Average Cost of Capital (WACC).
Economic profit is a useful indicator of performance. However, as with any metric, it does not provide a complete performance assessment and is dependent upon assumptions used and accounting policies adopted. As such, care needs to be taken in interpreting outputs; trends in economic profit can provide as much information as absolute values. For this reason, a 10-year economic profit analysis has been undertaken.