Residual income recognises that equity isn’t free: shareholders expect a return. Positive residual income means management created value beyond that expectation. The residual income model values a company as book value plus the present value of future residual income.
How to use the Residual Income Calculator
- Equity capital
- Cost of equity
- Net income
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter equity capital (book value), the cost of equity and net income.
Tips
- Take figures from the same financial statements and the same fiscal year.
- Compare ratios with companies in the same industry, not across industries.
- Use several valuation measures together; no single ratio tells the whole story.
- Market prices change every second – refresh the share price before you rely on a result.
Common mistakes to avoid
- Mixing per-share figures with company totals.
- Using trailing earnings for one company and forward earnings for another.
- Forgetting dilution from options and convertible securities.
Inputs explained
| Field | What to enter |
|---|---|
| Equity capital | Amount in your currency |
| Cost of equity | In % |
| Net income | Amount in your currency |
What each result means
- Equity charge = [Equity capital]×[Cost of equity]÷100
- Residual income = [Net income] – [Equity charge]
- Return on equity = [Net income]÷[Equity capital]×100
Example values
How the main result changes when Equity capital changes and everything else stays at the example values above:
| Equity capital | Residual income |
|---|---|
| 25,000,000 | 4,500,000 |
| 37,500,000 | 3,250,000 |
| 50,000,000 | 2,000,000 |
| 62,500,000 | 750,000 |
| 75,000,000 | -500,000 |
| 100,000,000 | -3,000,000 |
Formula
Equity charge = equity capital × cost of equityResidual income = net income − equity chargeWorked example
Inputs — Equity capital: $50,000,000; Cost of equity: 10 %; Net income: $7,000,000.
Results — Equity charge = $5,000,000.00; Residual income = $2,000,000.00; Return on equity = 14 %.
Frequently asked questions
What is residual income?
Net income minus a charge for the cost of equity.
What does positive residual income mean?
The company earned more than shareholders required.
How is it different from EVA?
EVA uses all capital and NOPAT; residual income uses equity and net income.
What formula does the Residual Income Calculator use?
Equity charge = equity capital × cost of equity.