Economic Profit (YavuzAkbay)

Oct 30, 2024

The Economic Profit Indicator is a Pine Script™ tool for assessing a company’s economic profit based on key financial metrics like Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC). This indicator is designed to give traders a more accurate understanding of risk-adjusted returns.

Features

• Customizable inputs for Risk-Free Rate and Corporate Tax Rate assets for people who are trading in other countries.
  
• Calculates Economic Profit based on ROIC and WACC, with values shown as both plots and in an on-screen table.
  
• Provides detailed breakdowns of all key calculations, enabling deeper insights into financial performance.
  

How to Use
Open the stock to be analyzed. In the settings, enter the risk-free asset (usually a 10-year bond) of the country where the company to be analyzed is located. Then enter the corporate tax of the country (USCTR for the USA, DECTR for Germany). Then enter the average return of the index the stock is in. I prefer 10% (0.10) for the SP500, different rates can be entered for different indices. Finally, the beta of the stock is entered. In future versions I will automatically pull beta and index returns, but in order to publish the indicator a bit earlier, I have left it entirely up to the investor.

How to Interpret
We see 3 pieces of data on the indicator. The dark blue one is ROIC, the dark orange one is WACC and the light blue line represents the difference between WACC and ROIC.

1. In a scenario where both ROIC and WACC are negative, if ROIC is lower than WACC, the share is at a complete economic loss.
   
2. In a scenario where both ROIC and WACC are negative, if ROIC has started to rise above WACC and is moving towards positive, the share is still in an economic loss but tending towards profit.
   
3. A scenario where ROIC is positive and WACC is negative is the most natural scenario for a company. In this scenario, we know that the company is doing well by a gradually increasing ROIC and a stable WACC.
   
4. In addition, if the ROIC and WACC difference line goes above 0, the company is now economically in net profit. This is the best scenario for a company.
   

My own investment strategy as a developer of the code is to look for the moment when ROIC is greater than WACC when ROIC and WACC are negative. At that point the stock is the best time to invest.

Trading is risky, and most traders lose money. The indicators Yavuz Akbay offers are for informational and educational purposes only. All content should be considered hypothetical, selected after the facts to demonstrate my product, and not constructed as financial advice. Decisions to buy, sell, hold, or trade in securities, commodities, and other investments involve risk and are best made based on the advice of qualified financial professionals. Past performance does not guarantee future results.

This indicator is experimental and will always remain experimental. The indicator will be updated by Yavuz Akbay according to market conditions.

Oct 31, 2024

Release Notes

With the new update, the Beta of stocks will now be determined automatically. Therefore, I have taken another burden off the shoulders of investors. However, the indicator should only be used on a monthly basis, as the indicator can only calculate betas accurately on a monthly basis.