What measures a company's economic profits instead of its accounting profits?

Economic Value Added (EVA) measures a company's economic profits rather than just its accounting profits by assessing the true economic performance of a business. It takes into consideration the opportunity cost of capital, which represents the return that could have been earned had the capital been invested in the next best alternative. This implies that EVA focuses on how well a company is generating returns in excess of its cost of capital.

In contrast, net income reflects the total profit of a company according to accounting principles, without accounting for the cost of capital used to generate that profit. Gross profit margin focuses on the relationship between gross profit and sales, not on the broader economic profitability from an investment perspective. Return on equity (ROE) evaluates the efficiency of a company in generating profits from shareholders' equity but does not address the cost of capital in determining the economic profit effectively.

Thus, Economic Value Added provides a more accurate measure of a company’s potential to create wealth over and above the costs of its investments.