Super profit is a term used in accounting and finance to describe the excess profit earned by a company over and above the normal profit. It is also known as abnormal profit or economic profit.

Calculating Super Profit

There are different methods of calculating super profit, but the most commonly used one is:

Super profit = Average profit - Normal profit

Where:

- Average profit is the profit earned by a company over a period of time, typically three to five years.
- Normal profit is the minimum profit required to cover the cost of capital, including the cost of debt and equity.

The concept of normal profit is important because it represents the opportunity cost of using the company's resources. If the company earns less than the normal profit, it is better off investing its capital elsewhere. If it earns more than the normal profit, it is generating a return on investment that exceeds the cost of capital.

Using the super profit formula, we can determine how much of the company's profit is due to its ability to generate returns above the cost of capital, and how much is due to other factors such as luck, timing, or market conditions.

Significance of Super Profit

Super profit is an important metric for investors and analysts because it reflects the company's competitive advantage and its ability to generate sustainable profits over the long term. A company that consistently earns super profits is more likely to have a moat or a competitive advantage that protects its market share and pricing power.

Super profit is also used to estimate the value of a company in a discounted cash flow (DCF) analysis. By estimating the company's future super profits, analysts can calculate its intrinsic value and compare it to the market price.

Conclusion

Super profit is a useful concept for understanding a company's profitability and competitive advantage. By calculating the excess profit earned over and above the normal profit, investors and analysts can evaluate the company's ability to generate sustainable returns on investment.