Microsoft Excel LibreOffice Calc

Alphabet Inc. (GOOG)

Economic Value Added (EVA)

High level of difficulty

EVA is registered trademark of Stern Stewart.

Economic value added or economic profit is the difference between revenues and costs,where costs include not only expenses, but also cost of capital.

Economic Profit

Alphabet Inc., economic profit calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net operating profit after taxes (NOPAT)1 29,841  12,948  19,452  15,883  12,721 
Cost of capital2 11.99% 11.99% 11.95% 11.88% 11.83%
Invested capital3 86,977  65,705  72,287  71,467  64,391 
 
Economic profit4 19,409  5,068  10,810  7,393  5,105 

Based on: 10-K (filing date: 2019-02-05), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09).

1 NOPAT. See details »

2 Cost of capital. See details »

3 Invested capital. See details »

<>4 2018 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 29,841 – 11.99% × 86,977 = 19,409

Item Description The company
Economic profit Economic profit is a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital. Alphabet Inc.’s economic profit declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Net Operating Profit after Taxes (NOPAT)

Alphabet Inc., NOPAT calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income 30,736  12,662  19,478  16,348  14,444 
Deferred income tax expense (benefit)1 773  177  (120) (258) (7)
Increase (decrease) in allowance for doubtful accounts and sales credits2 55  207  171  71  (406)
Increase (decrease) in deferred revenue3 408  471  362  83  (345)
Increase (decrease) in equity equivalents4 1,236  855  413  (104) (758)
Interest expense 114  109  124  104  101 
Interest expense, operating lease liability5 256  222  199  131  107 
Adjusted interest expense 370  331  323  235  208 
Tax benefit of interest expense6 (78) (116) (113) (82) (73)
Adjusted interest expense, after taxes7 293  215  210  153  135 
(Gain) loss on marketable securities (1,190) 105  221  208  (153)
Interest income (1,878) (1,312) (1,220) (999) (746)
Investment income, before taxes (3,068) (1,207) (999) (791) (899)
Tax expense (benefit) of investment income8 644  422  350  277  315 
Investment income, after taxes9 (2,424) (785) (649) (514) (584)
(Income) loss from discontinued operations, net of tax10 —  —  —  —  (516)
Net operating profit after taxes (NOPAT) 29,841  12,948  19,452  15,883  12,721 

Based on: 10-K (filing date: 2019-02-05), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09).

1 Elimination of deferred tax expense. See details »

2 Addition of increase (decrease) in allowance for doubtful accounts and sales credits.

3 Addition of increase (decrease) in deferred revenue.

4 Addition of increase (decrease) in equity equivalents to net income.

5 2018 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 8,872 × 2.89% = 256

6 2018 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 370 × 21.00% = 78

7 Addition of after taxes interest expense to net income.

8 2018 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 3,068 × 21.00% = 644

9 Elimination of after taxes investment income.

10 Elimination of discontinued operations.

Item Description The company
NOPAT Net operating profit after taxes is income from operations, but after removement of taxes calculated on cash basis that are relevant to operating income. Alphabet Inc.’s NOPAT declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Cash Operating Taxes

Alphabet Inc., cash operating taxes calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Provision for income taxes 4,177  14,531  4,672  3,303  3,331 
Less: Deferred income tax expense (benefit) 773  177  (120) (258) (7)
Add: Tax savings from interest expense 78  116  113  82  73 
Less: Tax imposed on investment income 644  422  350  277  315 
Cash operating taxes 2,838  14,048  4,555  3,366  3,096 

Based on: 10-K (filing date: 2019-02-05), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09).

Item Description The company
Cash operating taxes Cash operating taxes are estimated by adjusting income tax expense for changes in deferred taxes and tax benefit from the interest deduction. Alphabet Inc.’s cash operating taxes increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Invested Capital

Alphabet Inc., invested capital calculation (financing approach)

US$ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Short-term debt —  —  —  3,225  2,009 
Long-term debt, excluding short-term portion 4,012  3,969  3,935  1,995  3,228 
Operating lease liability1 8,872  7,693  6,884  6,710  5,623 
Total reported debt & leases 12,884  11,662  10,819  11,930  10,860 
Stockholders’ equity 177,628  152,502  139,036  120,331  104,500 
Net deferred tax (assets) liabilities2 527  (250) (157) (62) 580 
Allowance for doubtful accounts and sales credits3 729  674  467  296  225 
Deferred revenue4 2,180  1,772  1,301  939  856 
Equity equivalents5 3,436  2,196  1,611  1,173  1,661 
Accumulated other comprehensive (income) loss, net of tax6 2,306  992  2,402  1,874  (27)
Adjusted stockholders’ equity 183,370  155,690  143,049  123,378  106,134 
Construction in progress7 (16,838) (10,491) (8,166) (7,324) (6,555)
Marketable securities8 (92,439) (91,156) (73,415) (56,517) (46,048)
Invested capital 86,977  65,705  72,287  71,467  64,391 

Based on: 10-K (filing date: 2019-02-05), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09).

1 Addition of capitalized operating leases.

2 Elimination of deferred taxes from assets and liabilities. See details »

3 Addition of allowance for doubtful accounts receivable.

4 Addition of deferred revenue.

5 Addition of equity equivalents to stockholders’ equity.

6 Removal of accumulated other comprehensive income.

7 Subtraction of construction in progress.

8 Subtraction of marketable securities.

Item Description The company
Invested capital Capital is an approximation of the economic book value of all cash invested in going-concern business activities. Alphabet Inc.’s invested capital declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Cost of Capital

Alphabet Inc., cost of capital calculations

Capital (fair value)1 Weights Cost of capital
Equity2 796,677  796,677  ÷ 809,511  = 0.98 0.98 × 12.15% = 11.96%
Debt and capital lease obligation3 3,962  3,962  ÷ 809,511  = 0.00 0.00 × 2.89% × (1 – 21.00%) = 0.01%
Operating lease liability4 8,872  8,872  ÷ 809,511  = 0.01 0.01 × 2.89% × (1 – 21.00%) = 0.03%
Total capital: 809,511  Total weights: 1.00 Cost of total capital: 11.99%

Based on: 10-K (filing date: 2019-02-05).

1 US$ in millions

2 Equity. See details »

3 Debt and capital lease obligation. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 751,339  751,339  ÷ 763,058  = 0.98 0.98 × 12.15% = 11.96%
Debt and capital lease obligation3 4,026  4,026  ÷ 763,058  = 0.01 0.01 × 2.89% × (1 – 35.00%) = 0.01%
Operating lease liability4 7,693  7,693  ÷ 763,058  = 0.01 0.01 × 2.89% × (1 – 35.00%) = 0.02%
Total capital: 763,058  Total weights: 1.00 Cost of total capital: 11.99%

Based on: 10-K (filing date: 2018-02-06).

1 US$ in millions

2 Equity. See details »

3 Debt and capital lease obligation. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 554,166  554,166  ÷ 564,950  = 0.98 0.98 × 12.15% = 11.92%
Debt and capital lease obligation3 3,900  3,900  ÷ 564,950  = 0.01 0.01 × 2.89% × (1 – 35.00%) = 0.01%
Operating lease liability4 6,884  6,884  ÷ 564,950  = 0.01 0.01 × 2.89% × (1 – 35.00%) = 0.02%
Total capital: 564,950  Total weights: 1.00 Cost of total capital: 11.95%

Based on: 10-K (filing date: 2017-02-03).

1 US$ in millions

2 Equity. See details »

3 Debt and capital lease obligation. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 470,198  470,198  ÷ 482,233  = 0.98 0.98 × 12.15% = 11.85%
Debt and capital lease obligation3 5,325  5,325  ÷ 482,233  = 0.01 0.01 × 1.95% × (1 – 35.00%) = 0.01%
Operating lease liability4 6,710  6,710  ÷ 482,233  = 0.01 0.01 × 1.95% × (1 – 35.00%) = 0.02%
Total capital: 482,233  Total weights: 1.00 Cost of total capital: 11.88%

Based on: 10-K (filing date: 2016-02-11).

1 US$ in millions

2 Equity. See details »

3 Debt and capital lease obligation. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 359,253  359,253  ÷ 370,222  = 0.97 0.97 × 12.15% = 11.79%
Debt and capital lease obligation3 5,346  5,346  ÷ 370,222  = 0.01 0.01 × 1.91% × (1 – 35.00%) = 0.02%
Operating lease liability4 5,623  5,623  ÷ 370,222  = 0.02 0.02 × 1.91% × (1 – 35.00%) = 0.02%
Total capital: 370,222  Total weights: 1.00 Cost of total capital: 11.83%

Based on: 10-K (filing date: 2015-02-09).

1 US$ in millions

2 Equity. See details »

3 Debt and capital lease obligation. See details »

4 Operating lease liability. See details »

Economic Spread Ratio

Alphabet Inc., economic spread ratio calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US$ in millions)
Economic profit1 19,409  5,068  10,810  7,393  5,105 
Invested capital2 86,977  65,705  72,287  71,467  64,391 
Performance Ratio
Economic spread ratio3 22.31% 7.71% 14.95% 10.34% 7.93%

Based on: 10-K (filing date: 2019-02-05), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09).

1 Economic profit. See details »

2 Invested capital. See details »

3 2018 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × 19,409 ÷ 86,977 = 22.31%

Performance ratio Description The company
Economic spread ratio The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital. Alphabet Inc.’s economic spread ratio deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Economic Profit Margin

Alphabet Inc., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US$ in millions)
Economic profit1 19,409  5,068  10,810  7,393  5,105 
Revenues 136,819  110,855  90,272  74,989  66,001 
Add: Increase (decrease) in deferred revenue 408  471  362  83  (345)
Adjusted revenues 137,227  111,326  90,634  75,072  65,656 
Performance Ratio
Economic profit margin2 14.14% 4.55% 11.93% 9.85% 7.78%

Based on: 10-K (filing date: 2019-02-05), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09).

1 Economic profit. See details »

2 2018 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted revenues
= 100 × 19,409 ÷ 137,227 = 14.14%

Performance ratio Description The company
Economic profit margin The ratio of economic profit to sales. It is the company’s profit margin covering income efficiency and asset management. Economic profit margin is not biased in favor of capital-intensive business models, because any added capital is a cost to the economic profit margin. Alphabet Inc.’s economic profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.