Microsoft Excel LibreOffice Calc

Alphabet Inc. (GOOG)

Economic Value Added (EVA)

Difficulty: Advanced

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

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net operating profit after taxes (NOPAT)1 12,948  19,457  15,890  12,727  11,276 
Cost of capital2 11.51% 11.47% 11.40% 11.35% 11.41%
Invested capital3 65,705  72,287  71,467  64,391  53,083 
Economic profit4 5,388  11,167  7,746  5,421  5,217 

Based on: 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), 10-K (filing date: 2014-02-12).

2017 Calculations

1 NOPAT. See Details »

2 Cost of capital. See Details »

3 Invested capital. See Details »

4 Economic profit = NOPAT – Cost of capital × Invested capital
= 12,948 – 11.51% × 65,705 = 5,388

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 increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

Net Operating Profit after Taxes (NOPAT)

Alphabet Inc., NOPAT calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net income 12,662  19,478  16,348  14,444  12,920 
Deferred income tax expense (benefit)1 177  (120) (258) (7) (453)
Increase (decrease) in allowance for doubtful accounts and sales credits2 207  171  71  (406) 50 
Increase (decrease) in deferred revenue3 471  362  83  (345) 206 
Increase (decrease) in restructuring accruals4 –  –  –  –  (196)
Increase (decrease) in equity equivalents5 855  413  (104) (758) (393)
Interest expense 109  124  104  101  83 
Interest expense, operating lease obligations6 247  219  142  116  64 
Adjusted interest expense 356  343  246  217  147 
Tax benefit of interest expense7 (125) (120) (86) (76) (51)
Adjusted interest expense, after taxes8 231  223  160  141  95 
(Gain) loss on marketable securities 80  210  208  (153) (201)
Interest income (1,312) (1,220) (999) (746) (785)
Investment income, before taxes (1,232) (1,010) (791) (899) (986)
Tax expense (benefit) of investment income9 431  354  277  315  345 
Investment income, after taxes10 (801) (657) (514) (584) (641)
(Income) loss from discontinued operations, net of tax11 –  –  –  (516) (706)
Net operating profit after taxes (NOPAT) 12,948  19,457  15,890  12,727  11,276 

Based on: 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), 10-K (filing date: 2014-02-12).

2017 Calculations

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 restructuring accruals.

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

6 Addition of interest expense on capitalized operating leases. See Details »

7 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 356 × 35% = 125

8 Addition of after taxes interest expense to net income.

9 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 1,232 × 35% = 431

10 Elimination of after taxes investment income.

11 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 increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

Cash Operating Taxes

Alphabet Inc., cash operating taxes calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Provision for income taxes 14,531  4,672  3,303  3,331  2,282 
Less: Deferred income tax expense (benefit) 177  (120) (258) (7) (453)
Add: Tax savings from interest expense 125  120  86  76  51 
Less: Tax imposed on investment income 431  354  277  315  345 
Cash operating taxes 14,047  4,558  3,370  3,099  2,441 

Based on: 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), 10-K (filing date: 2014-02-12).

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 2015 to 2016 and from 2016 to 2017.

Invested Capital

Alphabet Inc., invested capital calculation (financing approach)

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Short-term debt –  –  3,225  2,009  3,009 
Long-term debt, excluding short-term portion 3,969  3,935  1,995  3,228  2,236 
PV of operating lease payments1 7,693  6,884  6,710  5,623  3,829 
Total reported debt & leases 11,662  10,819  11,930  10,860  9,074 
Stockholders' equity 152,502  139,036  120,331  104,500  87,309 
Net deferred tax (assets) liabilities2 (250) (157) (62) 580  357 
Allowance for doubtful accounts and sales credits3 674  467  296  225  631 
Deferred revenue4 1,772  1,301  939  856  1,201 
Restructuring accruals5 –  –  –  –  57 
Equity equivalents6 2,196  1,611  1,173  1,661  2,246 
Accumulated other comprehensive (income) loss, net of tax7 992  2,402  1,874  (27) (125)
Adjusted stockholders' equity 155,690  143,049  123,378  106,134  89,430 
Construction in progress8 (10,491) (8,166) (7,324) (6,555) (5,602)
Marketable securities9 (91,156) (73,415) (56,517) (46,048) (39,819)
Invested capital 65,705  72,287  71,467  64,391  53,083 

Based on: 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), 10-K (filing date: 2014-02-12).

1 Addition of capitalized operating leases. See Details »

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 restructuring accruals.

6 Addition of equity equivalents to stockholders' equity.

7 Removal of accumulated other comprehensive income.

8 Subtraction of construction in progress.

9 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 increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

Cost of Capital

Alphabet Inc., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 751,339  751,339  ÷ 763,032  = 0.98 0.98 × 11.65% = 11.48%
Debt and capital lease obligation3 4,000  4,000  ÷ 763,032  = 0.01 0.01 × 2.89% × (1 – 35%) = 0.01%
PV of operating lease payments4 7,693  7,693  ÷ 763,032  = 0.01 0.01 × 2.89% × (1 – 35%) = 0.02%
Total: 763,032  1.00 11.51%

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

1 USD $ in millions

2 Equity. See Details »

3 Debt and capital lease obligation. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 554,166  554,166  ÷ 564,950  = 0.98 0.98 × 11.65% = 11.43%
Debt and capital lease obligation3 3,900  3,900  ÷ 564,950  = 0.01 0.01 × 2.89% × (1 – 35%) = 0.01%
PV of operating lease payments4 6,884  6,884  ÷ 564,950  = 0.01 0.01 × 2.89% × (1 – 35%) = 0.02%
Total: 564,950  1.00 11.47%

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

1 USD $ in millions

2 Equity. See Details »

3 Debt and capital lease obligation. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 470,198  470,198  ÷ 482,233  = 0.98 0.98 × 11.65% = 11.36%
Debt and capital lease obligation3 5,325  5,325  ÷ 482,233  = 0.01 0.01 × 1.95% × (1 – 35%) = 0.01%
PV of operating lease payments4 6,710  6,710  ÷ 482,233  = 0.01 0.01 × 1.95% × (1 – 35%) = 0.02%
Total: 482,233  1.00 11.40%

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

1 USD $ in millions

2 Equity. See Details »

3 Debt and capital lease obligation. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 359,253  359,253  ÷ 370,222  = 0.97 0.97 × 11.65% = 11.31%
Debt and capital lease obligation3 5,346  5,346  ÷ 370,222  = 0.01 0.01 × 1.91% × (1 – 35%) = 0.02%
PV of operating lease payments4 5,623  5,623  ÷ 370,222  = 0.02 0.02 × 1.91% × (1 – 35%) = 0.02%
Total: 370,222  1.00 11.35%

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

1 USD $ in millions

2 Equity. See Details »

3 Debt and capital lease obligation. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 398,792  398,792  ÷ 407,975  = 0.98 0.98 × 11.65% = 11.39%
Debt and capital lease obligation3 5,355  5,355  ÷ 407,975  = 0.01 0.01 × 1.49% × (1 – 35%) = 0.01%
PV of operating lease payments4 3,829  3,829  ÷ 407,975  = 0.01 0.01 × 1.49% × (1 – 35%) = 0.01%
Total: 407,975  1.00 11.41%

Based on: 10-K (filing date: 2014-02-12).

1 USD $ in millions

2 Equity. See Details »

3 Debt and capital lease obligation. See Details »

4 PV of operating lease payments. See Details »

Economic Spread

Alphabet Inc., economic spread calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 5,388  11,167  7,746  5,421  5,217 
Invested capital2 65,705  72,287  71,467  64,391  53,083 
Ratio
Economic spread3 8.20% 15.45% 10.84% 8.42% 9.83%

Based on: 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), 10-K (filing date: 2014-02-12).

2017 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 5,388 ÷ 65,705 = 8.20%

Ratio Description The company
Economic spread 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 improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Economic Profit Margin

Alphabet Inc., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 5,388  11,167  7,746  5,421  5,217 
Revenues 110,855  90,272  74,989  66,001  59,825 
Add: Increase (decrease) in deferred revenue 471  362  83  (345) 206 
Adjusted revenues 111,326  90,634  75,072  65,656  60,031 
Ratio
Economic profit margin2 4.84% 12.32% 10.32% 8.26% 8.69%

Based on: 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), 10-K (filing date: 2014-02-12).

2017 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Adjusted revenues
= 100 × 5,388 ÷ 111,326 = 4.84%

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 improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.