Microsoft Excel LibreOffice Calc

Apple Inc. (AAPL)

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

Apple Inc., economic profit calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013
Net operating profit after taxes (NOPAT)1 25,161  52,089  46,554  55,178  43,505  39,927 
Cost of capital2 12.00% 11.80% 11.67% 12.07% 12.41% 12.67%
Invested capital3 30,068  51,146  40,704  38,792  39,875  38,109 
Economic profit4 21,553  46,055  41,804  50,495  38,556  35,100 

Based on: 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-27), 10-K (filing date: 2013-10-30).

2018 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
= 25,161 – 12.00% × 30,068 = 21,553

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. Apple Inc.’s economic profit increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Net Operating Profit after Taxes (NOPAT)

Apple Inc., NOPAT calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013
Net income 59,531  48,351  45,687  53,394  39,510  37,037 
Deferred income tax expense (benefit)1 (32,590) 5,966  4,938  1,382  2,347  1,141 
Increase (decrease) in deferred revenue2 (44) (626) (1,554) 1,042  1,462  1,459 
Increase (decrease) in accrued warranty and related costs3 (142) 132  (1,078) 621  1,192  1,329 
Increase (decrease) in equity equivalents4 (32,776) 5,472  2,306  3,045  5,001  3,929 
Interest expense 3,240  2,323  1,456  733  384  136 
Interest expense, operating lease obligations5 355  310  242  158  69  95 
Adjusted interest expense 3,595  2,633  1,698  891  453  231 
Tax benefit of interest expense6 (881) (922) (594) (312) (158) (81)
Adjusted interest expense, after taxes7 2,714  1,711  1,104  579  294  150 
(Gain) loss on marketable securities (20) (99) 87  91  (205) (213)
Interest and dividend income (5,686) (5,201) (3,999) (2,921) (1,795) (1,616)
Investment income, before taxes (5,706) (5,300) (3,912) (2,830) (2,000) (1,829)
Tax expense (benefit) of investment income8 1,398  1,855  1,369  991  700  640 
Investment income, after taxes9 (4,308) (3,445) (2,543) (1,840) (1,300) (1,189)
Net operating profit after taxes (NOPAT) 25,161  52,089  46,554  55,178  43,505  39,927 

Based on: 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-27), 10-K (filing date: 2013-10-30).

2018 Calculations

1 Elimination of deferred tax expense. See Details »

2 Addition of increase (decrease) in deferred revenue.

3 Addition of increase (decrease) in accrued warranty and related costs.

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

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

6 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 3,595 × 24.50% = 881

7 Addition of after taxes interest expense to net income.

8 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 5,706 × 24.50% = 1,398

9 Elimination of after taxes investment income.

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. Apple Inc.’s NOPAT increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Cash Operating Taxes

Apple Inc., cash operating taxes calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013
Provision for income taxes 13,372  15,738  15,685  19,121  13,973  13,118 
Less: Deferred income tax expense (benefit) (32,590) 5,966  4,938  1,382  2,347  1,141 
Add: Tax savings from interest expense 881  922  594  312  158  81 
Less: Tax imposed on investment income 1,398  1,855  1,369  991  700  640 
Cash operating taxes 45,445  8,839  9,972  17,060  11,084  11,418 

Based on: 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-27), 10-K (filing date: 2013-10-30).

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. Apple Inc.’s cash operating taxes declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Invested Capital

Apple Inc., invested capital calculation (financing approach)

USD $ in millions

Microsoft Excel LibreOffice Calc
Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013
Commercial paper 11,964  11,977  8,105  8,499  6,308  — 
Current portion of term debt 8,784  6,496  3,500  2,500  —  — 
Term debt, excluding current portion 93,735  97,207  75,427  53,463  28,987  16,960 
PV of operating lease payments1 7,973  8,069  6,540  5,572  4,709  4,322 
Total reported debt & leases 122,456  123,749  93,572  70,034  40,004  21,282 
Shareholders’ equity 107,147  134,047  128,249  119,355  111,547  123,549 
Net deferred tax (assets) liabilities2 (5,834) 27,588  21,906  16,260  15,120  12,282 
Deferred revenue3 10,340  10,384  11,010  12,564  11,522  10,060 
Accrued warranty and related costs4 3,692  3,834  3,702  4,780  4,159  2,967 
Equity equivalents5 8,198  41,806  36,618  33,604  30,801  25,309 
Accumulated other comprehensive (income) loss, net of tax6 3,454  150  (634) 345  (1,082) 471 
Adjusted shareholders’ equity 118,799  176,003  164,233  153,304  141,266  149,329 
Marketable securities7 (211,187) (248,606) (217,101) (184,546) (141,395) (132,502)
Invested capital 30,068  51,146  40,704  38,792  39,875  38,109 

Based on: 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-27), 10-K (filing date: 2013-10-30).

1 Addition of capitalized operating leases. See Details »

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

3 Addition of deferred revenue.

4 Addition of accrued warranty and related costs.

5 Addition of equity equivalents to shareholders’ equity.

6 Removal of accumulated other comprehensive income.

7 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. Apple Inc.’s invested capital increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Cost of Capital

Apple Inc., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 956,625  956,625  ÷ 1,079,762  = 0.89 0.89 × 13.15% = 11.65%
Commercial paper and term debt3 115,164  115,164  ÷ 1,079,762  = 0.11 0.11 × 4.03% × (1 – 24.50%) = 0.32%
PV of operating lease payments4 7,973  7,973  ÷ 1,079,762  = 0.01 0.01 × 4.03% × (1 – 24.50%) = 0.02%
Total: 1,079,762  1.00 12.00%

Based on: 10-K (filing date: 2018-11-05).

1 USD $ in millions

2 Equity. See Details »

3 Commercial paper and term debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 885,669  885,669  ÷ 1,011,815  = 0.88 0.88 × 13.15% = 11.51%
Commercial paper and term debt3 118,077  118,077  ÷ 1,011,815  = 0.12 0.12 × 3.50% × (1 – 35.00%) = 0.27%
PV of operating lease payments4 8,069  8,069  ÷ 1,011,815  = 0.01 0.01 × 3.50% × (1 – 35.00%) = 0.02%
Total: 1,011,815  1.00 11.80%

Based on: 10-K (filing date: 2017-11-03).

1 USD $ in millions

2 Equity. See Details »

3 Commercial paper and term debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 616,362  616,362  ÷ 712,708  = 0.86 0.86 × 13.15% = 11.38%
Commercial paper and term debt3 89,805  89,805  ÷ 712,708  = 0.13 0.13 × 3.34% × (1 – 35.00%) = 0.27%
PV of operating lease payments4 6,540  6,540  ÷ 712,708  = 0.01 0.01 × 3.34% × (1 – 35.00%) = 0.02%
Total: 712,708  1.00 11.67%

Based on: 10-K (filing date: 2016-10-26).

1 USD $ in millions

2 Equity. See Details »

3 Commercial paper and term debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 664,970  664,970  ÷ 733,941  = 0.91 0.91 × 13.15% = 11.92%
Commercial paper and term debt3 63,399  63,399  ÷ 733,941  = 0.09 0.09 × 2.54% × (1 – 35.00%) = 0.14%
PV of operating lease payments4 5,572  5,572  ÷ 733,941  = 0.01 0.01 × 2.54% × (1 – 35.00%) = 0.01%
Total: 733,941  1.00 12.07%

Based on: 10-K (filing date: 2015-10-28).

1 USD $ in millions

2 Equity. See Details »

3 Commercial paper and term debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 616,453  616,453  ÷ 655,970  = 0.94 0.94 × 13.15% = 12.36%
Commercial paper and term debt3 34,808  34,808  ÷ 655,970  = 0.05 0.05 × 1.28% × (1 – 35.00%) = 0.04%
PV of operating lease payments4 4,709  4,709  ÷ 655,970  = 0.01 0.01 × 1.28% × (1 – 35.00%) = 0.01%
Total: 655,970  1.00 12.41%

Based on: 10-K (filing date: 2014-10-27).

1 USD $ in millions

2 Equity. See Details »

3 Commercial paper and term debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 472,299  472,299  ÷ 492,521  = 0.96 0.96 × 13.15% = 12.61%
Commercial paper and term debt3 15,900  15,900  ÷ 492,521  = 0.03 0.03 × 1.94% × (1 – 35.00%) = 0.04%
PV of operating lease payments4 4,322  4,322  ÷ 492,521  = 0.01 0.01 × 1.94% × (1 – 35.00%) = 0.01%
Total: 492,521  1.00 12.67%

Based on: 10-K (filing date: 2013-10-30).

1 USD $ in millions

2 Equity. See Details »

3 Commercial paper and term debt. See Details »

4 PV of operating lease payments. See Details »

Economic Spread

Apple Inc., economic spread calculation

Microsoft Excel LibreOffice Calc
Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 21,553  46,055  41,804  50,495  38,556  35,100 
Invested capital2 30,068  51,146  40,704  38,792  39,875  38,109 
Ratio
Economic spread3 71.68% 90.05% 102.70% 130.17% 96.69% 92.10%

Based on: 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-27), 10-K (filing date: 2013-10-30).

2018 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 21,553 ÷ 30,068 = 71.68%

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. Apple Inc.’s economic spread deteriorated from 2016 to 2017 and from 2017 to 2018.

Economic Profit Margin

Apple Inc., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 21,553  46,055  41,804  50,495  38,556  35,100 
Net sales 265,595  229,234  215,639  233,715  182,795  170,910 
Add: Increase (decrease) in deferred revenue (44) (626) (1,554) 1,042  1,462  1,459 
Adjusted net sales 265,551  228,608  214,085  234,757  184,257  172,369 
Ratio
Economic profit margin2 8.12% 20.15% 19.53% 21.51% 20.92% 20.36%

Based on: 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-27), 10-K (filing date: 2013-10-30).

2018 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Adjusted net sales
= 100 × 21,553 ÷ 265,551 = 8.12%

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. Apple Inc.’s economic profit margin improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.