.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
Applied Materials Inc., economic profit calculation
USD $ in millions
| 12 months ended | Oct 29, 2017 | Oct 30, 2016 | Oct 25, 2015 | Oct 26, 2014 | Oct 27, 2013 | Oct 28, 2012 | |
|---|---|---|---|---|---|---|---|
| | Net operating profit after taxes (NOPAT)1 | ||||||
| | Cost of capital2 | % | % | % | % | % | % |
| | Invested capital3 | ||||||
| | Economic profit4 | ||||||
Source: Based on data from Applied Materials Inc. Annual Reports
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
= – % × =
| 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. | Applied Materials Inc.'s economic profit increased from 2015 to 2016 and from 2016 to 2017. |
Net Operating Profit after Taxes (NOPAT)
Applied Materials Inc., NOPAT calculation
USD $ in millions
| 12 months ended | Oct 29, 2017 | Oct 30, 2016 | Oct 25, 2015 | Oct 26, 2014 | Oct 27, 2013 | Oct 28, 2012 | |
|---|---|---|---|---|---|---|---|
| | Net income | ||||||
| | Deferred income tax expense (benefit)1 | ||||||
| | Increase (decrease) in allowance for doubtful accounts2 | ||||||
| | Increase (decrease) in deferred revenue3 | ||||||
| | Increase (decrease) in warranty reserves4 | ||||||
| | Increase (decrease) in restructuring reserve5 | ||||||
| | Increase (decrease) in equity equivalents6 | ||||||
| | Interest expense | ||||||
| | Interest expense, operating lease obligations7 | ||||||
| | Adjusted interest expense | ||||||
| | Tax benefit of interest expense8 | ||||||
| | Adjusted interest expense, after taxes9 | ||||||
| | (Gain) loss on marketable securities | ||||||
| | Investment income, before taxes | ||||||
| | Tax expense (benefit) of investment income10 | ||||||
| | Investment income, after taxes11 | ||||||
| | Net operating profit after taxes (NOPAT) |
Source: Based on data from Applied Materials Inc. Annual Reports
2017 Calculations
1 Elimination of deferred tax expense. See Details »
2 Addition of increase (decrease) in allowance for doubtful accounts.
3 Addition of increase (decrease) in deferred revenue.
4 Addition of increase (decrease) in warranty reserves.
5 Addition of increase (decrease) in restructuring reserve.
6 Addition of increase (decrease) in equity equivalents to net income.
7 Addition of interest expense on capitalized operating leases. See Details »
8 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= × 35% =
9 Addition of after taxes interest expense to net income.
10 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= × 35% =
11 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. | Applied Materials Inc.'s NOPAT increased from 2015 to 2016 and from 2016 to 2017. |
Cash Operating Taxes
Applied Materials Inc., cash operating taxes calculation
USD $ in millions
| 12 months ended | Oct 29, 2017 | Oct 30, 2016 | Oct 25, 2015 | Oct 26, 2014 | Oct 27, 2013 | Oct 28, 2012 | |
|---|---|---|---|---|---|---|---|
| | Provision for income taxes | ||||||
| | Less: Deferred income tax expense (benefit) | ||||||
| | Add: Tax savings from interest expense | ||||||
| | Less: Tax imposed on investment income | ||||||
| | Cash operating taxes |
Source: Based on data from Applied Materials Inc. Annual Reports
| 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. | Applied Materials Inc.'s cash operating taxes declined from 2015 to 2016 but then slightly increased from 2016 to 2017. |
Invested Capital
Applied Materials Inc., invested capital calculation (financing approach)
USD $ in millions
| Oct 29, 2017 | Oct 30, 2016 | Oct 25, 2015 | Oct 26, 2014 | Oct 27, 2013 | Oct 28, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Notes payable, short-term | ||||||
| | Long-term debt | ||||||
| | PV of operating lease payments1 | ||||||
| | Total reported debt & leases | ||||||
| | Stockholders’ equity | ||||||
| | Net deferred tax (assets) liabilities2 | ||||||
| | Allowance for doubtful accounts3 | ||||||
| | Deferred revenue4 | ||||||
| | Warranty reserves5 | ||||||
| | Restructuring reserve6 | ||||||
| | Equity equivalents7 | ||||||
| | Accumulated other comprehensive (income) loss, net of tax8 | ||||||
| | Adjusted stockholders’ equity | ||||||
| | Construction in progress9 | ||||||
| | Available-for-sale investments10 | ||||||
| | Invested capital |
Source: Based on data from Applied Materials Inc. Annual Reports
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 warranty reserves.
6 Addition of restructuring reserve.
7 Addition of equity equivalents to stockholders’ equity.
8 Removal of accumulated other comprehensive income.
9 Subtraction of construction in progress.
10 Subtraction of available-for-sale investments.
| Item | Description | The company |
|---|---|---|
| Invested capital | Capital is an approximation of the economic book value of all cash invested in going-concern business activities. | Applied Materials Inc.'s invested capital declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Cost of Capital
Applied Materials Inc., cost of capital calculations
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | % | = | % | |||||
| Debt3 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| PV of operating lease payments4 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| Total: | % | ||||||||||
Source: Based on data from Applied Materials Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | % | = | % | |||||
| Debt3 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| PV of operating lease payments4 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| Total: | % | ||||||||||
Source: Based on data from Applied Materials Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | % | = | % | |||||
| Debt3 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| PV of operating lease payments4 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| Total: | % | ||||||||||
Source: Based on data from Applied Materials Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | % | = | % | |||||
| Debt3 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| PV of operating lease payments4 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| Total: | % | ||||||||||
Source: Based on data from Applied Materials Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | % | = | % | |||||
| Debt3 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| PV of operating lease payments4 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| Total: | % | ||||||||||
Source: Based on data from Applied Materials Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | % | = | % | |||||
| Debt3 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| PV of operating lease payments4 | ÷ | = | × | % × (1 – 35%) | = | % | |||||
| Total: | % | ||||||||||
Source: Based on data from Applied Materials Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Economic Spread
Applied Materials Inc., economic spread calculation
| Oct 29, 2017 | Oct 30, 2016 | Oct 25, 2015 | Oct 26, 2014 | Oct 27, 2013 | Oct 28, 2012 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | |||||||
| | Economic profit1 | ||||||
| | Invested capital2 | ||||||
| Ratio | |||||||
| | Economic spread3 | % | % | % | % | % | % |
Source: Based on data from Applied Materials Inc. Annual Reports
2017 Calculations
1 Economic profit. See Details »
2 Invested capital. See Details »
3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × ÷ = %
| 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. | Applied Materials Inc.'s economic spread improved from 2015 to 2016 and from 2016 to 2017. |
Economic Profit Margin
Applied Materials Inc., economic profit margin calculation
| Oct 29, 2017 | Oct 30, 2016 | Oct 25, 2015 | Oct 26, 2014 | Oct 27, 2013 | Oct 28, 2012 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | |||||||
| | Economic profit1 | ||||||
| | Net sales | ||||||
| | Increase (decrease) in deferred revenue | ||||||
| Ratio | |||||||
| | Economic profit margin2 | % | % | % | % | % | % |
Source: Based on data from Applied Materials Inc. Annual Reports
2017 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ (Net sales + Change in deferred revenue)
= 100 × ÷ ( + ) = %
| 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. | Applied Materials Inc.'s economic profit margin improved from 2015 to 2016 and from 2016 to 2017. |
