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

Automatic Data Processing Inc., economic profit calculation

USD $ in thousands

 
12 months ended Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Net operating profit after taxes (NOPAT)1 1,775,941  1,532,229  1,297,055  1,453,072  1,372,588  1,334,235 
Cost of capital2 10.17% 10.07% 10.49% 9.89% 10.37% 10.40%
Invested capital3 7,519,836  7,921,908  6,104,700  8,331,374  7,711,953  7,494,400 
Economic profit4 1,011,259  734,474  656,631  628,926  573,194  555,011 

Source: Based on data from Automatic Data Processing 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
= 1,775,941 – 10.17% × 7,519,836 = 1,011,259

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. Automatic Data Processing Inc.'s economic profit increased from 2015 to 2016 and from 2016 to 2017.

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Net Operating Profit after Taxes (NOPAT)

Automatic Data Processing Inc., NOPAT calculation

USD $ in thousands

 
12 months ended Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Net earnings 1,733,400  1,492,500  1,452,500  1,515,900  1,405,800  1,388,500 
Deferred income tax expense (benefit)1 8,100  700  (15,300) (50,300) 24,600  38,100 
Increase (decrease) in allowance for doubtful accounts2 11,500  2,600  (7,200) 5,500  4,800  (4,000)
Increase (decrease) in deferred revenues3 10,000  23,000  (21,000) 38,000  30,200  (25,900)
Increase (decrease) in equity equivalents4 29,600  26,300  (43,500) (6,800) 59,600  8,200 
Interest expense 80,000  56,200  6,500  6,100  9,100  7,700 
Interest expense, operating lease obligations5 18,809  20,475  865  5,365 
Adjusted interest expense 98,809  76,675  6,500  6,965  14,465  7,700 
Tax benefit of interest expense6 (34,583) (26,836) (2,275) (2,438) (5,063) (2,695)
Adjusted interest expense, after taxes7 64,226  49,839  4,225  4,527  9,403  5,005 
(Gain) loss on marketable securities (2,200) 5,000  (4,900) (16,500) (28,600) (18,600)
Interest income on corporate funds (76,700) (62,400) (56,900) (56,200) (64,500) (85,200)
Investment income, before taxes (78,900) (57,400) (61,800) (72,700) (93,100) (103,800)
Tax expense (benefit) of investment income8 27,615  20,090  21,630  25,445  32,585  36,330 
Investment income, after taxes9 (51,285) (37,310) (40,170) (47,255) (60,515) (67,470)
(Income) loss from discontinued operations, net of tax10 900  (76,000) (13,300) (41,700)
Net operating profit after taxes (NOPAT) 1,775,941  1,532,229  1,297,055  1,453,072  1,372,588  1,334,235 

Source: Based on data from Automatic Data Processing 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 revenues.

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

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

6 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 98,809 × 35% = 34,583

7 Addition of after taxes interest expense to net earnings.

8 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 78,900 × 35% = 27,615

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. Automatic Data Processing Inc.'s NOPAT increased from 2015 to 2016 and from 2016 to 2017.

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Cash Operating Taxes

Automatic Data Processing Inc., cash operating taxes calculation

USD $ in thousands

 
12 months ended Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Provision for income taxes 797,700  741,300  694,200  772,000  720,200  733,600 
Less: Deferred income tax expense (benefit) 8,100  700  (15,300) (50,300) 24,600  38,100 
Add: Tax savings from interest expense 34,583  26,836  2,275  2,438  5,063  2,695 
Less: Tax imposed on investment income 27,615  20,090  21,630  25,445  32,585  36,330 
Cash operating taxes 796,568  747,346  690,145  799,293  668,078  661,865 

Source: Based on data from Automatic Data Processing 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. Automatic Data Processing Inc.'s cash operating taxes increased from 2015 to 2016 and from 2016 to 2017.

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Invested Capital

Automatic Data Processing Inc., invested capital calculation (financing approach)

USD $ in thousands

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Obligations under reverse repurchase agreements 245,900 
Obligations under commercial paper borrowings 2,173,000 
Long-term debt 2,002,400  2,007,700  9,200  11,500  14,700  16,800 
PV of operating lease payments1 428,436  445,608  320,900  559,374  501,653  488,600 
Total reported debt & leases 2,430,836  2,453,308  330,100  2,743,874  762,253  505,400 
Stockholders' equity 3,977,000  4,481,600  4,808,500  6,670,200  6,189,900  6,114,000 
Net deferred tax (assets) liabilities2 69,700  150,800  134,200  280,300  256,700  373,800 
Allowance for doubtful accounts3 49,600  38,100  35,500  55,700  50,900  46,500 
Deferred revenues4 624,300  614,300  591,300  845,800  809,600  802,200 
Equity equivalents5 743,600  803,200  761,000  1,181,800  1,117,200  1,222,500 
Accumulated other comprehensive (income) loss, net of tax6 379,200  215,100  260,600  (178,200) (15,400) (230,200)
Adjusted stockholders' equity 5,099,800  5,499,900  5,830,100  7,673,800  7,291,700  7,106,300 
Marketable securities7 (10,800) (31,300) (55,500) (2,086,300) (342,000) (117,300)
Invested capital 7,519,836  7,921,908  6,104,700  8,331,374  7,711,953  7,494,400 

Source: Based on data from Automatic Data Processing 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 revenues.

5 Addition of equity equivalents to stockholders' 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. Automatic Data Processing Inc.'s invested capital increased from 2015 to 2016 but then slightly declined from 2016 to 2017.

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Cost of Capital

Automatic Data Processing Inc., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 49,498,904  49,498,904  ÷ 51,978,940  = 0.95 0.95 × 10.58% = 10.08%
Debt3 2,051,600  2,051,600  ÷ 51,978,940  = 0.04 0.04 × 2.92% × (1 – 35%) = 0.07%
PV of operating lease payments4 428,436  428,436  ÷ 51,978,940  = 0.01 0.01 × 2.92% × (1 – 35%) = 0.02%
Total: 51,978,940  1.00 10.17%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 40,905,387  40,905,387  ÷ 43,477,395  = 0.94 0.94 × 10.58% = 9.96%
Debt3 2,126,400  2,126,400  ÷ 43,477,395  = 0.05 0.05 × 2.94% × (1 – 35%) = 0.09%
PV of operating lease payments4 445,608  445,608  ÷ 43,477,395  = 0.01 0.01 × 2.94% × (1 – 35%) = 0.02%
Total: 43,477,395  1.00 10.07%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 37,399,895  37,399,895  ÷ 37,729,995  = 0.99 0.99 × 10.58% = 10.49%
Debt3 9,200  9,200  ÷ 37,729,995  = 0.00 0.00 × –% × (1 – 35%) = –%
PV of operating lease payments4 320,900  320,900  ÷ 37,729,995  = 0.01 0.01 × –% × (1 – 35%) = –%
Total: 37,729,995  1.00 10.49%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 39,011,590  39,011,590  ÷ 41,755,465  = 0.93 0.93 × 10.58% = 9.89%
Debt3 2,184,500  2,184,500  ÷ 41,755,465  = 0.05 0.05 × 0.10% × (1 – 35%) = 0.00%
PV of operating lease payments4 559,374  559,374  ÷ 41,755,465  = 0.01 0.01 × 0.10% × (1 – 35%) = 0.00%
Total: 41,755,465  1.00 9.89%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 34,714,979  34,714,979  ÷ 35,477,232  = 0.98 0.98 × 10.58% = 10.36%
Debt3 260,600  260,600  ÷ 35,477,232  = 0.01 0.01 × 0.70% × (1 – 35%) = 0.00%
PV of operating lease payments4 501,653  501,653  ÷ 35,477,232  = 0.01 0.01 × 0.70% × (1 – 35%) = 0.01%
Total: 35,477,232  1.00 10.37%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 28,275,701  28,275,701  ÷ 28,781,101  = 0.98 0.98 × 10.58% = 10.40%
Debt3 16,800  16,800  ÷ 28,781,101  = 0.00 0.00 × –% × (1 – 35%) = –%
PV of operating lease payments4 488,600  488,600  ÷ 28,781,101  = 0.02 0.02 × –% × (1 – 35%) = –%
Total: 28,781,101  1.00 10.40%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

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Economic Spread

Automatic Data Processing Inc., economic spread calculation

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Selected Financial Data (USD $ in thousands)
Economic profit1 1,011,259  734,474  656,631  628,926  573,194  555,011 
Invested capital2 7,519,836  7,921,908  6,104,700  8,331,374  7,711,953  7,494,400 
Ratio
Economic spread3 13.45% 9.27% 10.76% 7.55% 7.43% 7.41%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 1,011,259 ÷ 7,519,836 = 13.45%

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. Automatic Data Processing Inc.'s economic spread deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Economic Profit Margin

Automatic Data Processing Inc., economic profit margin calculation

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Selected Financial Data (USD $ in thousands)
Economic profit1 1,011,259  734,474  656,631  628,926  573,194  555,011 
Revenues 12,379,800  11,667,800  10,938,500  12,206,500  11,310,100  10,665,200 
Increase (decrease) in deferred revenues 10,000  23,000  (21,000) 38,000  30,200  (25,900)
Ratio
Economic profit margin2 8.16% 6.28% 6.01% 5.14% 5.05% 5.22%

Source: Based on data from Automatic Data Processing Inc. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ (Revenues + Change in deferred revenues)
= 100 × 1,011,259 ÷ (12,379,800 + 10,000) = 8.16%

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. Automatic Data Processing Inc.'s economic profit margin improved from 2015 to 2016 and from 2016 to 2017.

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