Microsoft Excel LibreOffice Calc

Broadcom Inc. (AVGO)

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

Broadcom Inc., economic profit calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014 Nov 3, 2013
Net operating profit after taxes (NOPAT)1 4,674  1,797  (712) 1,315  348  528 
Cost of capital2 9.83% 9.84% 9.69% 10.33% 9.69% 10.98%
Invested capital3 44,781  51,099  45,840  8,437  8,755  2,865 
Economic profit4 273  (3,232) (5,154) 443  (500) 214 

Based on: 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29), 10-K (filing date: 2013-12-20).

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
= 4,674 – 9.83% × 44,781 = 273

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. Broadcom Inc.’s economic profit increased from 2016 to 2017 and from 2017 to 2018.

Net Operating Profit after Taxes (NOPAT)

Broadcom Inc., NOPAT calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014 Nov 3, 2013
Net income (loss) attributable to common stock 12,259  1,692  (1,739) 1,364  263  552 
Deferred income tax expense (benefit)1 (8,548) (235) 418  (220) (92) (22)
Increase (decrease) in allowances for doubtful accounts2 —  (9) 6  1  1  — 
Increase (decrease) in deferred revenue3 113  —  —  —  —  — 
Increase (decrease) in restructuring liabilities4 (23) (106) 125  (14) 40  — 
Increase (decrease) in equity equivalents5 (8,458) (350) 549  (233) (51) (22)
Interest expense 628  454  585  191  110  2 
Interest expense, operating lease liability6 17  20  13  6  5  — 
Adjusted interest expense 645  474  598  197  115  2 
Tax benefit of interest expense7 (136) (81) (102) (33) (19) — 
Adjusted interest expense, after taxes8 510  393  496  163  95  2 
(Gain) loss on marketable securities 106  —  —  —  —  — 
Interest income (114) (44) (10) (8) (6) (4)
Investment income, before taxes (8) (44) (10) (8) (6) (4)
Tax expense (benefit) of investment income9 2  7  2  1  1  1 
Investment income, after taxes10 (6) (37) (8) (7) (5) (3)
(Income) loss from discontinued operations, net of tax11 19  6  112  27  46  — 
Net income (loss) attributable to noncontrolling interest 351  92  (122) —  —  — 
Net operating profit after taxes (NOPAT) 4,674  1,797  (712) 1,315  348  528 

Based on: 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29), 10-K (filing date: 2013-12-20).

2018 Calculations

1 Elimination of deferred tax expense. See Details »

2 Addition of increase (decrease) in allowances for doubtful accounts.

3 Addition of increase (decrease) in deferred revenue.

4 Addition of increase (decrease) in restructuring liabilities.

5 Addition of increase (decrease) in equity equivalents to net income (loss) attributable to common stock.

6 Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 512 × 3.38% = 17

7 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 645 × 21.00% = 136

8 Addition of after taxes interest expense to net income (loss) attributable to common stock.

9 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 8 × 21.00% = 2

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. Broadcom Inc.’s NOPAT increased from 2016 to 2017 and from 2017 to 2018.

Cash Operating Taxes

Broadcom Inc., cash operating taxes calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014 Nov 3, 2013
Provision for (benefit from) income taxes (8,084) 35  642  76  33  16 
Less: Deferred income tax expense (benefit) (8,548) (235) 418  (220) (92) (22)
Add: Tax savings from interest expense 136  81  102  33  19  — 
Less: Tax imposed on investment income 2  7  2  1  1  1 
Cash operating taxes 598  343  324  328  143  38 

Based on: 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29), 10-K (filing date: 2013-12-20).

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. Broadcom Inc.’s cash operating taxes increased from 2016 to 2017 and from 2017 to 2018.

Invested Capital

Broadcom Inc., invested capital calculation (financing approach)

US$ in millions

Microsoft Excel LibreOffice Calc
Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014 Nov 3, 2013
Current portion of long-term debt —  117  454  46  46  — 
Long-term debt, excluding current portion 17,493  17,431  13,188  3,903  4,543  — 
Convertible notes payable to related party, non-current —  —  —  —  920  — 
Operating lease liability1 512  591  410  140  112  91 
Total reported debt & leases 18,005  18,139  14,052  4,089  5,621  91 
Total Broadcom Inc. stockholders’ equity 26,657  20,285  18,892  4,714  3,243  2,886 
Net deferred tax (assets) liabilities2 (115) 9,998  9,979  (315) (3) (36)
Allowances for doubtful accounts3 —  —  9  3  2  1 
Deferred revenue4 164  51  —  —  —  — 
Restructuring liabilities5 22  45  151  26  40  — 
Equity equivalents6 71  10,094  10,139  (286) 39  (35)
Accumulated other comprehensive (income) loss, net of tax7 115  91  134  73  50  6 
Noncontrolling interest —  2,901  2,984  —  —  — 
Adjusted total Broadcom Inc. stockholders’ equity 26,843  33,371  32,149  4,501  3,332  2,857 
Construction in progress8 (67) (411) (361) (153) (198) (83)
Invested capital 44,781  51,099  45,840  8,437  8,755  2,865 

Based on: 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29), 10-K (filing date: 2013-12-20).

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 restructuring liabilities.

6 Addition of equity equivalents to total Broadcom Inc. stockholders’ equity.

7 Removal of accumulated other comprehensive income.

8 Subtraction of construction in progress.

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

Cost of Capital

Broadcom Inc., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 99,745  99,745  ÷ 116,884  = 0.85 0.85 × 11.06% = 9.44%
Borrowings3 16,627  16,627  ÷ 116,884  = 0.14 0.14 × 3.38% × (1 – 21.00%) = 0.38%
Operating lease liability4 512  512  ÷ 116,884  = 0.00 0.00 × 3.38% × (1 – 21.00%) = 0.01%
Total: 116,884  1.00 9.83%

Based on: 10-K (filing date: 2018-12-21).

1 US$ in millions

2 Equity. See Details »

3 Borrowings. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 107,061  107,061  ÷ 125,605  = 0.85 0.85 × 11.06% = 9.43%
Borrowings3 17,953  17,953  ÷ 125,605  = 0.14 0.14 × 3.38% × (1 – 17.00%) = 0.40%
Operating lease liability4 591  591  ÷ 125,605  = 0.00 0.00 × 3.38% × (1 – 17.00%) = 0.01%
Total: 125,605  1.00 9.84%

Based on: 10-K (filing date: 2017-12-21).

1 US$ in millions

2 Equity. See Details »

3 Borrowings. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 72,590  72,590  ÷ 86,642  = 0.84 0.84 × 11.06% = 9.27%
Borrowings3 13,642  13,642  ÷ 86,642  = 0.16 0.16 × 3.15% × (1 – 17.00%) = 0.41%
Operating lease liability4 410  410  ÷ 86,642  = 0.00 0.00 × 3.15% × (1 – 17.00%) = 0.01%
Total: 86,642  1.00 9.69%

Based on: 10-K (filing date: 2016-12-23).

1 US$ in millions

2 Equity. See Details »

3 Borrowings. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 38,841  38,841  ÷ 42,930  = 0.90 0.90 × 11.06% = 10.01%
Borrowings3 3,949  3,949  ÷ 42,930  = 0.09 0.09 × 4.15% × (1 – 17.00%) = 0.32%
Operating lease liability4 140  140  ÷ 42,930  = 0.00 0.00 × 4.15% × (1 – 17.00%) = 0.01%
Total: 42,930  1.00 10.33%

Based on: 10-K (filing date: 2015-12-17).

1 US$ in millions

2 Equity. See Details »

3 Borrowings. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 25,863  25,863  ÷ 31,435  = 0.82 0.82 × 11.06% = 9.10%
Borrowings3 5,460  5,460  ÷ 31,435  = 0.17 0.17 × 4.01% × (1 – 17.00%) = 0.58%
Operating lease liability4 112  112  ÷ 31,435  = 0.00 0.00 × 4.01% × (1 – 17.00%) = 0.01%
Total: 31,435  1.00 9.69%

Based on: 10-K (filing date: 2014-12-29).

1 US$ in millions

2 Equity. See Details »

3 Borrowings. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 12,856  12,856  ÷ 12,947  = 0.99 0.99 × 11.06% = 10.98%
Borrowings3 —  —  ÷ 12,947  = 0.00 0.00 × 0.00% × (1 – 17.00%) = 0.00%
Operating lease liability4 91  91  ÷ 12,947  = 0.01 0.01 × 0.00% × (1 – 17.00%) = 0.00%
Total: 12,947  1.00 10.98%

Based on: 10-K (filing date: 2013-12-20).

1 US$ in millions

2 Equity. See Details »

3 Borrowings. See Details »

4 Operating lease liability. See Details »

Economic Spread

Broadcom Inc., economic spread calculation

Microsoft Excel LibreOffice Calc
Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014 Nov 3, 2013
Selected Financial Data (US$ in millions)
Economic profit1 273  (3,232) (5,154) 443  (500) 214 
Invested capital2 44,781  51,099  45,840  8,437  8,755  2,865 
Ratio
Economic spread3 0.61% -6.32% -11.24% 5.25% -5.71% 7.46%

Based on: 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29), 10-K (filing date: 2013-12-20).

2018 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 273 ÷ 44,781 = 0.61%

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. Broadcom Inc.’s economic spread improved from 2016 to 2017 and from 2017 to 2018.

Economic Profit Margin

Broadcom Inc., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014 Nov 3, 2013
Selected Financial Data (US$ in millions)
Economic profit1 273  (3,232) (5,154) 443  (500) 214 
Net revenue 20,848  17,636  13,240  6,824  4,269  2,520 
Add: Increase (decrease) in deferred revenue 113  —  —  —  —  — 
Adjusted net revenue 20,961  17,636  13,240  6,824  4,269  2,520 
Ratio
Economic profit margin2 1.30% -18.33% -38.93% 6.49% -11.72% 8.48%

Based on: 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29), 10-K (filing date: 2013-12-20).

2018 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Adjusted net revenue
= 100 × 273 ÷ 20,961 = 1.30%

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. Broadcom Inc.’s economic profit margin improved from 2016 to 2017 and from 2017 to 2018.