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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

Cisco Systems Inc., economic profit calculation

USD $ in millions

 
12 months ended Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014 Jul 27, 2013 Jul 28, 2012
Net operating profit after taxes (NOPAT)1
Cost of capital2 % % % % % %
Invested capital3
Economic profit4

Source: Based on data from Cisco Systems 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. Cisco Systems Inc.'s economic profit increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

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Net Operating Profit after Taxes (NOPAT)

Cisco Systems Inc., NOPAT calculation

USD $ in millions

 
12 months ended Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014 Jul 27, 2013 Jul 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 product warranty liability4
Increase (decrease) in restructuring liability5
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
Interest income
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 Cisco Systems 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 product warranty liability.

5 Addition of increase (decrease) in restructuring liability.

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. Cisco Systems Inc.'s NOPAT increased from 2015 to 2016 but then slightly declined from 2016 to 2017.

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Cash Operating Taxes

Cisco Systems Inc., cash operating taxes calculation

USD $ in millions

 
12 months ended Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014 Jul 27, 2013 Jul 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 Cisco Systems 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. Cisco Systems Inc.'s cash operating taxes increased from 2015 to 2016 and from 2016 to 2017.

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Invested Capital

Cisco Systems Inc., invested capital calculation (financing approach)

USD $ in millions

 
Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014 Jul 27, 2013 Jul 28, 2012
Short-term debt
Long-term debt, excluding current portion
PV of operating lease payments1
Total reported debt & leases
Total Cisco shareholders' equity
Net deferred tax (assets) liabilities2
Allowance for doubtful accounts3
Deferred revenue4
Product warranty liability5
Restructuring liability6
Equity equivalents7
Accumulated other comprehensive (income) loss, net of tax8
Noncontrolling interests
Adjusted total Cisco shareholders' equity
Available-for-sale investments9
Invested capital

Source: Based on data from Cisco Systems 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 product warranty liability.

6 Addition of restructuring liability.

7 Addition of equity equivalents to total Cisco shareholders' equity.

8 Removal of accumulated other comprehensive income.

9 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. Cisco Systems Inc.'s invested capital increased from 2015 to 2016 and from 2016 to 2017.

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Cost of Capital

Cisco Systems 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 Cisco Systems 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 Cisco Systems 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 Cisco Systems 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 Cisco Systems 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 Cisco Systems 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 Cisco Systems Inc. Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

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Economic Spread

Cisco Systems Inc., economic spread calculation

 
Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014 Jul 27, 2013 Jul 28, 2012
Selected Financial Data (USD $ in millions)
Economic profit1
Invested capital2
Ratio
Economic spread3 % % % % % %

Source: Based on data from Cisco Systems 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. Cisco Systems Inc.'s economic spread improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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Economic Profit Margin

Cisco Systems Inc., economic profit margin calculation

 
Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014 Jul 27, 2013 Jul 28, 2012
Selected Financial Data (USD $ in millions)
Economic profit1
Revenue
Increase (decrease) in deferred revenue
Ratio
Economic profit margin2 % % % % % %

Source: Based on data from Cisco Systems Inc. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ (Revenue + 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. Cisco Systems Inc.'s economic profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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