Economic Value Added (EVA)
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
Illumina Inc., economic profit calculation
US$ in millions
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2020 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 593 – 17.73% × 4,907 = -277
The financial trajectory from 2016 to 2020 exhibits a period of initial value creation followed by a significant decline in economic performance. While operating profits and invested capital grew for the majority of the period, the final year shows a sharp contraction in economic profit, indicating a failure to generate returns exceeding the cost of capital.
- Net Operating Profit After Taxes (NOPAT)
- A consistent upward trend is observed from 2016 to 2019, with NOPAT increasing from 453 million to a peak of 957 million. However, 2020 experienced a substantial reduction to 593 million, marking a significant deviation from the previous growth pattern.
- Invested Capital and Cost of Capital
- Invested capital expanded steadily from 2,874 million in 2016 to a peak of 4,997 million in 2019, followed by a slight contraction to 4,907 million in 2020. Over the same period, the cost of capital remained relatively stable but trended slightly upward, rising from 17.04% in 2016 to 17.73% in 2020. This increasing cost of capital raised the threshold of operating profit required to maintain positive economic value.
- Economic Profit Analysis
- Economic profit fluctuated from a deficit of 36 million in 2016 to a period of value creation between 2017 and 2019, peaking at 121 million in 2017 before gradually declining to 85 million by 2019. The period concluded with a sharp reversal in 2020, where economic profit fell to negative 277 million. This decline was driven by the convergence of reduced NOPAT and a high cost of capital applied to a large base of invested capital.
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Net Operating Profit after Taxes (NOPAT)
Illumina Inc., NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for doubtful accounts.
3 Addition of increase (decrease) in reserve for product warranties.
4 Addition of increase (decrease) in equity equivalents to net income attributable to Illumina stockholders.
5 2020 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 722 × 4.50% = 32
6 2020 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 81 × 21.00% = 17
7 Addition of after taxes interest expense to net income attributable to Illumina stockholders.
8 2020 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 311 × 21.00% = 65
9 Elimination of after taxes investment income.
An analysis of the financial performance between 2016 and 2020 reveals a period of sustained growth in operating profitability followed by a notable contraction in the final year of the period. Both net income attributable to stockholders and Net Operating Profit After Taxes (NOPAT) followed a similar trajectory, peaking in 2019 before experiencing a sharp decline in 2020.
- NOPAT Growth Trajectory
- NOPAT demonstrated significant growth from 2016 to 2019, increasing from US$ 453 million to a peak of US$ 957 million. This represents a more than two-fold increase in operating profit after tax over four years. However, this upward trend reversed in 2020, with NOPAT falling to US$ 593 million, representing a decrease of approximately 38% from the 2019 peak.
- Correlation Between NOPAT and Net Income
- A strong positive correlation exists between NOPAT and net income attributable to stockholders. The two metrics moved in tandem throughout the period, suggesting that changes in bottom-line profitability were driven primarily by operating performance rather than non-operating items. While net income was higher than NOPAT in most years, NOPAT exceeded net income in 2017, indicating a temporary divergence in the impact of non-operating income or expenses.
- Implications for Economic Value Added (EVA)
- As NOPAT serves as the primary numerator in the calculation of Economic Value Added, the volatility observed in 2020 indicates a likely reduction in the company's ability to generate economic value above its cost of capital for that specific year. The substantial drop in operating profit suggests a compression in operating margins or a significant increase in operating expenses that occurred during the 2020 fiscal period.
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Cash Operating Taxes
Illumina Inc., cash operating taxes calculation
US$ in millions
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
The analysis of tax-related expenditures between 2016 and 2020 reveals significant volatility in both the provision for income taxes and actual cash operating taxes. While both metrics experienced a substantial peak in 2017, their trajectories diverged notably by the end of the observed period.
- Provision for Income Taxes Trend
- The provision for income taxes exhibited a non-linear pattern, starting at 133 million US dollars in 2016 and peaking at 365 million US dollars in 2017. Following this peak, the provision decreased to 112 million US dollars in 2018 before climbing steadily to 200 million US dollars by December 31, 2020.
- Cash Operating Taxes Trend
- Cash operating taxes followed a similar upward trajectory initially, reaching a peak of 344 million US dollars in 2017. However, from 2018 onward, a consistent downward trend is observed, with payments decreasing from 133 million US dollars in 2018 to a period low of 35 million US dollars in 2020.
- Analysis of Tax Divergence
- A widening gap between the tax provision and cash taxes is evident in the final year of the analysis. In 2020, the provision for income taxes was 200 million US dollars, whereas cash operating taxes fell to 35 million US dollars. This substantial divergence indicates an increase in non-cash tax expenses or the utilization of tax credits, which reduced the actual cash outflow for tax obligations. This discrepancy is critical for Economic Value Added (EVA) calculations, as the reduction in cash taxes improves operational cash flow relative to the accounting tax provision.
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Invested Capital
Illumina Inc., invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
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 reserve for product warranties.
5 Addition of equity equivalents to total Illumina stockholders’ equity.
6 Removal of accumulated other comprehensive income.
7 Subtraction of construction in progress.
8 Subtraction of short-term investments.
Invested capital exhibited a sustained upward trajectory from 2016 through 2019, followed by a marginal contraction in 2020. The total invested capital rose from US$ 2,874 million in 2016 to a peak of US$ 4,997 million in 2019, representing a significant expansion of the capital base deployed to generate economic value.
- Stockholders' Equity Growth
- A consistent and uninterrupted increase in stockholders' equity is observed throughout the analyzed period. Equity grew from US$ 2,197 million in 2016 to US$ 4,694 million by 2020. This steady accumulation indicates that equity became the primary driver of the increase in total invested capital.
- Debt and Lease Obligations
- Debt levels demonstrated greater volatility than equity. Total reported debt and leases increased from US$ 1,795 million in 2016 to a peak of US$ 2,599 million in 2018. This was followed by a sharp reduction to US$ 1,881 million in 2019, with levels remaining relatively stable at US$ 1,906 million in 2020.
- Capital Composition Analysis
- The relationship between debt and equity shifted over the five-year period. In 2018, the growth in invested capital was supported by both increasing debt and equity. However, in 2019, invested capital continued to grow by US$ 1,008 million despite a US$ 718 million reduction in total debt, confirming that the expansion of the capital base during this phase was funded exclusively through equity growth.
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Cost of Capital
Illumina Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 72,110) | 72,110) | ÷ | 74,427) | = | 0.97 | 0.97 | × | 18.20% | = | 17.63% | ||
| Debt3 | 1,595) | 1,595) | ÷ | 74,427) | = | 0.02 | 0.02 | × | 3.62% × (1 – 21.00%) | = | 0.06% | ||
| Operating lease liability4 | 722) | 722) | ÷ | 74,427) | = | 0.01 | 0.01 | × | 4.50% × (1 – 21.00%) | = | 0.03% | ||
| Total: | 74,427) | 1.00 | 17.73% | ||||||||||
Based on: 10-K (reporting date: 2020-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 43,512) | 43,512) | ÷ | 45,801) | = | 0.95 | 0.95 | × | 18.20% | = | 17.29% | ||
| Debt3 | 1,549) | 1,549) | ÷ | 45,801) | = | 0.03 | 0.03 | × | 3.62% × (1 – 21.00%) | = | 0.10% | ||
| Operating lease liability4 | 740) | 740) | ÷ | 45,801) | = | 0.02 | 0.02 | × | 4.60% × (1 – 21.00%) | = | 0.06% | ||
| Total: | 45,801) | 1.00 | 17.44% | ||||||||||
Based on: 10-K (reporting date: 2019-12-29).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 42,953) | 42,953) | ÷ | 46,050) | = | 0.93 | 0.93 | × | 18.20% | = | 16.97% | ||
| Debt3 | 2,494) | 2,494) | ÷ | 46,050) | = | 0.05 | 0.05 | × | 3.38% × (1 – 21.00%) | = | 0.14% | ||
| Operating lease liability4 | 602) | 602) | ÷ | 46,050) | = | 0.01 | 0.01 | × | 3.38% × (1 – 21.00%) | = | 0.03% | ||
| Total: | 46,050) | 1.00 | 17.15% | ||||||||||
Based on: 10-K (reporting date: 2018-12-30).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 32,405) | 32,405) | ÷ | 34,575) | = | 0.94 | 0.94 | × | 18.20% | = | 17.06% | ||
| Debt3 | 1,566) | 1,566) | ÷ | 34,575) | = | 0.05 | 0.05 | × | 3.17% × (1 – 35.00%) | = | 0.09% | ||
| Operating lease liability4 | 604) | 604) | ÷ | 34,575) | = | 0.02 | 0.02 | × | 3.17% × (1 – 35.00%) | = | 0.04% | ||
| Total: | 34,575) | 1.00 | 17.19% | ||||||||||
Based on: 10-K (reporting date: 2017-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 24,060) | 24,060) | ÷ | 25,927) | = | 0.93 | 0.93 | × | 18.20% | = | 16.89% | ||
| Debt3 | 1,343) | 1,343) | ÷ | 25,927) | = | 0.05 | 0.05 | × | 3.17% × (1 – 35.00%) | = | 0.11% | ||
| Operating lease liability4 | 523) | 523) | ÷ | 25,927) | = | 0.02 | 0.02 | × | 3.17% × (1 – 35.00%) | = | 0.04% | ||
| Total: | 25,927) | 1.00 | 17.04% | ||||||||||
Based on: 10-K (reporting date: 2016-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Illumina Inc., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2020 | Dec 29, 2019 | Dec 30, 2018 | Dec 31, 2017 | Dec 31, 2016 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (277) | 85) | 90) | 121) | (36) | |
| Invested capital2 | 4,907) | 4,997) | 3,989) | 3,596) | 2,874) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | -5.65% | 1.70% | 2.27% | 3.37% | -1.27% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| AbbVie Inc. | — | — | — | — | — | |
| Amgen Inc. | — | — | — | — | — | |
| Bristol-Myers Squibb Co. | — | — | — | — | — | |
| Danaher Corp. | — | — | — | — | — | |
| Eli Lilly & Co. | — | — | — | — | — | |
| Gilead Sciences Inc. | — | — | — | — | — | |
| Johnson & Johnson | — | — | — | — | — | |
| Merck & Co. Inc. | — | — | — | — | — | |
| Pfizer Inc. | — | — | — | — | — | |
| Regeneron Pharmaceuticals Inc. | — | — | — | — | — | |
| Thermo Fisher Scientific Inc. | — | — | — | — | — | |
| Vertex Pharmaceuticals Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2020 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -277 ÷ 4,907 = -5.65%
4 Click competitor name to see calculations.
The financial performance between 2016 and 2020 exhibits significant volatility in value creation, characterized by a period of growth and positive economic returns followed by a substantial contraction in 2020.
- Invested Capital Growth
- A consistent upward trajectory in invested capital is observed from 2016 to 2019, rising from 2,874 million US dollars to a peak of 4,997 million US dollars. This represents a substantial expansion of the capital base over four years. A slight reduction occurred in 2020, with invested capital settling at 4,907 million US dollars.
- Economic Profit Fluctuations
- Economic profit demonstrated an unstable pattern. After starting with a deficit of 36 million US dollars in 2016, the figure shifted to a positive 121 million US dollars in 2017. A gradual decline followed through 2018 and 2019, with profits dropping to 90 million and 85 million US dollars, respectively. This trend culminated in a sharp reversal in 2020, where economic profit fell to a significant loss of 277 million US dollars.
- Economic Spread Ratio Analysis
- The economic spread ratio mirrors the volatility of the economic profit, indicating the degree to which returns exceeded the cost of capital. The ratio moved from -1.27% in 2016 to a peak of 3.37% in 2017, signaling that the company was creating value above its cost of capital during this window. However, the spread steadily compressed to 1.70% by 2019 before collapsing to -5.65% in 2020. This final decline suggests a severe erosion of economic efficiency, where the return on invested capital fell significantly below the required cost of capital.
The convergence of high invested capital and a deeply negative economic spread ratio in 2020 indicates a period of significant value destruction, reversing the modest gains achieved between 2017 and 2019.
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Economic Profit Margin
Illumina Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2020 | Dec 29, 2019 | Dec 30, 2018 | Dec 31, 2017 | Dec 31, 2016 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (277) | 85) | 90) | 121) | (36) | |
| Revenue | 3,239) | 3,543) | 3,333) | 2,752) | 2,398) | |
| Performance Ratio | ||||||
| Economic profit margin2 | -8.56% | 2.40% | 2.71% | 4.40% | -1.52% | |
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| AbbVie Inc. | — | — | — | — | — | |
| Amgen Inc. | — | — | — | — | — | |
| Bristol-Myers Squibb Co. | — | — | — | — | — | |
| Danaher Corp. | — | — | — | — | — | |
| Eli Lilly & Co. | — | — | — | — | — | |
| Gilead Sciences Inc. | — | — | — | — | — | |
| Johnson & Johnson | — | — | — | — | — | |
| Merck & Co. Inc. | — | — | — | — | — | |
| Pfizer Inc. | — | — | — | — | — | |
| Regeneron Pharmaceuticals Inc. | — | — | — | — | — | |
| Thermo Fisher Scientific Inc. | — | — | — | — | — | |
| Vertex Pharmaceuticals Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 Economic profit. See details »
2 2020 Calculation
Economic profit margin = 100 × Economic profit ÷ Revenue
= 100 × -277 ÷ 3,239 = -8.56%
3 Click competitor name to see calculations.
The financial performance between 2016 and 2020 exhibits significant volatility in value creation relative to revenue growth. While revenue showed a general upward trajectory through 2019, the ability to generate economic profit fluctuated, culminating in a substantial contraction in the final year of the period.
- Economic Profit Trends
- Economic profit shifted from a deficit of US$ 36 million in 2016 to a peak of US$ 121 million in 2017. This positive trend persisted through 2019, although a gradual decline was observed in 2018 and 2019, with figures falling to US$ 90 million and US$ 85 million, respectively. A severe reversal occurred in 2020, as economic profit plummeted to a loss of US$ 277 million.
- Revenue Correlation
- Revenue grew consistently from US$ 2,398 million in 2016 to a peak of US$ 3,543 million in 2019. The sharp contraction in economic profit observed in 2020 coincided with the first year of declining revenue, which fell to US$ 3,239 million. The magnitude of the economic profit decline in 2020 far exceeded the percentage decrease in revenue, indicating that the loss of value was driven by factors beyond simple top-line shrinkage.
- Economic Profit Margin Analysis
- The economic profit margin reflects this volatility, starting at -1.52% in 2016 and improving to a high of 4.40% in 2017. A steady compression of the margin followed over the next two years, reaching 2.40% by 2019. The period concluded with a sharp decline to -8.56% in 2020, representing a significant erosion of economic value efficiency across the five-year span.
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