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 – 17.75% × 4,907 = -278
The financial performance between 2016 and 2020 is characterized by a period of value creation followed by a significant contraction in economic profit. After failing to cover the cost of capital in 2016, the entity achieved positive economic profit for three consecutive years before experiencing a substantial decline in 2020.
- Net Operating Profit After Taxes (NOPAT)
- A consistent upward trajectory was observed from 2016 to 2019, with NOPAT increasing from 453 million to a peak of 957 million. However, this growth was reversed in 2020, when NOPAT fell sharply to 593 million, representing a significant reduction in operating efficiency and earnings power.
- Capital Investment and Cost of Capital
- Invested capital grew steadily from 2,874 million in 2016 to 4,997 million in 2019, indicating an expansion of the asset base. Throughout this period, the cost of capital remained relatively stable but trended slightly upward, moving from 17.06% to 17.75%. The combination of an expanding capital base and a high, rising hurdle rate increased the total capital charge required to generate economic value.
- Economic Profit Dynamics
- The transition from an economic loss of 37 million in 2016 to a profit of 120 million in 2017 indicates a successful alignment of operating returns with the cost of capital. While economic profit remained positive from 2017 through 2019, a gradual decline was noted from 120 million to 84 million, suggesting that NOPAT growth was not sufficient to keep pace with the increasing capital charge. This culminated in a severe economic loss of 278 million in 2020, driven by the simultaneous collapse of NOPAT and the maintenance of a high cost of capital on a large invested capital base.
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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 | × | 18.22% | = | 17.65% | ||
| 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 | 17.75% | ||||||||||
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 | × | 18.22% | = | 17.31% | ||
| 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 | 17.46% | ||||||||||
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 | × | 18.22% | = | 16.99% | ||
| 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 | 17.17% | ||||||||||
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 | × | 18.22% | = | 17.08% | ||
| 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 | 17.21% | ||||||||||
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 | × | 18.22% | = | 16.91% | ||
| 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 | 17.06% | ||||||||||
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 | (278) | 84) | 90) | 120) | (37) | |
| Invested capital2 | 4,907) | 4,997) | 3,989) | 3,596) | 2,874) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | -5.67% | 1.68% | 2.25% | 3.35% | -1.29% | |
| 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 × -278 ÷ 4,907 = -5.67%
4 Click competitor name to see calculations.
The financial performance from 2016 to 2020 demonstrates a volatile cycle of value creation and destruction, characterized by a period of growth followed by a significant contraction in economic efficiency. While invested capital expanded steadily for most of the period, the ability to generate returns above the cost of capital fluctuated sharply, culminating in a substantial deficit by the end of 2020.
- Economic Profit Trends
- Economic profit exhibited high volatility over the five-year period. After starting with a deficit of 37 million USD in 2016, profit shifted to a positive position, peaking at 120 million USD in 2017. However, a gradual decline followed in 2018 and 2019, before a severe reversal occurred in 2020, where economic profit plummeted to negative 278 million USD.
- Invested Capital Growth
- There was a consistent upward trajectory in invested capital from 2016 through 2019, increasing from 2,874 million USD to a peak of 4,997 million USD. This indicates a sustained period of capital deployment and investment in the business. In 2020, this trend stabilized with a slight contraction to 4,907 million USD.
- Economic Spread Ratio Analysis
- The economic spread ratio reflects a diminishing return on invested capital relative to the cost of capital. Following a negative start of -1.29% in 2016, the ratio peaked at 3.35% in 2017. Between 2017 and 2019, the spread steadily eroded, falling to 2.25% and then 1.68%, suggesting that although the company remained value-additive, the efficiency of its capital utilization was declining. This deterioration culminated in 2020 with a sharp drop to -5.67%, signaling that the returns on invested capital fell significantly below the required threshold.
Overall, the divergence between the growth in invested capital and the decline in economic profit after 2017 suggests that the incremental capital deployed did not yield proportional economic gains. The collapse in the economic spread ratio in 2020 highlights a critical failure to generate a return exceeding the cost of capital during that fiscal year.
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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 | (278) | 84) | 90) | 120) | (37) | |
| Revenue | 3,239) | 3,543) | 3,333) | 2,752) | 2,398) | |
| Performance Ratio | ||||||
| Economic profit margin2 | -8.59% | 2.37% | 2.69% | 4.37% | -1.54% | |
| 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 × -278 ÷ 3,239 = -8.59%
3 Click competitor name to see calculations.
The financial performance from 2016 to 2020 is characterized by an initial period of value creation followed by a significant contraction in economic profitability. While revenue exhibited a general upward trajectory for the majority of the period, economic profit and its corresponding margin demonstrated high volatility, ending the period with a substantial deficit.
- Revenue Trajectory
- A consistent growth pattern was observed from 2016 through 2019, with revenue increasing from 2,398 million to a peak of 3,543 million. This growth phase was interrupted in 2020, when revenue declined to 3,239 million, signaling a reversal of the previous four-year expansion trend.
- Economic Profit Trends
- Economic profit transitioned from a negative position of 37 million in 2016 to a peak of 120 million in 2017. Between 2017 and 2019, a gradual downward trend occurred, with values sliding to 90 million and then 84 million. A severe decline followed in 2020, resulting in an economic profit of negative 278 million, the lowest point in the analyzed timeframe.
- Economic Profit Margin Analysis
- The economic profit margin mirrored the volatility of the absolute economic profit. After starting at negative 1.54% in 2016, the margin reached its highest level of 4.37% in 2017. Despite continued revenue growth through 2019, the margin compressed to 2.37%, suggesting that the cost of capital or operating expenses grew disproportionately to economic gains. This culminated in a sharp drop to negative 8.59% in 2020, indicating a significant failure to generate returns above the cost of capital during that fiscal year.
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