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.
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Kraft Foods Group Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value (EV)
- Enterprise Value to FCFF (EV/FCFF)
- Present Value of Free Cash Flow to Equity (FCFE)
- Operating Profit Margin since 2012
- Return on Equity (ROE) since 2012
- Current Ratio since 2012
- Price to Sales (P/S) since 2012
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Economic Profit
Kraft Foods Group Inc., economic profit calculation
US$ in millions
| 12 months ended: | Dec 27, 2014 | Dec 28, 2013 | Dec 29, 2012 | |
|---|---|---|---|---|
| Net operating profit after taxes (NOPAT)1 | ||||
| Cost of capital2 | ||||
| Invested capital3 | ||||
| Economic profit4 | ||||
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2014 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= – × =
The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) increased substantially from 2012 to 2013, but experienced a considerable decline in 2014. Simultaneously, the cost of capital exhibited a consistent, albeit gradual, increase across the three years. Invested capital also increased from 2012 to 2013, followed by a decrease in 2014.
- Economic Profit Trend
- Economic profit increased markedly from US$365 million in 2012 to US$1,373 million in 2013. This positive trend reversed sharply in 2014, resulting in an economic loss of US$1,238 million. This indicates a diminishing ability to generate returns exceeding the cost of capital.
- NOPAT and Cost of Capital Relationship
- While NOPAT rose in 2013, the concurrent increase in the cost of capital was not substantial enough to offset the NOPAT growth, contributing to the significant improvement in economic profit. However, the substantial decrease in NOPAT in 2014, coupled with a further increase in the cost of capital, led to the negative economic profit observed in that year. The increasing cost of capital consistently placed upward pressure on the required return, making it more challenging to achieve positive economic profit.
- Invested Capital Impact
- The increase in invested capital from 2012 to 2013 did not hinder economic profit growth, suggesting that the investments made during this period were effectively deployed. The subsequent reduction in invested capital in 2014, however, did not prevent the decline into negative economic profit, indicating that the primary driver of the 2014 result was the substantial decrease in NOPAT rather than the scale of invested capital.
Overall, the analysis reveals a period of strong economic performance in 2013 followed by a significant downturn in 2014. The decline in NOPAT appears to be the dominant factor contributing to the negative economic profit in 2014, despite a reduction in invested capital and a continuing increase in the cost of capital.
Net Operating Profit after Taxes (NOPAT)
Kraft Foods Group Inc., NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowances related to accounts receivable.
3 Addition of increase (decrease) in restructuring costs liability.
4 Addition of increase (decrease) in equity equivalents to net earnings.
5 2014 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= × =
6 2014 Calculation
Tax benefit of interest and other expense, net = Adjusted interest and other expense, net × Statutory income tax rate
= × 35.00% =
7 Addition of after taxes interest expense to net earnings.
The financial data reveals notable fluctuations in both net earnings and net operating profit after taxes (NOPAT) over the three-year period under consideration.
- Net Earnings
- Net earnings increased significantly from 1,642 million US dollars in 2012 to 2,715 million US dollars in 2013. However, in 2014, net earnings declined sharply to 1,043 million US dollars, representing a substantial decrease relative to the prior year and even falling below the 2012 level.
- Net Operating Profit After Taxes (NOPAT)
- Similar to net earnings, NOPAT demonstrated strong growth from 2,340 million US dollars in 2012 to 3,734 million US dollars in 2013. Yet, there was a pronounced decline in 2014, with NOPAT dropping to 989 million US dollars, marking a significant reduction compared to both preceding years.
Overall, the data suggests that although the company experienced robust profitability improvements in 2013, this positive trend was not sustained, with a marked downturn occurring in 2014. Both profitability indicators reflect this pattern, highlighting sensitivity to potentially adverse operational or market conditions during the latter year.
Cash Operating Taxes
Kraft Foods Group Inc., cash operating taxes calculation
US$ in millions
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
The analysis of the provided annual financial data reveals notable fluctuations in the tax-related expenses over the three-year period ending December 27, 2014.
- Provision for Income Taxes
- There is a significant fluctuation observed in the provision for income taxes. In 2012, the provision was reported at 811 million US dollars, which increased substantially to 1,375 million US dollars in 2013, representing a considerable rise. However, in 2014, this figure sharply declined to 363 million US dollars, indicating a substantial reduction from the previous year. This large variance may reflect changes in pre-tax income, tax policies, or adjustments related to prior periods.
- Cash Operating Taxes
- The cash operating taxes also show an upward trend throughout the examined period. Starting at 437 million US dollars in 2012, the amount nearly doubled to 849 million US dollars in 2013 and saw a further increase to 899 million US dollars in 2014. The consistent increase may indicate higher taxable income or changes in tax payment practices.
Overall, while cash operating taxes steadily increased each year, the provision for income taxes displayed considerable volatility, peaking in 2013 before dropping sharply the following year. This divergence between the provision and cash taxes could denote timing differences in tax recognition or other accounting factors affecting recorded tax expense versus actual cash payments.
Invested Capital
Kraft Foods Group Inc., invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
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 restructuring costs liability.
5 Addition of equity equivalents to equity.
6 Removal of accumulated other comprehensive income.
7 Subtraction of construction in progress.
- Total Reported Debt & Leases
- The total reported debt and leases remained relatively stable over the three-year period, with a slight increase from 10,353 million USD in 2012 to 10,402 million USD in 2013. It then remained almost constant at 10,401 million USD in 2014, indicating a stable capital structure in terms of debt obligations.
- Equity
- Equity experienced a notable increase from 3,572 million USD in 2012 to 5,187 million USD in 2013, representing a significant growth. However, this was followed by a decrease to 4,365 million USD in 2014. This fluctuation suggests some variability in shareholder value or retained earnings within this timeframe.
- Invested Capital
- Invested capital showed an upward trend from 13,807 million USD in 2012 to 16,041 million USD in 2013, before declining to 14,787 million USD in 2014. This pattern aligns with the changes in both equity and debt, reflecting adjustments in the company’s total funding and asset base.
- Overall Analysis
- The financial data reveals that while debt levels were largely maintained, equity and invested capital exhibited growth followed by contraction over the three years. The rise in equity and invested capital in 2013 may reflect increased investment or retained earnings that year, but the subsequent decline in 2014 indicates a pullback or redistribution. Stability in debt suggests a consistent leverage approach, but the variations in equity and invested capital warrant further investigation to understand the underlying causes, such as potential asset disposals, dividend payments, or changes in profitability.
Cost of Capital
Kraft Foods Group Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 35.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 35.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2014-12-27).
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 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 35.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 35.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2013-12-28).
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 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 35.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 35.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2012-12-29).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Kraft Foods Group Inc., economic spread ratio calculation, comparison to benchmarks
| Dec 27, 2014 | Dec 28, 2013 | Dec 29, 2012 | ||
|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||
| Economic profit1 | ||||
| Invested capital2 | ||||
| Performance Ratio | ||||
| Economic spread ratio3 | ||||
| Benchmarks | ||||
| Economic Spread Ratio, Competitors4 | ||||
| lululemon athletica inc. | ||||
| Nike Inc. | ||||
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
1 Economic profit. See details »
2 Invested capital. See details »
3 2014 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × ÷ =
4 Click competitor name to see calculations.
The financial performance, as indicated by economic value added metrics, exhibits significant fluctuations over the observed period. Economic profit demonstrates a substantial increase from 2012 to 2013, followed by a considerable decline in 2014, resulting in a negative value. Invested capital increased between 2012 and 2013, then decreased in 2014. The economic spread ratio mirrors these trends, showing a marked increase initially and then a substantial decrease, ultimately becoming negative.
- Economic Profit
- Economic profit increased significantly from US$365 million in 2012 to US$1,373 million in 2013, representing a growth of over 275%. However, this positive trend reversed sharply in 2014, with economic profit falling to negative US$1,238 million. This indicates a substantial deterioration in the company’s ability to generate returns exceeding its cost of capital in the most recent year.
- Invested Capital
- Invested capital rose from US$13,807 million in 2012 to US$16,041 million in 2013, a growth of approximately 16%. In 2014, invested capital decreased to US$14,787 million, representing a decline of approximately 8% from the prior year. This suggests a potential shift in capital allocation strategy or a divestiture of assets.
- Economic Spread Ratio
- The economic spread ratio increased from 2.64% in 2012 to 8.56% in 2013, indicating an improved ability to generate returns above the cost of capital. However, the ratio experienced a dramatic decline in 2014, falling to -8.37%. This negative value signifies that the company’s returns on invested capital were less than its cost of capital, resulting in value destruction. The substantial swing in this ratio is directly correlated with the changes in economic profit and invested capital.
The observed trends suggest a period of strong performance in 2013 followed by a significant downturn in 2014. The negative economic profit and economic spread ratio in 2014 warrant further investigation to understand the underlying causes and potential corrective actions.
Economic Profit Margin
Kraft Foods Group Inc., economic profit margin calculation, comparison to benchmarks
| Dec 27, 2014 | Dec 28, 2013 | Dec 29, 2012 | ||
|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||
| Economic profit1 | ||||
| Net revenues | ||||
| Performance Ratio | ||||
| Economic profit margin2 | ||||
| Benchmarks | ||||
| Economic Profit Margin, Competitors3 | ||||
| lululemon athletica inc. | ||||
| Nike Inc. | ||||
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
1 Economic profit. See details »
2 2014 Calculation
Economic profit margin = 100 × Economic profit ÷ Net revenues
= 100 × ÷ =
3 Click competitor name to see calculations.
The economic profit exhibited significant fluctuation between the analyzed periods. Initially positive and substantial, it transitioned to a considerable loss. This movement is directly reflected in the economic profit margin, which demonstrates a corresponding pattern of increase followed by decline.
- Economic Profit
- Economic profit increased substantially from $365 million in 2012 to $1,373 million in 2013, representing a significant improvement in value creation. However, this positive trend reversed sharply in 2014, with economic profit falling to a loss of $1,238 million. This indicates a substantial decrease in returns exceeding the cost of capital.
- Net Revenues
- Net revenues remained relatively stable across the three years, decreasing slightly from $18,339 million in 2012 to $18,205 million in 2014. The consistency in revenue suggests that changes in economic profit are not primarily driven by sales volume, but rather by factors affecting profitability or the cost of capital.
- Economic Profit Margin
- The economic profit margin mirrored the trend in economic profit. It increased from 1.99% in 2012 to 7.54% in 2013, signifying improved profitability relative to revenue. The margin then experienced a dramatic decline, reaching -6.80% in 2014. This negative margin indicates that the company’s returns were insufficient to cover its cost of capital during that period.
The substantial shift from positive to negative economic profit and margin between 2013 and 2014 warrants further investigation. Potential contributing factors could include increased cost of capital, decreased operational efficiency, or unfavorable changes in the competitive landscape. The stability of net revenues suggests that the primary driver of this change lies within the factors impacting profitability rather than top-line performance.