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
Kraft Foods Group Inc., economic profit 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 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
= 989 – 15.07% × 14,787 = -1,240
The financial performance over the observed three-year period is characterized by significant volatility in value creation, culminating in a substantial shift from economic profit to economic loss by the end of 2014.
- Net Operating Profit After Taxes (NOPAT)
- A non-linear trend is observed in NOPAT, which increased from US$ 2,340 million in 2012 to a peak of US$ 3,734 million in 2013, before experiencing a sharp decline to US$ 989 million in 2014. This contraction in the final year represents a reduction of approximately 73% from the previous year's peak, indicating a severe downturn in operational profitability.
- Cost of Capital and Invested Capital
- The cost of capital exhibited a consistent upward trend, rising from 14.32% in 2012 to 15.07% in 2014. This steady increase raised the financial threshold required for the company to generate value. Meanwhile, invested capital grew from US$ 13,807 million in 2012 to a peak of US$ 16,041 million in 2013, before contracting to US$ 14,787 million in 2014.
- Economic Profit and Value Creation
- Economic profit followed a trajectory of rapid expansion followed by a severe reversal. After an initial positive value of US$ 363 million in 2012, the figure surged to US$ 1,370 million in 2013, signaling strong value creation. However, in 2014, the economic profit turned negative, reaching -US$ 1,240 million. This transition indicates that the operating returns in the final year were insufficient to cover the weighted cost of the capital employed, resulting in the destruction of shareholder value.
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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
= 369 × 4.62% = 17
6 2014 Calculation
Tax benefit of interest and other expense, net = Adjusted interest and other expense, net × Statutory income tax rate
= 501 × 35.00% = 175
7 Addition of after taxes interest expense to net earnings.
The financial performance over the three-year period is characterized by significant volatility, with a peak in both net earnings and net operating profit after taxes (NOPAT) in 2013, followed by a substantial decline in 2014.
- Net Earnings Trend
- Net earnings experienced a sharp increase between 2012 and 2013, rising from 1,642 million US$ to 2,715 million US$. This upward trajectory was reversed in 2014, as earnings fell to 1,043 million US$, representing a decrease of approximately 61.6% from the prior year.
- NOPAT Performance
- Net operating profit after taxes followed a similar pattern of expansion and contraction. NOPAT increased from 2,340 million US$ in 2012 to a peak of 3,734 million US$ in 2013. However, a severe contraction occurred in 2014, with NOPAT dropping to 989 million US$, a decline of approximately 73.5% compared to 2013 levels.
- Correlation Between Operating and Net Profit
- In 2012 and 2013, NOPAT was consistently higher than net earnings, suggesting that operating profitability was strong but offset by non-operating expenses, such as interest payments. By 2014, this relationship shifted, as NOPAT fell below net earnings. This indicates a significant erosion of core operating profitability that was more severe than the decline in overall net income.
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Cash Operating Taxes
Kraft Foods Group Inc., cash operating taxes calculation
US$ 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 financial data reveals a notable divergence between the accounting provision for income taxes and the actual cash operating taxes paid over the three-year period ending December 27, 2014.
- Provision for Income Taxes
- The provision for income taxes exhibited significant volatility throughout the period. The amount increased from US$ 811 million in 2012 to a peak of US$ 1,375 million in 2013, before experiencing a sharp decline to US$ 363 million in 2014.
- Cash Operating Taxes
- In contrast to the volatility seen in the provisions, cash operating taxes followed a consistent upward trajectory. Payments rose from US$ 437 million in 2012 to US$ 849 million in 2013, and continued to increase to US$ 899 million in 2014.
- Analysis of Tax Divergence and Cash Flow Impact
- A significant reversal in the relationship between accounting provisions and cash outflows occurred in 2014. While the provision for income taxes was higher than the cash paid in 2012 and 2013, the cash operating taxes in 2014 (US$ 899 million) substantially exceeded the provision (US$ 363 million). This indicates that actual cash tax payments were significantly higher than the tax expense recognized on the income statement for that year, which increases the cash tax burden and directly reduces the cash-based metrics used in Economic Value Added (EVA) calculations.
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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.
The analysis of invested capital components from 2012 to 2014 reveals a period of fluctuation primarily driven by shifts in equity, while debt levels remained remarkably stable. The overall capital structure shows a peak in total invested capital during the 2013 fiscal year, followed by a moderate contraction in 2014.
- Debt and Lease Stability
- Total reported debt and leases exhibited minimal variance over the three-year period. Values remained nearly constant, moving from 10,353 million US dollars in 2012 to 10,402 million in 2013, and ending at 10,401 million in 2014. This indicates a consistent reliance on debt financing with no significant new borrowing or substantial repayments during this timeframe.
- Equity Volatility
- Equity experienced significant fluctuations, acting as the primary driver for changes in the total capital base. A substantial increase was observed between 2012 and 2013, where equity rose from 3,572 million US dollars to 5,187 million US dollars. This was followed by a decrease to 4,365 million US dollars in 2014, representing a reduction from the previous year's peak.
- Invested Capital Trends
- Total invested capital mirrored the trajectory of equity due to the stability of the debt component. Invested capital grew from 13,807 million US dollars in 2012 to a peak of 16,041 million US dollars in 2013. By 2014, this figure declined to 14,787 million US dollars. The correlation suggests that the changes in the economic value added base during this period were almost exclusively attributable to changes in the equity position.
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Cost of Capital
Kraft Foods Group Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 37,731) | 37,731) | ÷ | 49,101) | = | 0.77 | 0.77 | × | 18.71% | = | 14.38% | ||
| Debt3 | 11,000) | 11,000) | ÷ | 49,101) | = | 0.22 | 0.22 | × | 4.62% × (1 – 35.00%) | = | 0.67% | ||
| Operating lease liability4 | 369) | 369) | ÷ | 49,101) | = | 0.01 | 0.01 | × | 4.62% × (1 – 35.00%) | = | 0.02% | ||
| Total: | 49,101) | 1.00 | 15.07% | ||||||||||
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 | 32,851) | 32,851) | ÷ | 43,973) | = | 0.75 | 0.75 | × | 18.71% | = | 13.98% | ||
| Debt3 | 10,700) | 10,700) | ÷ | 43,973) | = | 0.24 | 0.24 | × | 4.62% × (1 – 35.00%) | = | 0.73% | ||
| Operating lease liability4 | 422) | 422) | ÷ | 43,973) | = | 0.01 | 0.01 | × | 4.62% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 43,973) | 1.00 | 14.74% | ||||||||||
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 | 30,654) | 30,654) | ÷ | 42,536) | = | 0.72 | 0.72 | × | 18.71% | = | 13.48% | ||
| Debt3 | 11,500) | 11,500) | ÷ | 42,536) | = | 0.27 | 0.27 | × | 4.62% × (1 – 35.00%) | = | 0.81% | ||
| Operating lease liability4 | 382) | 382) | ÷ | 42,536) | = | 0.01 | 0.01 | × | 4.62% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 42,536) | 1.00 | 14.32% | ||||||||||
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 | (1,240) | 1,370) | 363) | |
| Invested capital2 | 14,787) | 16,041) | 13,807) | |
| Performance Ratio | ||||
| Economic spread ratio3 | -8.39% | 8.54% | 2.63% | |
| 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 × -1,240 ÷ 14,787 = -8.39%
4 Click competitor name to see calculations.
The company's economic performance between 2012 and 2014 was characterized by significant volatility, moving from a phase of value creation to a substantial erosion of economic value. While the period from 2012 to 2013 showed an improving capacity to generate returns exceeding the cost of capital, the results for 2014 indicate a sharp reversal in financial efficiency.
- Economic Profit
- Economic profit experienced a sharp increase from 363 million US dollars in 2012 to 1,370 million US dollars in 2013. This positive trend was completely reversed in 2014, as economic profit plummeted to negative 1,240 million US dollars, signifying that the operating returns were insufficient to cover the cost of the capital employed.
- Invested Capital
- Invested capital rose from 13,807 million US dollars in 2012 to a peak of 16,041 million US dollars in 2013. A moderate contraction followed in 2014, with the total invested capital decreasing to 14,787 million US dollars.
- Economic Spread Ratio
- The economic spread ratio followed the trajectory of economic profit, ascending from 2.63% in 2012 to 8.54% in 2013, which indicates a widening gap between the return on invested capital and the cost of capital. However, the ratio shifted dramatically to negative 8.39% in 2014, representing a significant deficit in value creation relative to the capital investment.
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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 | (1,240) | 1,370) | 363) | |
| Net revenues | 18,205) | 18,218) | 18,339) | |
| Performance Ratio | ||||
| Economic profit margin2 | -6.81% | 7.52% | 1.98% | |
| 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 × -1,240 ÷ 18,205 = -6.81%
3 Click competitor name to see calculations.
The financial performance from 2012 to 2014 is characterized by stagnant revenue growth coupled with extreme volatility in economic value creation. While the company initially experienced a surge in economic profit, this trend reversed sharply in the final year, resulting in a substantial loss of economic value.
- Net Revenues
- Net revenues remained nearly constant over the observed period, with a marginal decrease from US$ 18,339 million in 2012 to US$ 18,205 million in 2014. This stability suggests that the fluctuations in economic profitability were not the result of top-line revenue volatility.
- Economic Profit
- Economic profit exhibited significant instability. An initial value of US$ 363 million in 2012 increased substantially to US$ 1,370 million in 2013, before shifting to a deficit of US$ 1,240 million in 2014. This trajectory indicates a sharp reversal in the ability to generate returns exceeding the company's cost of capital.
- Economic Profit Margin
- The economic profit margin mirrored the volatility of absolute economic profit. The margin improved from 1.98% in 2012 to 7.52% in 2013, then collapsed to -6.81% in 2014. The transition to a negative margin indicates that by 2014, the company was destroying economic value relative to its invested capital, despite maintaining steady revenue levels.
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