.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
3M Co., economic profit calculation
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | Net operating profit after taxes (NOPAT)1 | |||||
| | Cost of capital2 | % | % | % | % | % |
| | Invested capital3 | |||||
| | Economic profit4 | |||||
Source: Based on data from 3M Co. 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. | 3M Co.'s economic profit increased from 2015 to 2016 but then slightly declined from 2016 to 2017 not reaching 2015 level. |
Net Operating Profit after Taxes (NOPAT)
3M Co., NOPAT calculation
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | Net income attributable to 3M | |||||
| | Deferred income tax expense (benefit)1 | |||||
| | Increase (decrease) in allowances2 | |||||
| | Increase (decrease) in deferred income3 | |||||
| | Increase (decrease) in product warranty liabilities4 | |||||
| | Increase (decrease) in accrued restructuring action balances5 | |||||
| | 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 income (loss) attributable to noncontrolling interest | |||||
| | Net operating profit after taxes (NOPAT) |
Source: Based on data from 3M Co. Annual Reports
2017 Calculations
1 Elimination of deferred tax expense. See Details »
2 Addition of increase (decrease) in allowances.
3 Addition of increase (decrease) in deferred income.
4 Addition of increase (decrease) in product warranty liabilities.
5 Addition of increase (decrease) in accrued restructuring action balances.
6 Addition of increase (decrease) in equity equivalents to net income attributable to 3M.
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 attributable to 3M.
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. | 3M Co.'s NOPAT increased from 2015 to 2016 and from 2016 to 2017. |
Cash Operating Taxes
3M Co., cash operating taxes calculation
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | 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 3M Co. 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. | 3M Co.'s cash operating taxes increased from 2015 to 2016 and from 2016 to 2017. |
Invested Capital
3M Co., invested capital calculation (financing approach)
USD $ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| | Short-term borrowings and current portion of long-term debt | |||||
| | Long-term debt, excluding current portion | |||||
| | Capital lease obligations | |||||
| | PV of operating lease payments1 | |||||
| | Total reported debt & leases | |||||
| | Total 3M Company shareholders' equity | |||||
| | Net deferred tax (assets) liabilities2 | |||||
| | Allowances3 | |||||
| | Deferred income4 | |||||
| | Product warranty liabilities5 | |||||
| | Accrued restructuring action balances6 | |||||
| | Equity equivalents7 | |||||
| | Accumulated other comprehensive (income) loss, net of tax8 | |||||
| | Noncontrolling interest | |||||
| | Adjusted total 3M Company shareholders' equity | |||||
| | Construction in progress9 | |||||
| | Marketable securities10 | |||||
| | Invested capital |
Source: Based on data from 3M Co. 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 income.
5 Addition of product warranty liabilities.
6 Addition of accrued restructuring action balances.
7 Addition of equity equivalents to total 3M Company shareholders' equity.
8 Removal of accumulated other comprehensive income.
9 Subtraction of construction in progress.
10 Subtraction of marketable securities.
| Item | Description | The company |
|---|---|---|
| Invested capital | Capital is an approximation of the economic book value of all cash invested in going-concern business activities. | 3M Co.'s invested capital declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Cost of Capital
3M Co., 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 3M Co. 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 3M Co. 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 3M Co. 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 3M Co. 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 3M Co. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Economic Spread
3M Co., economic spread calculation
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | ||||||
| | Economic profit1 | |||||
| | Invested capital2 | |||||
| Ratio | ||||||
| | Economic spread3 | % | % | % | % | % |
Source: Based on data from 3M Co. 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. | 3M Co.'s economic spread improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017. |
Economic Profit Margin
3M Co., economic profit margin calculation
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | ||||||
| | Economic profit1 | |||||
| | Net sales | |||||
| | Increase (decrease) in deferred income | |||||
| Ratio | ||||||
| | Economic profit margin2 | % | % | % | % | % |
Source: Based on data from 3M Co. Annual Reports
2017 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ (Net sales + Change in deferred income)
= 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. | 3M Co.'s economic profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017. |
