.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
AT&T Inc., 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 AT&T Inc. 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. | AT&T Inc.'s economic profit declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level. |
Net Operating Profit after Taxes (NOPAT)
AT&T Inc., 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 AT&T | |||||
| | Deferred income tax expense (benefit)1 | |||||
| | Increase (decrease) in allowances for doubtful accounts2 | |||||
| | Increase (decrease) in equity equivalents3 | |||||
| | Interest expense | |||||
| | Interest expense, operating lease obligations4 | |||||
| | Adjusted interest expense | |||||
| | Tax benefit of interest expense5 | |||||
| | Adjusted interest expense, after taxes6 | |||||
| | (Gain) loss on marketable securities | |||||
| | Investment income, before taxes | |||||
| | Tax expense (benefit) of investment income7 | |||||
| | Investment income, after taxes8 | |||||
| | Net income (loss) attributable to noncontrolling interest | |||||
| | Net operating profit after taxes (NOPAT) |
Source: Based on data from AT&T Inc. Annual Reports
2017 Calculations
1 Elimination of deferred tax expense. See Details »
2 Addition of increase (decrease) in allowances for doubtful accounts.
3 Addition of increase (decrease) in equity equivalents to net income attributable to AT&T.
4 Addition of interest expense on capitalized operating leases. See Details »
5 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= × 35% =
6 Addition of after taxes interest expense to net income attributable to AT&T.
7 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= × 35% =
8 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. | AT&T Inc.'s NOPAT declined from 2015 to 2016 and from 2016 to 2017. |
Cash Operating Taxes
AT&T Inc., 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 | |
|---|---|---|---|---|---|---|
| | Income tax expense (benefit) | |||||
| | 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 AT&T Inc. 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. | AT&T Inc.'s cash operating taxes increased from 2015 to 2016 but then declined significantly from 2016 to 2017. |
Invested Capital
AT&T Inc., invested capital calculation (financing approach)
USD $ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| | Debt maturing within one year | |||||
| | Long-term debt, excluding maturing within one year | |||||
| | PV of operating lease payments1 | |||||
| | Total reported debt & leases | |||||
| | Stockholders' equity attributable to AT&T | |||||
| | Net deferred tax (assets) liabilities2 | |||||
| | Allowances for doubtful accounts3 | |||||
| | Equity equivalents4 | |||||
| | Accumulated other comprehensive (income) loss, net of tax5 | |||||
| | Noncontrolling interest | |||||
| | Adjusted stockholders' equity attributable to AT&T | |||||
| | Under construction6 | |||||
| | Investment securities7 | |||||
| | Invested capital |
Source: Based on data from AT&T Inc. 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 equity equivalents to stockholders' equity attributable to AT&T.
5 Removal of accumulated other comprehensive income.
6 Subtraction of under construction.
7 Subtraction of investment 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. | AT&T Inc.'s invested capital increased from 2015 to 2016 but then declined significantly from 2016 to 2017. |
Cost of Capital
AT&T Inc., 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 AT&T Inc. 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 AT&T Inc. 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 AT&T Inc. 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 AT&T Inc. 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 AT&T Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Economic Spread
AT&T Inc., 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 AT&T Inc. 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. | AT&T Inc.'s economic spread deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level. |
Economic Profit Margin
AT&T Inc., 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 | |||||
| | Operating revenues | |||||
| Ratio | ||||||
| | Economic profit margin2 | % | % | % | % | % |
Source: Based on data from AT&T Inc. Annual Reports
2017 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ Operating revenues
= 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. | AT&T Inc.'s economic profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level. |
