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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Economic Profit
Albemarle Corp., economic profit calculation
US$ in thousands
| 12 months ended: | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | |
|---|---|---|---|---|---|---|
| Net operating profit after taxes (NOPAT)1 | ||||||
| Cost of capital2 | ||||||
| Invested capital3 | ||||||
| Economic profit4 | ||||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2022 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= – × =
The period under review demonstrates significant fluctuations in economic profit. Initially, the company experienced negative economic profit, which progressively worsened before a substantial turnaround in the most recent year. This analysis details the observed trends in net operating profit after taxes, cost of capital, invested capital, and ultimately, economic profit.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT decreased from US$827.22 million in 2018 to US$504.00 million in 2020, indicating a declining operational profitability. However, a dramatic increase occurred in 2022, with NOPAT reaching US$3,022.03 million. This represents a significant improvement in the company’s core earnings.
- Cost of Capital
- The cost of capital exhibited relative stability between 2018 and 2022, fluctuating between 18.05% and 21.98%. A slight upward trend is discernible, suggesting a modestly increasing cost of financing over the period. The increase in 2022 is minimal, however.
- Invested Capital
- Invested capital increased from US$5,433.09 million in 2018 to US$7,383.74 million in 2020. A decrease was observed in 2021 to US$6,792.15 million, followed by a substantial rise to US$10,052.40 million in 2022. This suggests significant capital deployment in the latest year.
- Economic Profit
- Economic profit was negative from 2018 through 2021, ranging from a loss of US$284.81 million to a loss of US$1,226.77 million. The largest loss occurred in 2021. A substantial shift occurred in 2022, with economic profit turning positive at US$812.27 million. This positive economic profit indicates that the company generated returns exceeding its cost of capital in the most recent year. The turnaround in economic profit is primarily driven by the significant increase in NOPAT, despite the increase in invested capital.
In summary, the company experienced a period of declining profitability and negative economic profit, culminating in a substantial improvement in 2022. The positive economic profit in 2022 suggests improved capital allocation efficiency and a stronger financial performance relative to the cost of funding its operations.
Net Operating Profit after Taxes (NOPAT)
Albemarle Corp., NOPAT calculation
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for doubtful accounts.
3 Addition of increase (decrease) in LIFO reserve. See details »
4 Addition of increase (decrease) in equity equivalents to net income attributable to Albemarle Corporation.
5 2022 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= × =
6 2022 Calculation
Tax benefit of interest and financing expenses = Adjusted interest and financing expenses × Statutory income tax rate
= × 21.00% =
7 Addition of after taxes interest expense to net income attributable to Albemarle Corporation.
- Net Income Attributable to Albemarle Corporation
- The net income showed a declining trend from 2018 to 2021, decreasing from approximately 693.6 million USD in 2018 to 123.7 million USD in 2021. This represents a substantial drop over four years. However, in 2022, there was a significant and notable rebound, with net income reaching approximately 2.69 billion USD, marking an exceptional increase compared to previous years.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT followed a similar pattern to net income over the observed period. From 2018 to 2021, NOPAT steadily decreased from around 827.2 million USD to 230.4 million USD, indicating a reduction in operating profitability after taxes. In 2022, there was a strong recovery, with NOPAT rising to approximately 3.02 billion USD, which surpasses all previous years by a wide margin.
- Overall Trend Analysis
- Both net income and NOPAT experienced a clear downward trend during the period from 2018 to 2021, reflecting challenges that negatively impacted profitability. The drastic improvement in 2022 suggests a significant positive change in the company's operational performance or market conditions, resulting in substantially higher earnings and operating profits. This marked turnaround may warrant further investigation into underlying drivers, such as changes in revenue, cost structure, or market factors.
Cash Operating Taxes
Albemarle Corp., cash operating taxes calculation
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
- Income Tax Expense
- The income tax expense shows a decreasing trend from 2018 to 2021, moving from 144,826 thousand US dollars in 2018 down to 29,446 thousand US dollars in 2021. This represents a significant reduction over the four-year period. However, in 2022, the income tax expense sharply increased to 390,588 thousand US dollars, indicating a reversal of the previous downward trend and a substantial rise compared to all prior years in the dataset.
- Cash Operating Taxes
- Cash operating taxes decreased steadily from 107,671 thousand US dollars in 2018 to 72,906 thousand US dollars in 2020. There was a slight increase in 2021, with cash operating taxes rising to 82,002 thousand US dollars. In 2022, there was a notable surge to 324,092 thousand US dollars, mirroring the sharp increase seen in income tax expense for the same year. Overall, the trend from 2018 through 2021 was downward with a peak drop in 2020, followed by a steep upward movement in 2022.
- Summary of Tax-Related Expenses
- Both income tax expense and cash operating taxes generally declined from 2018 through 2021, reaching their lowest values in 2021. The year 2022, however, saw a pronounced increase in these tax-related costs, with figures markedly higher than previous years. This substantial rise in 2022 may reflect changes in taxable income, tax rates, or other external factors affecting the company's tax obligations in that period.
Invested Capital
Albemarle Corp., invested capital calculation (financing approach)
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
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 LIFO reserve. See details »
5 Addition of equity equivalents to total Albemarle Corporation shareholders’ equity.
6 Removal of accumulated other comprehensive income.
7 Subtraction of construction in progress.
8 Subtraction of marketable securities.
- Total reported debt & leases
- The total reported debt and leases exhibit a fluctuating pattern over the analyzed period. Starting from approximately 1.84 billion at the end of 2018, the debt level increased substantially to about 3.19 billion by the end of 2019, marking a notable escalation. This upward trend continued into 2020, reaching roughly 3.71 billion, before experiencing a decline to around 2.55 billion in 2021. However, in 2022, the debt surged again, rising to approximately 3.35 billion. Overall, this indicates periods of increased leveraging interspersed with some reduction, pointing to possible strategic financing adjustments or capital restructuring during these years.
- Total Albemarle Corporation shareholders’ equity
- Shareholders’ equity showed a consistent upward trajectory throughout the five-year span. Beginning with about 3.59 billion at the end of 2018, equity rose steadily each year, reaching approximately 7.98 billion by the end of 2022. The rate of increase became more pronounced in the later years, particularly from 2021 to 2022, suggesting strong retention of earnings and/or additional equity financing. This growth in equity signifies an improvement in the company's net asset base and financial strength, supporting sustainable long-term operations.
- Invested capital
- Invested capital also demonstrated an overall increasing trend, albeit with some variability. Starting at about 5.43 billion in 2018, it increased to roughly 6.90 billion in 2019 and 7.38 billion in 2020. In 2021, there was a noticeable decline to approximately 6.79 billion, before a significant jump to about 10.05 billion in 2022. The sharp increase in the final year suggests substantial new investments or acquisitions that expanded the company’s capital base. Fluctuations in invested capital correspond closely with changes in debt and equity, reflecting shifts in funding strategy and capital deployment over time.
Cost of Capital
Albemarle Corp., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2022-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2021-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2020-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2019-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2018-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Albemarle Corp., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | ||||||
| Economic profit1 | ||||||
| Invested capital2 | ||||||
| Performance Ratio | ||||||
| Economic spread ratio3 | ||||||
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2022 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × ÷ =
4 Click competitor name to see calculations.
The economic spread ratio exhibited a consistently negative trend from 2018 through 2021, followed by a significant positive shift in 2022. This indicates a progression from substantial underperformance relative to the cost of capital to a position of value creation. The magnitude of the negative spread increased each year until 2021, before reversing dramatically.
- Economic Spread Ratio Trend
- In 2018, the economic spread ratio was -5.24%. This worsened to -8.40% in 2019, and continued to decline, reaching -13.12% in 2020. The most substantial negative spread was recorded in 2021 at -18.06%. A marked improvement occurred in 2022, with the ratio becoming positive at 8.08%.
The negative economic spread ratios from 2018 to 2021 suggest that the returns generated by invested capital were consistently below the company’s cost of capital during those years. The increasing negativity of the ratio implies a widening gap between returns and the cost of capital. The substantial positive shift in 2022 indicates that returns on invested capital exceeded the cost of capital, resulting in value creation.
- Relationship to Economic Profit
- The trend in economic profit mirrors the economic spread ratio. Negative economic profit values were observed from 2018 to 2021, corresponding with the negative spread ratios. The transition to positive economic profit in 2022 aligns with the positive economic spread ratio, confirming the improvement in value creation.
The invested capital generally increased from 2018 to 2022, with a slight decrease observed between 2020 and 2021. The substantial increase in invested capital in 2022, coupled with the positive economic spread ratio, suggests that the company effectively deployed additional capital to generate returns exceeding its cost.
- Invested Capital Considerations
- While invested capital increased over the period, the significant improvement in the economic spread ratio in 2022 suggests that the increase in capital was accompanied by improved operational efficiency or a shift towards more profitable investments. Further investigation into the composition of invested capital and the drivers of profitability would be beneficial.
Economic Profit Margin
Albemarle Corp., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | ||||||
| Economic profit1 | ||||||
| Net sales | ||||||
| Performance Ratio | ||||||
| Economic profit margin2 | ||||||
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 Economic profit. See details »
2 2022 Calculation
Economic profit margin = 100 × Economic profit ÷ Net sales
= 100 × ÷ =
3 Click competitor name to see calculations.
The economic profit margin exhibited a significant shift over the observed period. Initially negative, the metric transitioned to positive territory, indicating a change in the company’s ability to generate returns exceeding its cost of capital.
- Economic Profit Margin Trend
- From 2018 to 2021, the economic profit margin consistently declined. Starting at -8.44% in 2018, it reached -36.86% in 2021. This indicates a widening gap between the company’s operating profits and the cost of capital employed. The magnitude of the negative margin increased substantially year-over-year during this period.
- A substantial reversal occurred in 2022, with the economic profit margin rising to 11.10%. This represents a significant improvement and suggests the company’s investments and operations began to generate returns that exceeded the cost of capital.
The movement in economic profit mirrors the trend in the economic profit margin. Negative economic profit values were recorded from 2018 through 2021, aligning with the declining margin. The substantial increase in economic profit to US$812,268 thousand in 2022 corresponds directly with the positive shift in the economic profit margin.
- Relationship to Net Sales
- Net sales decreased from 2019 to 2020, then increased significantly in 2022. While sales decreased in 2020, the economic profit margin worsened, suggesting that profitability was more affected by cost of capital than by revenue decline. The substantial increase in net sales in 2022, coupled with the positive economic profit margin, indicates that increased revenue contributed to the improved financial performance.
The substantial change in 2022 warrants further investigation to understand the drivers behind the improved economic profit margin. Factors such as cost reductions, improved operational efficiency, or changes in the cost of capital could be contributing to this positive trend.