.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
Caterpillar 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 Caterpillar 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. | Caterpillar 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)
Caterpillar Inc., NOPAT calculation
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | Profit (loss) attributable to common stockholders | |||||
| | Deferred income tax expense (benefit)1 | |||||
| | Increase (decrease) in LIFO reserve2 | |||||
| | Increase (decrease) in product warranty liability3 | |||||
| | Increase (decrease) in employee separation liability4 | |||||
| | Increase (decrease) in equity equivalents5 | |||||
| | Interest expense excluding Financial Products | |||||
| | Interest expense, operating lease obligations6 | |||||
| | Adjusted interest expense excluding Financial Products | |||||
| | Tax benefit of interest expense excluding Financial Products7 | |||||
| | Adjusted interest expense excluding Financial Products, after taxes8 | |||||
| | (Gain) loss on marketable securities | |||||
| | Investment income, before taxes | |||||
| | Tax expense (benefit) of investment income9 | |||||
| | Investment income, after taxes10 | |||||
| | Net income (loss) attributable to noncontrolling interest | |||||
| | Net operating profit after taxes (NOPAT) |
Source: Based on data from Caterpillar Inc. Annual Reports
2017 Calculations
1 Elimination of deferred tax expense. See Details »
2 Addition of increase (decrease) in LIFO reserve. See Details »
3 Addition of increase (decrease) in product warranty liability.
4 Addition of increase (decrease) in employee separation liability.
5 Addition of increase (decrease) in equity equivalents to profit (loss) attributable to common stockholders.
6 Addition of interest expense on capitalized operating leases. See Details »
7 Tax benefit of interest expense excluding Financial Products = Adjusted interest expense excluding Financial Products × Statutory income tax rate
= × 35% =
8 Addition of after taxes interest expense to profit (loss) attributable to common stockholders.
9 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= × 35% =
10 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. | Caterpillar Inc.'s NOPAT declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Cash Operating Taxes
Caterpillar 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 | |
|---|---|---|---|---|---|---|
| | Provision for income taxes | |||||
| | Less: Deferred income tax expense (benefit) | |||||
| | Add: Tax savings from interest expense excluding Financial Products | |||||
| | Less: Tax imposed on investment income | |||||
| | Cash operating taxes |
Source: Based on data from Caterpillar 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. | Caterpillar Inc.'s cash operating taxes declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Invested Capital
Caterpillar Inc., 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 | |||||
| | Long-term debt due within one year | |||||
| | Long-term debt due after one year | |||||
| | PV of operating lease payments1 | |||||
| | Total reported debt & leases | |||||
| | Equity attributable to common stockholders | |||||
| | Net deferred tax (assets) liabilities2 | |||||
| | LIFO reserve3 | |||||
| | Product warranty liability4 | |||||
| | Employee separation liability5 | |||||
| | Equity equivalents6 | |||||
| | Accumulated other comprehensive (income) loss, net of tax7 | |||||
| | Noncontrolling interests | |||||
| | Adjusted equity attributable to common stockholders | |||||
| | Construction-in-process8 | |||||
| | Available-for-sale securities9 | |||||
| | Invested capital |
Source: Based on data from Caterpillar 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 LIFO reserve. See Details »
4 Addition of product warranty liability.
5 Addition of employee separation liability.
6 Addition of equity equivalents to equity attributable to common stockholders.
7 Removal of accumulated other comprehensive income.
8 Subtraction of construction-in-process.
9 Subtraction of available-for-sale 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. | Caterpillar Inc.'s invested capital declined from 2015 to 2016 and from 2016 to 2017. |
Cost of Capital
Caterpillar 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 Caterpillar 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 Caterpillar 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 Caterpillar 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 Caterpillar 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 Caterpillar 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
Caterpillar 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 Caterpillar 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. | Caterpillar Inc.'s economic spread deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level. |
Economic Profit Margin
Caterpillar 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 | |||||
| | Sales of Machinery, Energy & Transportation | |||||
| Ratio | ||||||
| | Economic profit margin2 | % | % | % | % | % |
Source: Based on data from Caterpillar Inc. Annual Reports
2017 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ Sales of Machinery, Energy & Transportation
= 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. | Caterpillar Inc.'s economic profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level. |
