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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.

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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.

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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.

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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.

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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 »

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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.

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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.

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