Microsoft Excel LibreOffice Calc

Coca-Cola Co. (KO)

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

Coca-Cola Co., economic profit calculation

USD $ in millions

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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 (18) 5,782  7,572  7,253  9,244 
Cost of capital2 7.90% 7.86% 7.99% 7.98% 8.03%
Invested capital3 72,598  79,169  77,538  76,173  75,127 
Economic profit4 (5,750) (439) 1,379  1,177  3,214 

Source: Based on data from Coca-Cola 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
= -18 – 7.90% × 72,598 = -5,750

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. Coca-Cola Co.'s economic profit declined from 2015 to 2016 and from 2016 to 2017.

Net Operating Profit after Taxes (NOPAT)

Coca-Cola Co., NOPAT calculation

USD $ in millions

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12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net income attributable to shareowners of The Coca-Cola Company 1,248  6,527  7,351  7,098  8,584 
Deferred income tax expense (benefit)1 (1,256) (856) 73  (40) 648 
Increase (decrease) in allowance for doubtful accounts2 11  114  21  270  8 
Increase (decrease) in equity equivalents3 (1,245) (742) 94  230  656 
Interest expense 841  733  856  483  463 
Interest expense, operating lease obligations4 9  9  9  12  13 
Adjusted interest expense 850  742  865  495  476 
Tax benefit of interest expense5 (297) (260) (303) (173) (167)
Adjusted interest expense, after taxes6 552  483  562  322  309 
(Gain) loss on marketable securities (103) (140) (80) (57) –
Interest income (677) (642) (613) (594) (534)
Investment income, before taxes (780) (782) (693) (651) (534)
Tax expense (benefit) of investment income7 273  274  243  228  187 
Investment income, after taxes8 (507) (508) (450) (423) (347)
(Income) loss from discontinued operations, net of tax9 (101) – – – –
Net income (loss) attributable to noncontrolling interest 35  23  15  26  42 
Net operating profit after taxes (NOPAT) (18) 5,782  7,572  7,253  9,244 

Source: Based on data from Coca-Cola Co. Annual Reports

2017 Calculations

1 Elimination of deferred tax expense. See Details »

2 Addition of increase (decrease) in allowance for doubtful accounts.

3 Addition of increase (decrease) in equity equivalents to net income attributable to shareowners of The Coca-Cola Company.

4 Interest expense on capitalized operating leases = PV of operating lease payments × Discount rate
= 510 × 1.69% = 9

5 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 850 × 35% = 297

6 Addition of after taxes interest expense to net income attributable to shareowners of The Coca-Cola Company.

7 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 780 × 35% = 273

8 Elimination of after taxes investment income.

9 Elimination of discontinued operations.

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. Coca-Cola Co.'s NOPAT declined from 2015 to 2016 and from 2016 to 2017.

Cash Operating Taxes

Coca-Cola Co., cash operating taxes calculation

USD $ in millions

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12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Income taxes from continuing operations 5,560  1,586  2,239  2,201  2,851 
Less: Deferred income tax expense (benefit) (1,256) (856) 73  (40) 648 
Add: Tax savings from interest expense 297  260  303  173  167 
Less: Tax imposed on investment income 273  274  243  228  187 
Cash operating taxes 6,840  2,428  2,226  2,186  2,183 

Source: Based on data from Coca-Cola 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. Coca-Cola Co.'s cash operating taxes increased from 2015 to 2016 and from 2016 to 2017.

Invested Capital

Coca-Cola Co., invested capital calculation (financing approach)

USD $ in millions

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Loans and notes payable 13,205  12,498  13,129  19,130  16,901 
Current maturities of long-term debt 3,298  3,527  2,677  3,552  1,024 
Long-term debt, excluding current maturities 31,182  29,684  28,407  19,063  19,154 
PV of operating lease payments1 510  645  679  919  997 
Total reported debt & leases 48,195  46,354  44,892  42,664  38,076 
Equity attributable to shareowners of The Coca-Cola Company 17,072  23,062  25,554  30,320  33,173 
Net deferred tax (assets) liabilities2 2,191  4,039  4,923  5,607  5,952 
Allowance for doubtful accounts3 477  466  352  331  61 
Equity equivalents4 2,668  4,505  5,275  5,938  6,013 
Accumulated other comprehensive (income) loss, net of tax5 10,305  11,205  10,174  5,777  3,432 
Equity attributable to noncontrolling interests 1,905  158  210  241  267 
Adjusted equity attributable to shareowners of The Coca-Cola Company 31,950  38,930  41,213  42,276  42,885 
Construction in progress6 – – – (522) (865)
Marketable securities7 (7,547) (6,115) (8,567) (8,245) (4,969)
Invested capital 72,598  79,169  77,538  76,173  75,127 

Source: Based on data from Coca-Cola 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 equity equivalents to equity attributable to shareowners of The Coca-Cola Company.

5 Removal of accumulated other comprehensive income.

6 Subtraction of construction in progress.

7 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. Coca-Cola Co.'s invested capital increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

Cost of Capital

Coca-Cola Co., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 187,871  187,871  ÷ 236,754  = 0.79 0.79 × 9.67% = 7.67%
Debt3 48,374  48,374  ÷ 236,754  = 0.20 0.20 × 1.69% × (1 – 35%) = 0.22%
PV of operating lease payments4 510  510  ÷ 236,754  = 0.00 0.00 × 1.69% × (1 – 35%) = 0.00%
Total: 236,754  1.00 7.90%

Source: Based on data from Coca-Cola 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 179,381  179,381  ÷ 226,276  = 0.79 0.79 × 9.67% = 7.66%
Debt3 46,250  46,250  ÷ 226,276  = 0.20 0.20 × 1.46% × (1 – 35%) = 0.19%
PV of operating lease payments4 645  645  ÷ 226,276  = 0.00 0.00 × 1.46% × (1 – 35%) = 0.00%
Total: 226,276  1.00 7.86%

Source: Based on data from Coca-Cola 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 191,191  191,191  ÷ 236,307  = 0.81 0.81 × 9.67% = 7.82%
Debt3 44,437  44,437  ÷ 236,307  = 0.19 0.19 × 1.35% × (1 – 35%) = 0.17%
PV of operating lease payments4 679  679  ÷ 236,307  = 0.00 0.00 × 1.35% × (1 – 35%) = 0.00%
Total: 236,307  1.00 7.99%

Source: Based on data from Coca-Cola 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 183,601  183,601  ÷ 227,060  = 0.81 0.81 × 9.67% = 7.82%
Debt3 42,541  42,541  ÷ 227,060  = 0.19 0.19 × 1.29% × (1 – 35%) = 0.16%
PV of operating lease payments4 919  919  ÷ 227,060  = 0.00 0.00 × 1.29% × (1 – 35%) = 0.00%
Total: 227,060  1.00 7.98%

Source: Based on data from Coca-Cola 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 167,732  167,732  ÷ 205,982  = 0.81 0.81 × 9.67% = 7.87%
Debt3 37,253  37,253  ÷ 205,982  = 0.18 0.18 × 1.29% × (1 – 35%) = 0.15%
PV of operating lease payments4 997  997  ÷ 205,982  = 0.00 0.00 × 1.29% × (1 – 35%) = 0.00%
Total: 205,982  1.00 8.03%

Source: Based on data from Coca-Cola 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

Coca-Cola Co., economic spread calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 (5,750) (439) 1,379  1,177  3,214 
Invested capital2 72,598  79,169  77,538  76,173  75,127 
Ratio
Economic spread3 -7.92% -0.56% 1.78% 1.55% 4.28%

Source: Based on data from Coca-Cola Co. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × -5,750 ÷ 72,598 = -7.92%

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. Coca-Cola Co.'s economic spread deteriorated from 2015 to 2016 and from 2016 to 2017.

Economic Profit Margin

Coca-Cola Co., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 (5,750) (439) 1,379  1,177  3,214 
Net operating revenues 35,410  41,863  44,294  45,998  46,854 
Ratio
Economic profit margin2 -16.24% -1.05% 3.11% 2.56% 6.86%

Source: Based on data from Coca-Cola Co. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Net operating revenues
= 100 × -5,750 ÷ 35,410 = -16.24%

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. Coca-Cola Co.'s economic profit margin deteriorated from 2015 to 2016 and from 2016 to 2017.