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

Colgate-Palmolive Co., 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 2,450  2,737  1,485  2,581  2,564 
Cost of capital2 9.70% 9.74% 9.66% 9.73% 9.72%
Invested capital3 11,744  11,692  11,343  11,704  11,149 
Economic profit4 1,310  1,598  390  1,443  1,480 

Source: Based on data from Colgate-Palmolive 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
= 2,450 – 9.70% × 11,744 = 1,310

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. Colgate-Palmolive Co.'s economic profit increased from 2015 to 2016 but then slightly declined from 2016 to 2017.

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Net Operating Profit after Taxes (NOPAT)

Colgate-Palmolive Co., 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 Colgate-Palmolive Company 2,024  2,441  1,384  2,180  2,241 
Deferred income tax expense (benefit)1 108  71  (119) 37  (18)
Increase (decrease) in allowance for doubtful accounts and estimated returns2 14  (13)
Increase (decrease) in LIFO reserve3 33  24  (12) (19)
Increase (decrease) in restructuring accrual4 53  (34) 23  34  69 
Increase (decrease) in equity equivalents5 198  75  (103) 39  57 
Interest expense 153  149  133  130  116 
Interest expense, operating lease obligations6 18  19  22  22  25 
Adjusted interest expense 171  168  155  152  141 
Tax benefit of interest expense7 (60) (59) (54) (53) (49)
Adjusted interest expense, after taxes8 111  109  101  99  91 
(Gain) loss on marketable securities (1) 14  267  133 
Interest income (51) (50) (107) (106) (125)
Investment income, before taxes (51) (51) (93) 161 
Tax expense (benefit) of investment income9 18  18  33  (56) (3)
Investment income, after taxes10 (33) (33) (60) 105 
Net income (loss) attributable to noncontrolling interest 150  145  164  159  169 
Net operating profit after taxes (NOPAT) 2,450  2,737  1,485  2,581  2,564 

Source: Based on data from Colgate-Palmolive Co. Annual Reports

2017 Calculations

1 Elimination of deferred tax expense. See Details »

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

3 Addition of increase (decrease) in LIFO reserve. See Details »

4 Addition of increase (decrease) in restructuring accrual.

5 Addition of increase (decrease) in equity equivalents to net income attributable to Colgate-Palmolive Company.

6 Addition of interest expense on capitalized operating leases. See Details »

7 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 171 × 35% = 60

8 Addition of after taxes interest expense to net income attributable to Colgate-Palmolive Company.

9 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 51 × 35% = 18

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. Colgate-Palmolive Co.'s NOPAT increased from 2015 to 2016 but then slightly declined from 2016 to 2017.

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Cash Operating Taxes

Colgate-Palmolive Co., 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 1,313  1,152  1,215  1,194  1,155 
Less: Deferred income tax expense (benefit) 108  71  (119) 37  (18)
Add: Tax savings from interest expense 60  59  54  53  49 
Less: Tax imposed on investment income 18  18  33  (56) (3)
Cash operating taxes 1,247  1,122  1,356  1,267  1,225 

Source: Based on data from Colgate-Palmolive 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. Colgate-Palmolive Co.'s cash operating taxes declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.

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Invested Capital

Colgate-Palmolive Co., invested capital calculation (financing approach)

USD $ in millions

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Notes and loans payable 11  13  16  13 
Current portion of long-term debt 298  488  895 
Long-term debt, excluding current portion 6,566  6,520  6,269  5,644  4,749 
PV of operating lease payments1 697  808  861  993  1,018 
Total reported debt & leases 7,274  7,341  7,432  7,141  6,675 
Total Colgate-Palmolive Company shareholders' equity (60) (243) (299) 1,145  2,305 
Net deferred tax (assets) liabilities2 16  (55) (92) (71) 83 
Allowance for doubtful accounts and estimated returns3 77  73  59  54  67 
LIFO reserve4 63  30  18  37 
Restructuring accrual5 234  181  215  192  158 
Equity equivalents6 390  229  188  193  345 
Accumulated other comprehensive (income) loss, net of tax7 3,855  4,180  3,950  3,507  2,451 
Noncontrolling interests 303  260  255  240  231 
Adjusted total Colgate-Palmolive Company shareholders' equity 4,488  4,426  4,094  5,085  5,332 
Marketable securities8 (18) (75) (183) (522) (858)
Invested capital 11,744  11,692  11,343  11,704  11,149 

Source: Based on data from Colgate-Palmolive 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 LIFO reserve. See Details »

5 Addition of restructuring accrual.

6 Addition of equity equivalents to total Colgate-Palmolive Company shareholders' equity.

7 Removal of accumulated other comprehensive income.

8 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. Colgate-Palmolive Co.'s invested capital increased from 2015 to 2016 and from 2016 to 2017.

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Cost of Capital

Colgate-Palmolive Co., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 62,341  62,341  ÷ 69,848  = 0.89 0.89 × 10.71% = 9.56%
Debt3 6,810  6,810  ÷ 69,848  = 0.10 0.10 × 2.00% × (1 – 35%) = 0.13%
PV of operating lease payments4 697  697  ÷ 69,848  = 0.01 0.01 × 2.00% × (1 – 35%) = 0.01%
Total: 69,848  1.00 9.70%

Source: Based on data from Colgate-Palmolive 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 65,720  65,720  ÷ 73,258  = 0.90 0.90 × 10.71% = 9.61%
Debt3 6,730  6,730  ÷ 73,258  = 0.09 0.09 × 1.90% × (1 – 35%) = 0.11%
PV of operating lease payments4 808  808  ÷ 73,258  = 0.01 0.01 × 1.90% × (1 – 35%) = 0.01%
Total: 73,258  1.00 9.74%

Source: Based on data from Colgate-Palmolive 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 60,010  60,010  ÷ 67,642  = 0.89 0.89 × 10.71% = 9.51%
Debt3 6,771  6,771  ÷ 67,642  = 0.10 0.10 × 2.10% × (1 – 35%) = 0.14%
PV of operating lease payments4 861  861  ÷ 67,642  = 0.01 0.01 × 2.10% × (1 – 35%) = 0.02%
Total: 67,642  1.00 9.66%

Source: Based on data from Colgate-Palmolive 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 63,686  63,686  ÷ 71,042  = 0.90 0.90 × 10.71% = 9.61%
Debt3 6,362  6,362  ÷ 71,042  = 0.09 0.09 × 1.82% × (1 – 35%) = 0.11%
PV of operating lease payments4 993  993  ÷ 71,042  = 0.01 0.01 × 1.82% × (1 – 35%) = 0.02%
Total: 71,042  1.00 9.73%

Source: Based on data from Colgate-Palmolive 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 56,846  56,846  ÷ 63,566  = 0.89 0.89 × 10.71% = 9.58%
Debt3 5,703  5,703  ÷ 63,566  = 0.09 0.09 × 2.00% × (1 – 35%) = 0.12%
PV of operating lease payments4 1,018  1,018  ÷ 63,566  = 0.02 0.02 × 2.00% × (1 – 35%) = 0.02%
Total: 63,566  1.00 9.72%

Source: Based on data from Colgate-Palmolive Co. 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

Colgate-Palmolive Co., 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 1,310  1,598  390  1,443  1,480 
Invested capital2 11,744  11,692  11,343  11,704  11,149 
Ratio
Economic spread3 11.16% 13.67% 3.44% 12.33% 13.27%

Source: Based on data from Colgate-Palmolive Co. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 1,310 ÷ 11,744 = 11.16%

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. Colgate-Palmolive Co.'s economic spread improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017.

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Economic Profit Margin

Colgate-Palmolive Co., 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 1,310  1,598  390  1,443  1,480 
Net sales 15,454  15,195  16,034  17,277  17,420 
Ratio
Economic profit margin2 8.48% 10.52% 2.43% 8.35% 8.50%

Source: Based on data from Colgate-Palmolive Co. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Net sales
= 100 × 1,310 ÷ 15,454 = 8.48%

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. Colgate-Palmolive Co.'s economic profit margin improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017.

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