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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

ConocoPhillips, 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 ConocoPhillips 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. ConocoPhillips's economic profit increased from 2015 to 2016 and from 2016 to 2017.

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Net Operating Profit after Taxes (NOPAT)

ConocoPhillips, 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 (loss) attributable to ConocoPhillips
Deferred income tax expense (benefit)1
Increase (decrease) in allowance for doubtful accounts and notes receivable2
Increase (decrease) in LIFO reserve3
Increase (decrease) in restructuring accruals4
Increase (decrease) in equity equivalents5
Interest and debt expense
Interest expense, operating lease obligations6
Adjusted interest and debt expense
Tax benefit of interest and debt expense7
Adjusted interest and debt expense, after taxes8
Interest income
Investment income, before taxes
Tax expense (benefit) of investment income9
Investment income, after taxes10
(Income) loss from discontinued operations, net of tax11
Net income (loss) attributable to noncontrolling interest
Net operating profit after taxes (NOPAT)

Source: Based on data from ConocoPhillips Annual Reports

2017 Calculations

1 Elimination of deferred tax expense. See Details »

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

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

4 Addition of increase (decrease) in restructuring accruals.

5 Addition of increase (decrease) in equity equivalents to net income (loss) attributable to ConocoPhillips.

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

7 Tax benefit of interest and debt expense = Adjusted interest and debt expense × Statutory income tax rate
= × 35% =

8 Addition of after taxes interest expense to net income (loss) attributable to ConocoPhillips.

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

10 Elimination of after taxes investment income.

11 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. ConocoPhillips's NOPAT increased from 2015 to 2016 and from 2016 to 2017.

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Cash Operating Taxes

ConocoPhillips, 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
Income tax provision (benefit)
Less: Deferred income tax expense (benefit)
Add: Tax savings from interest and debt expense
Less: Tax imposed on investment income
Cash operating taxes

Source: Based on data from ConocoPhillips 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. ConocoPhillips's cash operating taxes increased from 2015 to 2016 and from 2016 to 2017.

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Invested Capital

ConocoPhillips, 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 debt
Long-term debt
PV of operating lease payments1
Total reported debt & leases
Common stockholders’ equity
Net deferred tax (assets) liabilities2
Allowance for doubtful accounts and notes receivable3
LIFO reserve4
Restructuring accruals5
Equity equivalents6
Accumulated other comprehensive (income) loss, net of tax7
Noncontrolling interests
Adjusted common stockholders’ equity
Marketable securities8
Invested capital

Source: Based on data from ConocoPhillips 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 accruals.

6 Addition of equity equivalents to common stockholders’ 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. ConocoPhillips's invested capital declined from 2015 to 2016 and from 2016 to 2017.

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Cost of Capital

ConocoPhillips, cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Debt, including capital leases3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from ConocoPhillips Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capital leases. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Debt, including capital leases3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from ConocoPhillips Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capital leases. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Debt, including capital leases3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from ConocoPhillips Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capital leases. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Debt, including capital leases3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from ConocoPhillips Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capital leases. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Debt, including capital leases3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from ConocoPhillips Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capital leases. See Details »

4 PV of operating lease payments. See Details »

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Economic Spread

ConocoPhillips, 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 ConocoPhillips 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. ConocoPhillips's economic spread improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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Economic Profit Margin

ConocoPhillips, 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 and other operating revenues
Ratio
Economic profit margin2 % % % % %

Source: Based on data from ConocoPhillips Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Sales and other operating revenues
= 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. ConocoPhillips's economic profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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