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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

Danaher Corp., economic profit calculation

USD $ in thousands

 
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 Danaher Corp. 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. Danaher Corp.'s economic profit declined from 2015 to 2016 but then slightly increased from 2016 to 2017.

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Net Operating Profit after Taxes (NOPAT)

Danaher Corp., NOPAT calculation

USD $ in thousands

 
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net earnings
Deferred income tax expense (benefit)1
Increase (decrease) in allowance for doubtful accounts2
Increase (decrease) in LIFO reserve3
Increase (decrease) in deferred revenue4
Increase (decrease) in accrued warranty liability5
Increase (decrease) in accrual balance of restructuring cost6
Increase (decrease) in equity equivalents7
Interest expense
Interest expense, operating lease obligations8
Adjusted interest expense
Tax benefit of interest expense9
Adjusted interest expense, after taxes10
(Gain) loss on marketable securities
Interest income
Investment income, before taxes
Tax expense (benefit) of investment income11
Investment income, after taxes12
(Income) loss from discontinued operations, net of tax13
Net operating profit after taxes (NOPAT)

Source: Based on data from Danaher Corp. 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 LIFO reserve. See Details »

4 Addition of increase (decrease) in deferred revenue.

5 Addition of increase (decrease) in accrued warranty liability.

6 Addition of increase (decrease) in accrual balance of restructuring cost.

7 Addition of increase (decrease) in equity equivalents to net earnings.

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

9 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= × 35% =

10 Addition of after taxes interest expense to net earnings.

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

12 Elimination of after taxes investment income.

13 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. Danaher Corp.'s NOPAT declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.

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Cash Operating Taxes

Danaher Corp., cash operating taxes calculation

USD $ in thousands

 
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Income tax provision
Less: Deferred income tax expense (benefit)
Add: Tax savings from interest expense
Less: Tax imposed on investment income
Cash operating taxes

Source: Based on data from Danaher Corp. 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. Danaher Corp.'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

Danaher Corp., invested capital calculation (financing approach)

USD $ in thousands

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Notes payable and current portion of long-term debt
Long-term debt, excluding current portion
PV of operating lease payments1
Total reported debt & leases
Total Danaher stockholders' equity
Net deferred tax (assets) liabilities2
Allowance for doubtful accounts3
LIFO reserve4
Deferred revenue5
Accrued warranty liability6
Accrual balance of restructuring cost7
Equity equivalents8
Accumulated other comprehensive (income) loss, net of tax9
Noncontrolling interests
Adjusted total Danaher stockholders' equity
Available-for-sale securities10
Invested capital

Source: Based on data from Danaher Corp. 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 deferred revenue.

6 Addition of accrued warranty liability.

7 Addition of accrual balance of restructuring cost.

8 Addition of equity equivalents to total Danaher stockholders' equity.

9 Removal of accumulated other comprehensive income.

10 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. Danaher Corp.'s invested capital declined from 2015 to 2016 but then slightly increased from 2016 to 2017.

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Cost of Capital

Danaher Corp., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Borrowings3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from Danaher Corp. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Borrowings. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Borrowings3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from Danaher Corp. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Borrowings. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Borrowings3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from Danaher Corp. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Borrowings. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Borrowings3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from Danaher Corp. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Borrowings. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 ÷ = × % = %
Borrowings3 ÷ = × % × (1 – 35%) = %
PV of operating lease payments4 ÷ = × % × (1 – 35%) = %
Total: %

Source: Based on data from Danaher Corp. Annual Reports

1 USD $ in thousands

2 Equity. See Details »

3 Borrowings. See Details »

4 PV of operating lease payments. See Details »

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Economic Spread

Danaher Corp., economic spread calculation

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in thousands)
Economic profit1
Invested capital2
Ratio
Economic spread3 % % % % %

Source: Based on data from Danaher Corp. 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. Danaher Corp.'s economic spread deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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Economic Profit Margin

Danaher Corp., economic profit margin calculation

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in thousands)
Economic profit1
Sales
Increase (decrease) in deferred revenue
Ratio
Economic profit margin2 % % % % %

Source: Based on data from Danaher Corp. Annual Reports

2017 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ (Sales + Change in deferred revenue)
= 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. Danaher Corp.'s economic profit margin deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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