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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
General Mills Inc., economic profit calculation
USD $ in thousands
| 12 months ended | May 27, 2018 | May 28, 2017 | May 29, 2016 | May 31, 2015 | May 25, 2014 | May 26, 2013 | |
|---|---|---|---|---|---|---|---|
| Net operating profit after taxes (NOPAT)1 | |
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| Cost of capital2 | % |
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| Invested capital3 | |
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| Economic profit4 | |
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Source: Based on data from General Mills Inc. Annual Reports
2018 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. | General Mills Inc.'s economic profit increased from 2016 to 2017 but then declined significantly from 2017 to 2018. |
Net Operating Profit after Taxes (NOPAT)
General Mills Inc., NOPAT calculation
USD $ in thousands
Source: Based on data from General Mills Inc. Annual Reports
2018 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 restructuring and other exit costs reserve.
5 Addition of increase (decrease) in equity equivalents to net earnings attributable to General Mills.
6 Addition of interest expense on capitalized operating leases. See Details »
7 Tax benefit of interest expense, net of capitalized interest = Adjusted interest expense, net of capitalized interest × Statutory income tax rate
= × 29% =
8 Addition of after taxes interest expense to net earnings attributable to General Mills.
9 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= × 29% =
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. | General Mills Inc.'s NOPAT increased from 2016 to 2017 but then declined significantly from 2017 to 2018. |
Cash Operating Taxes
General Mills Inc., cash operating taxes calculation
USD $ in thousands
Source: Based on data from General Mills 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. | General Mills Inc.'s cash operating taxes declined from 2016 to 2017 but then increased from 2017 to 2018 not reaching 2016 level. |
Invested Capital
General Mills Inc., invested capital calculation (financing approach)
USD $ in thousands
Source: Based on data from General Mills 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 allowance for doubtful accounts receivable.
4 Addition of LIFO reserve. See Details »
5 Addition of restructuring and other exit costs reserve.
6 Addition of equity equivalents to stockholders' equity.
7 Removal of accumulated other comprehensive income.
8 Subtraction of construction in progress.
9 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. | General Mills Inc.'s invested capital increased from 2016 to 2017 and from 2017 to 2018. |
Cost of Capital
General Mills Inc., cost of capital calculations
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | |
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÷ | |
= | |
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× | % |
= | % |
| Debt3 | |
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÷ | |
= | |
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× | % × (1 – 29%) |
= | % |
| PV of operating lease payments4 | |
|
÷ | |
= | |
|
× | % × (1 – 29%) |
= | % |
| Total: | |
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% |
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Source: Based on data from General Mills Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | |
|
÷ | |
= | |
|
× | % |
= | % |
| Debt3 | |
|
÷ | |
= | |
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× | % × (1 – 35%) |
= | % |
| PV of operating lease payments4 | |
|
÷ | |
= | |
|
× | % × (1 – 35%) |
= | % |
| Total: | |
|
% |
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Source: Based on data from General Mills Inc. Annual Reports
1 USD $ in thousands
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 General Mills Inc. Annual Reports
1 USD $ in thousands
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 General Mills Inc. Annual Reports
1 USD $ in thousands
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 General Mills Inc. Annual Reports
1 USD $ in thousands
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 General Mills Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Economic Spread
General Mills Inc., economic spread calculation
| May 27, 2018 | May 28, 2017 | May 29, 2016 | May 31, 2015 | May 25, 2014 | May 26, 2013 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in thousands) | |||||||
| Economic profit1 | |
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| Invested capital2 | |
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| Ratio | |||||||
| Economic spread3 | % |
% |
% |
% |
% |
% |
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Source: Based on data from General Mills Inc. Annual Reports
2018 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. | General Mills Inc.'s economic spread improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
Economic Profit Margin
General Mills Inc., economic profit margin calculation
| May 27, 2018 | May 28, 2017 | May 29, 2016 | May 31, 2015 | May 25, 2014 | May 26, 2013 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in thousands) | |||||||
| Economic profit1 | |
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| Net sales | |
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| Ratio | |||||||
| Economic profit margin2 | % |
% |
% |
% |
% |
% |
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Source: Based on data from General Mills Inc. Annual Reports
2018 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ Net sales
= 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. | General Mills Inc.'s economic profit margin improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
