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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
Net Operating Profit after Taxes (NOPAT)
Cash Operating Taxes
Invested Capital
Cost of Capital
Economic Spread Ratio
Economic Profit Margin

HP Inc., economic profit calculation

US$ in millions

12 months ended:	Oct 31, 2018	Oct 31, 2017	Oct 31, 2016	Oct 31, 2015	Oct 31, 2014	Oct 31, 2013
Net operating profit after taxes (NOPAT)¹	2,027)	3,064)	2,997)	3,947)	4,693)	4,258)
Cost of capital²	22.63%	21.62%	21.16%	13.42%	20.93%	18.94%
Invested capital³	7,561)	9,763)	9,027)	71,569)	65,787)	67,461)

Economic profit⁴	316)	953)	1,087)	(5,659)	(9,077)	(8,518)

Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).

¹ NOPAT. See details »

² Cost of capital. See details »

³ Invested capital. See details »

⁴ 2018 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 2,027 – 22.63% × 7,561 = 316

The analysis of economic value added reveals a significant strategic transition between 2013 and 2018. The company shifted from a period of substantial value destruction, characterized by negative economic profit, to a state of value creation starting in 2016. This turnaround was achieved not through an increase in operating profits, but through a drastic reduction in the capital base.

Net Operating Profit After Taxes (NOPAT): A consistent downward trajectory is observed in NOPAT over the analyzed period. From a peak of 4,693 million US$ in 2014, NOPAT declined to 2,027 million US$ by 2018. This represents a reduction of approximately 56.8% from the 2014 high, indicating a contraction in the company's ability to generate operating earnings after taxes.
Invested Capital: The most profound change occurred in the invested capital, which remained relatively stable between 65,787 million US$ and 71,569 million US$ from 2013 to 2015. A sharp contraction occurred in 2016, where invested capital fell to 9,027 million US$, maintaining a lower threshold through 2018 at 7,561 million US$. This suggests a major corporate restructuring, divestiture, or asset reallocation that significantly reduced the capital employed in operations.
Cost of Capital: The cost of capital exhibited volatility, starting at 18.94% in 2013 and dipping to a period low of 13.42% in 2015. Following this dip, there was a steady annual increase, peaking at 22.63% in 2018. The rising cost of capital placed increasing pressure on the company to generate higher returns on its remaining investments.
Economic Profit: Economic profit transitioned from deep negative values to positive territory. Between 2013 and 2015, the company experienced significant economic losses, reaching a low of -9,077 million US$ in 2014. However, the drastic reduction in invested capital in 2016 lowered the capital charge sufficiently to allow NOPAT to exceed the cost of capital, resulting in a positive economic profit of 1,087 million US$. Although this figure declined to 316 million US$ by 2018 due to falling NOPAT and rising capital costs, the company maintained a state of value creation for the final three years of the period.

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HP Inc., NOPAT calculation

US$ in millions

12 months ended:	Oct 31, 2018	Oct 31, 2017	Oct 31, 2016	Oct 31, 2015	Oct 31, 2014	Oct 31, 2013
Net earnings	5,327)	2,526)	2,496)	4,554)	5,013)	5,113)
Deferred income tax expense (benefit)¹	(3,654)	239)	403)	(701)	(33)	(410)
Increase (decrease) in allowance for doubtful accounts²	28)	(6)	27)	(43)	(100)	(132)
Increase (decrease) in deferred revenue³	167)	149)	(79)	498)	(310)	(481)
Increase (decrease) in product warranty liabilities⁴	17)	(82)	(204)	(248)	(75)	(139)
Increase (decrease) in restructuring plans, accrued balance⁵	(49)	50)	(5)	(309)	(3)	90)
Increase (decrease) in equity equivalents⁶	(3,491)	350)	142)	(803)	(521)	(1,072)
Interest expense on borrowings	312)	309)	273)	327)	344)	426)
Interest expense, operating lease liability⁷	58)	46)	42)	103)	102)	106)
Adjusted interest expense on borrowings	370)	355)	315)	430)	446)	532)
Tax benefit of interest expense on borrowings⁸	(86)	(124)	(110)	(151)	(156)	(186)
Adjusted interest expense on borrowings, after taxes⁹	284)	230)	205)	280)	290)	345)
(Gain) loss on marketable securities	(5)	—)	—)	—)	(1)	(49)
Interest income	(116)	(66)	(24)	(129)	(136)	(148)
Investment income, before taxes	(121)	(66)	(24)	(129)	(137)	(197)
Tax expense (benefit) of investment income¹⁰	28)	23)	8)	45)	48)	69)
Investment income, after taxes¹¹	(93)	(43)	(16)	(84)	(89)	(128)
(Income) loss from discontinued operations, net of tax¹²	—)	—)	170)	—)	—)	—)
Net operating profit after taxes (NOPAT)	2,027)	3,064)	2,997)	3,947)	4,693)	4,258)

Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).

¹ Elimination of deferred tax expense. See details »

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

³ Addition of increase (decrease) in deferred revenue.

⁴ Addition of increase (decrease) in product warranty liabilities.

⁵ Addition of increase (decrease) in restructuring plans, accrued balance.

⁶ Addition of increase (decrease) in equity equivalents to net earnings.

⁷ 2018 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 1,260 × 4.60% = 58

⁸ 2018 Calculation
Tax benefit of interest expense on borrowings = Adjusted interest expense on borrowings × Statutory income tax rate
= 370 × 23.30% = 86

⁹ Addition of after taxes interest expense to net earnings.

¹⁰ 2018 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 121 × 23.30% = 28

¹¹ Elimination of after taxes investment income.

¹² Elimination of discontinued operations.

Net earnings: Net earnings displayed a downward trend from 2013 through 2016, decreasing from 5,113 million US dollars in 2013 to a low of 2,496 million US dollars in 2016. This was followed by a period of relative stability with a slight increase to 2,526 million US dollars in 2017. In 2018, net earnings sharply rebounded to 5,327 million US dollars, surpassing the 2013 figure.
Net operating profit after taxes (NOPAT): NOPAT witnessed a decline during the same initial period, dropping from 4,258 million US dollars in 2013 to 2,997 million US dollars in 2016. There was a modest recovery in 2017, reaching 3,064 million US dollars. However, contrary to net earnings, NOPAT decreased significantly in 2018 to 2,027 million US dollars, marking the lowest value in the observed range.
Overall Analysis: The data reveals diverging trends between net earnings and NOPAT in 2018. While net earnings showed a strong recovery, more than doubling relative to the previous year, NOPAT declined sharply, indicating potential changes in operational efficiency, tax effects, or non-operating income components affecting the profitability metrics differently. The earlier period from 2013 to 2016 demonstrates a consistent decline in both metrics, possibly pointing to operational challenges or adverse market conditions during those years.

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HP Inc., cash operating taxes calculation

US$ in millions

12 months ended:	Oct 31, 2018	Oct 31, 2017	Oct 31, 2016	Oct 31, 2015	Oct 31, 2014	Oct 31, 2013
Provision for (benefit from) taxes on earnings	(2,314)	750)	1,095)	178)	1,544)	1,397)
Less: Deferred income tax expense (benefit)	(3,654)	239)	403)	(701)	(33)	(410)
Add: Tax savings from interest expense on borrowings	86)	124)	110)	151)	156)	186)
Less: Tax imposed on investment income	28)	23)	8)	45)	48)	69)
Cash operating taxes	1,398)	612)	794)	984)	1,685)	1,924)

Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).

Provision for (benefit from) taxes on earnings: The provision for taxes on earnings exhibits significant volatility over the observed period. Starting at $1,397 million in 2013, it increased to $1,544 million in 2014, followed by a sharp decline to $178 million in 2015. In 2016, the amount rose again to $1,095 million, then decreased to $750 million in 2017, before turning into a substantial tax benefit of -$2,314 million in 2018. This fluctuation indicates variability in the company's taxable income or changes in tax strategy and tax regulations over the years.
Cash operating taxes: Cash operating taxes show a general downward trend from 2013 to 2017, decreasing from $1,924 million to $612 million. However, there is a notable rebound in 2018 with an increase to $1,398 million. This trend suggests a gradual reduction in actual cash tax payments over the first five years, possibly due to tax planning or changes in profitability, followed by a significant rise in the final year, which could reflect an increase in taxable cash flows or changes in tax payments timing or policies.

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HP Inc., invested capital calculation (financing approach)

US$ in millions

	Oct 31, 2018	Oct 31, 2017	Oct 31, 2016	Oct 31, 2015	Oct 31, 2014	Oct 31, 2013
Notes payable and short-term borrowings	1,463)	1,072)	78)	2,885)	3,486)	5,979)
Long-term debt, excluding current portion	4,524)	6,747)	6,758)	21,780)	16,039)	16,608)
Operating lease liability¹	1,260)	1,036)	901)	2,461)	2,681)	2,606)
Total reported debt & leases	7,247)	8,855)	7,737)	27,126)	22,206)	25,193)
Total HP stockholders’ equity (deficit)	(639)	(3,408)	(3,889)	27,768)	26,731)	27,269)
Net deferred tax (assets) liabilities²	(2,331)	1,068)	862)	(2,650)	(2,086)	(2,196)
Allowance for doubtful accounts³	129)	101)	107)	189)	232)	332)
Deferred revenue⁴	2,100)	1,933)	1,784)	10,572)	10,074)	10,384)
Product warranty liabilities⁵	915)	898)	980)	1,708)	1,956)	2,031)
Restructuring plans, accrued balance⁶	59)	108)	58)	805)	1,114)	1,117)
Equity equivalents⁷	872)	4,108)	3,791)	10,624)	11,290)	11,668)
Accumulated other comprehensive (income) loss, net of tax⁸	845)	1,418)	1,438)	6,302)	5,881)	3,778)
Non-controlling interests	—)	—)	—)	383)	396)	387)
Adjusted total HP stockholders’ equity (deficit)	1,078)	2,118)	1,340)	45,077)	44,298)	43,102)
Available-for-sale investments⁹	(764)	(1,210)	(50)	(634)	(717)	(834)
Invested capital	7,561)	9,763)	9,027)	71,569)	65,787)	67,461)

Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).

¹ Addition of capitalized operating leases.

² Elimination of deferred taxes from assets and liabilities. See details »

³ Addition of allowance for doubtful accounts receivable.

⁴ Addition of deferred revenue.

⁵ Addition of product warranty liabilities.

⁶ Addition of restructuring plans, accrued balance.

⁷ Addition of equity equivalents to total HP stockholders’ equity (deficit).

⁸ Removal of accumulated other comprehensive income.

⁹ Subtraction of available-for-sale investments.

Total reported debt & leases: The total reported debt and leases exhibited a fluctuating pattern over the analyzed period. Starting at 25,193 million US dollars in 2013, the figure decreased to 22,206 million in 2014, followed by an increase to 27,126 million in 2015. Subsequently, there was a sharp decline to 7,737 million in 2016, with minor increases to 8,855 million in 2017 and a decrease again to 7,247 million in 2018. This indicates a significant reduction in debt levels from 2015 onwards, possibly reflecting a strategic deleveraging or asset restructuring effort.
Total HP stockholders’ equity (deficit): Stockholders’ equity showed stability and slight growth from 27,269 million in 2013 to 27,768 million in 2015. However, from 2016 onwards, the equity balance turned negative, indicating a deficit position of -3,889 million in 2016. This deficit slightly improved but remained negative at -3,408 million in 2017 and -639 million in 2018. The transition to negative equity suggests significant losses or charges affecting retained earnings or valuation adjustments during this period.
Invested capital: Invested capital remained relatively stable and showed a mild upward trend from 67,461 million in 2013 to 71,569 million in 2015. Beginning in 2016, there was a sharp and substantial drop to 9,027 million followed by a slight increase to 9,763 million in 2017 and a decrease again to 7,561 million in 2018. The dramatic decline post-2015 aligns with reduced debt levels and negative equity, possibly reflecting a divestiture of significant assets or a fundamental change in capital structure.

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HP Inc., cost of capital calculations

Oct 31, 2018

	Capital (fair value)¹	Weights					Cost of capital
Equity²	34,627)	34,627)	÷	41,888)	=	0.83	0.83	×	26.64%	=	22.02%
Short- and long-term debt³	6,000)	6,000)	÷	41,888)	=	0.14	0.14	×	4.60% × (1 – 23.30%)	=	0.51%
Operating lease liability⁴	1,260)	1,260)	÷	41,888)	=	0.03	0.03	×	4.60% × (1 – 23.30%)	=	0.11%
Total:	41,888)					1.00					22.63%

Based on: 10-K (reporting date: 2018-10-31).

¹ US$ in millions

² Equity. See details »

³ Short- and long-term debt. See details »

⁴ Operating lease liability. See details »

Oct 31, 2017

	Capital (fair value)¹	Weights					Cost of capital
Equity²	34,122)	34,122)	÷	43,258)	=	0.79	0.79	×	26.64%	=	21.01%
Short- and long-term debt³	8,100)	8,100)	÷	43,258)	=	0.19	0.19	×	4.40% × (1 – 35.00%)	=	0.54%
Operating lease liability⁴	1,036)	1,036)	÷	43,258)	=	0.02	0.02	×	4.40% × (1 – 35.00%)	=	0.07%
Total:	43,258)					1.00					21.62%

Based on: 10-K (reporting date: 2017-10-31).

¹ US$ in millions

² Equity. See details »

³ Short- and long-term debt. See details »

⁴ Operating lease liability. See details »

Oct 31, 2016

	Capital (fair value)¹	Weights					Cost of capital
Equity²	26,452)	26,452)	÷	34,452)	=	0.77	0.77	×	26.64%	=	20.45%
Short- and long-term debt³	7,100)	7,100)	÷	34,452)	=	0.21	0.21	×	4.69% × (1 – 35.00%)	=	0.63%
Operating lease liability⁴	901)	901)	÷	34,452)	=	0.03	0.03	×	4.69% × (1 – 35.00%)	=	0.08%
Total:	34,452)					1.00					21.16%

Based on: 10-K (reporting date: 2016-10-31).

¹ US$ in millions

² Equity. See details »

³ Short- and long-term debt. See details »

⁴ Operating lease liability. See details »

Oct 31, 2015

	Capital (fair value)¹	Weights					Cost of capital
Equity²	21,968)	21,968)	÷	49,129)	=	0.45	0.45	×	26.64%	=	11.91%
Short- and long-term debt³	24,700)	24,700)	÷	49,129)	=	0.50	0.50	×	4.20% × (1 – 35.00%)	=	1.37%
Operating lease liability⁴	2,461)	2,461)	÷	49,129)	=	0.05	0.05	×	4.20% × (1 – 35.00%)	=	0.14%
Total:	49,129)					1.00					13.42%

Based on: 10-K (reporting date: 2015-10-31).

¹ US$ in millions

² Equity. See details »

³ Short- and long-term debt. See details »

⁴ Operating lease liability. See details »

Oct 31, 2014

	Capital (fair value)¹	Weights					Cost of capital
Equity²	73,033)	73,033)	÷	95,614)	=	0.76	0.76	×	26.64%	=	20.35%
Short- and long-term debt³	19,900)	19,900)	÷	95,614)	=	0.21	0.21	×	3.79% × (1 – 35.00%)	=	0.51%
Operating lease liability⁴	2,681)	2,681)	÷	95,614)	=	0.03	0.03	×	3.79% × (1 – 35.00%)	=	0.07%
Total:	95,614)					1.00					20.93%

Based on: 10-K (reporting date: 2014-10-31).

¹ US$ in millions

² Equity. See details »

³ Short- and long-term debt. See details »

⁴ Operating lease liability. See details »

Oct 31, 2013

	Capital (fair value)¹	Weights					Cost of capital
Equity²	53,579)	53,579)	÷	78,885)	=	0.68	0.68	×	26.64%	=	18.09%
Short- and long-term debt³	22,700)	22,700)	÷	78,885)	=	0.29	0.29	×	4.05% × (1 – 35.00%)	=	0.76%
Operating lease liability⁴	2,606)	2,606)	÷	78,885)	=	0.03	0.03	×	4.05% × (1 – 35.00%)	=	0.09%
Total:	78,885)					1.00					18.94%

Based on: 10-K (reporting date: 2013-10-31).

¹ US$ in millions

² Equity. See details »

³ Short- and long-term debt. See details »

⁴ Operating lease liability. See details »

HP Inc., economic spread ratio calculation, comparison to benchmarks

	Oct 31, 2018	Oct 31, 2017	Oct 31, 2016	Oct 31, 2015	Oct 31, 2014	Oct 31, 2013
Selected Financial Data (US$ in millions)
Economic profit¹	316)	953)	1,087)	(5,659)	(9,077)	(8,518)
Invested capital²	7,561)	9,763)	9,027)	71,569)	65,787)	67,461)
Performance Ratio
Economic spread ratio³	4.17%	9.76%	12.04%	-7.91%	-13.80%	-12.63%
Benchmarks
Economic Spread Ratio, Competitors⁴
Apple Inc.	—	—	—	—	—	—
Arista Networks Inc.	—	—	—	—	—	—
Cisco Systems Inc.	—	—	—	—	—	—
Dell Technologies Inc.	—	—	—	—	—	—
Lumentum Holdings Inc.	—	—	—	—	—	—
Super Micro Computer Inc.	—	—	—	—	—	—

Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).

¹ Economic profit. See details »

² Invested capital. See details »

³ 2018 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × 316 ÷ 7,561 = 4.17%

⁴ Click competitor name to see calculations.

The financial performance between 2013 and 2018 is characterized by a significant transition from substantial economic value destruction to a period of positive value creation. A critical inflection point occurred in 2016, where a fundamental shift in the capital structure coincided with the transition to positive economic profit.

Economic Profit: Economic profit exhibited deep negative values from 2013 to 2015, reaching a low of negative 9,077 million US dollars in 2014. A reversal occurred in 2016, with profit turning positive at 1,087 million US dollars. However, a subsequent downward trend is observed from 2016 through 2018, with the value decreasing to 316 million US dollars by the end of the period.
Invested Capital: Invested capital remained consistently high between 2013 and 2015, peaking at 71,569 million US dollars. In 2016, a drastic reduction is observed, with invested capital falling to 9,027 million US dollars. This represents a sharp contraction in the capital base, which remained relatively low through 2018, ending at 7,561 million US dollars.
Economic Spread Ratio: The economic spread ratio mirrored the trajectory of economic profit, starting at negative 12.63% in 2013 and dipping to negative 13.80% in 2014. Following the capital restructuring in 2016, the ratio surged to a peak of 12.04%. Since this peak, a consistent contraction has occurred, with the ratio declining to 9.76% in 2017 and further dropping to 4.17% in 2018, indicating a narrowing margin over the cost of capital.

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HP Inc., economic profit margin calculation, comparison to benchmarks

	Oct 31, 2018	Oct 31, 2017	Oct 31, 2016	Oct 31, 2015	Oct 31, 2014	Oct 31, 2013
Selected Financial Data (US$ in millions)
Economic profit¹	316)	953)	1,087)	(5,659)	(9,077)	(8,518)

Net revenue	58,472)	52,056)	48,238)	103,355)	111,454)	112,298)
Add: Increase (decrease) in deferred revenue	167)	149)	(79)	498)	(310)	(481)
Adjusted net revenue	58,639)	52,205)	48,159)	103,853)	111,144)	111,817)
Performance Ratio
Economic profit margin²	0.54%	1.83%	2.26%	-5.45%	-8.17%	-7.62%
Benchmarks
Economic Profit Margin, Competitors³
Apple Inc.	—	—	—	—	—	—
Arista Networks Inc.	—	—	—	—	—	—
Cisco Systems Inc.	—	—	—	—	—	—
Dell Technologies Inc.	—	—	—	—	—	—
Lumentum Holdings Inc.	—	—	—	—	—	—
Super Micro Computer Inc.	—	—	—	—	—	—

Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).

¹ Economic profit. See details »

² 2018 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted net revenue
= 100 × 316 ÷ 58,639 = 0.54%

³ Click competitor name to see calculations.

The financial performance from 2013 to 2018 is characterized by a significant transition from substantial economic value destruction to a period of positive, albeit declining, economic value creation.

Economic Profit Trajectory: A period of significant negative economic profit was observed between 2013 and 2015, with the lowest point occurring in 2014 at -9,077 million US$. A critical inflection point was reached in 2016, marking a shift to positive economic profit of 1,087 million US$. However, this positive momentum diminished in subsequent years, with figures falling to 953 million US$ in 2017 and further contracting to 316 million US$ by 2018.
Adjusted Net Revenue Volatility: Revenue levels remained relatively stable above 100 billion US$ from 2013 through 2015. A sharp contraction occurred in 2016, where adjusted net revenue dropped to 48,159 million US$. Following this decline, a recovery trend emerged, with revenue increasing to 52,205 million US$ in 2017 and reaching 58,639 million US$ in 2018.
Economic Profit Margin Analysis: The economic profit margin mirrored the overall profit trend, starting at -7.62% in 2013 and reaching a trough of -8.17% in 2014. The margin improved to -5.45% in 2015 before pivoting to a positive 2.26% in 2016. Despite this recovery, the margin underwent a consistent downward trend over the final three years of the analyzed period, ending at 0.54% in 2018, indicating a narrowing gap between net operating profit after tax and the cost of capital.

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HP Inc. (NYSE:HPQ)

Economic Value Added (EVA)

Economic Profit

Net Operating Profit after Taxes (NOPAT)

Cash Operating Taxes

Invested Capital

Cost of Capital

Economic Spread Ratio

Economic Profit Margin