Economic Value Added (EVA)
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
HP Inc., economic profit calculation
US$ in millions
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 – 22.51% × 7,561 = 325
The financial trajectory between 2013 and 2018 is characterized by a significant transition from substantial economic value destruction to the generation of positive economic profit. This reversal is not the result of improved operating performance, but rather a drastic restructuring of the capital base that occurred between 2015 and 2016.
- Net Operating Profit After Taxes (NOPAT)
- A general downward trend in NOPAT is observed, decreasing from 4,258 million US$ in 2013 to 2,027 million US$ in 2018. While a slight increase occurred in 2017, the overall decline indicates a reduction in the absolute operating earnings available to cover the cost of capital.
- Invested Capital
- A precipitous decline in invested capital occurred between 2015 and 2016, falling from 71,569 million US$ to 9,027 million US$. This massive reduction in the capital employed suggests a significant corporate divestiture or restructuring event, which fundamentally altered the company's economic profit calculation by lowering the total capital charge.
- Cost of Capital
- The cost of capital exhibited volatility, reaching a low of 13.36% in 2015 before trending upward to a peak of 22.51% by 2018. The rising cost of capital in the latter years of the period has placed additional pressure on the company's ability to maintain positive economic value added.
- Economic Profit
- Economic profit transitioned from deep negative values, peaking at a loss of 9,003 million US$ in 2014, to positive territory in 2016 with 1,097 million US$. This shift was driven by the reduction in invested capital, which allowed NOPAT to exceed the cost of capital charge. However, from 2016 to 2018, economic profit trended downward to 325 million US$, reflecting the combined impact of declining operating profits and an increasing cost of capital.
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Net Operating Profit after Taxes (NOPAT)
HP Inc., NOPAT calculation
US$ in millions
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.
An analysis of financial performance from 2013 to 2018 reveals a significant divergence between core operating profitability and bottom-line net earnings.
- Net Earnings Trajectory
- Net earnings exhibited considerable volatility over the six-year period. Following a gradual decline from 5,113 million US$ in 2013 to a trough of 2,496 million US$ in 2016, the metric remained relatively flat in 2017 before experiencing a sharp recovery in 2018, peaking at 5,327 million US$.
- Net Operating Profit After Taxes (NOPAT) Trend
- NOPAT followed a different trajectory, characterized by a sustained long-term decline after 2014. Despite an initial increase to 4,693 million US$ in 2014, NOPAT contracted consistently over the subsequent four years, ending the period at 2,027 million US$ in 2018. This represents a substantial erosion of operating profit, falling to less than half of its 2014 peak.
- Operational Divergence and Insights
- A notable inverse relationship emerged in the 2018 fiscal year. While net earnings reached their highest point in the analyzed timeframe, NOPAT simultaneously reached its lowest point. This divergence indicates that the growth in net earnings was not derived from operational efficiency or core business profitability, but was instead driven by non-operating items, such as tax benefits, asset sales, or other non-recurring financial gains.
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Cash Operating Taxes
HP Inc., cash operating taxes calculation
US$ in millions
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).
An analysis of tax expenditures from 2013 to 2018 reveals significant volatility in both accrual-based provisions and actual cash outflows. While the provision for taxes on earnings fluctuated considerably, ending in a substantial tax benefit, cash operating taxes followed a generally downward trajectory for several years before a sharp reversal in the final period.
- Provision for Taxes on Earnings
- The provision for taxes exhibited extreme volatility over the six-year period. After peaking at 1,544 million in 2014, the provision dropped sharply to 178 million in 2015. Despite a subsequent recovery in 2016 and 2017, the period concluded with a significant tax benefit of 2,314 million in 2018, representing a complete reversal from previous years of tax expenses.
- Cash Operating Taxes
- Cash outflows for operating taxes showed a consistent decline from 2013 to 2017, falling from 1,924 million to 612 million. This trend suggests a period of improving cash efficiency regarding tax obligations. However, this trend was abruptly reversed in 2018, with cash operating taxes increasing to 1,398 million, a rise of approximately 128% over the prior year.
- Analysis of Accrual and Cash Divergence
- A pronounced divergence between accounting provisions and cash payments is evident, particularly in 2018. While the company recorded a non-cash tax benefit of 2,314 million, it simultaneously experienced a substantial cash outflow of 1,398 million for taxes. This gap indicates that accounting adjustments or deferred tax items significantly decoupled the reported tax expense from the actual cash impact on the company's liquidity and its resulting Economic Value Added (EVA).
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Invested Capital
HP Inc., invested capital calculation (financing approach)
US$ in millions
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.
The capital structure from 2013 to 2018 is characterized by a profound transformation, transitioning from a high-capital intensity model to a significantly leaner balance sheet starting in 2016.
- Invested Capital Trends
- Invested capital maintained a high and relatively stable range between 2013 and 2015, peaking at $71,569 million in 2015. A precipitous decline occurred in 2016, with invested capital falling to $9,027 million, an 87% reduction from the previous year. Following this contraction, the value remained low, ending the period at $7,561 million in 2018.
- Debt and Lease Obligations
- Total reported debt and leases showed moderate fluctuations between 2013 and 2015, reaching a period high of $27,126 million. Similar to the invested capital trend, a sharp reduction is observed in 2016, where debt dropped to $7,737 million. This leaner debt profile persisted through 2018, ultimately decreasing to $7,247 million.
- Stockholders' Equity Position
- Stockholders' equity remained positive and stable at approximately $27 billion through 2015. A dramatic shift occurred in 2016, resulting in a stockholders' deficit of $3,889 million. A steady recovery trend is observed from 2016 to 2018, as the deficit narrowed consistently to $3,408 million in 2017 and finally to $639 million by October 31, 2018.
The synchronization of the collapse in invested capital, the sharp reduction in debt, and the swing to negative equity in 2016 indicates a significant structural reorganization of the balance sheet. The subsequent years show a trend of stabilizing the capital base while gradually reducing the equity deficit.
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Cost of Capital
HP Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 34,627) | 34,627) | ÷ | 41,888) | = | 0.83 | 0.83 | × | 26.49% | = | 21.90% | ||
| Short- and long-term debt3 | 6,000) | 6,000) | ÷ | 41,888) | = | 0.14 | 0.14 | × | 4.60% × (1 – 23.30%) | = | 0.51% | ||
| Operating lease liability4 | 1,260) | 1,260) | ÷ | 41,888) | = | 0.03 | 0.03 | × | 4.60% × (1 – 23.30%) | = | 0.11% | ||
| Total: | 41,888) | 1.00 | 22.51% | ||||||||||
Based on: 10-K (reporting date: 2018-10-31).
1 US$ in millions
2 Equity. See details »
3 Short- and long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 34,122) | 34,122) | ÷ | 43,258) | = | 0.79 | 0.79 | × | 26.49% | = | 20.90% | ||
| 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 | 21.50% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 26,452) | 26,452) | ÷ | 34,452) | = | 0.77 | 0.77 | × | 26.49% | = | 20.34% | ||
| 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 | 21.05% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 21,968) | 21,968) | ÷ | 49,129) | = | 0.45 | 0.45 | × | 26.49% | = | 11.85% | ||
| 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 | 13.36% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 73,033) | 73,033) | ÷ | 95,614) | = | 0.76 | 0.76 | × | 26.49% | = | 20.24% | ||
| 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 | 20.82% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 53,579) | 53,579) | ÷ | 78,885) | = | 0.68 | 0.68 | × | 26.49% | = | 17.99% | ||
| 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 | 18.84% | ||||||||||
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 »
Economic Spread Ratio
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 | 325) | 964) | 1,097) | (5,612) | (9,003) | (8,451) | |
| Invested capital2 | 7,561) | 9,763) | 9,027) | 71,569) | 65,787) | 67,461) | |
| Performance Ratio | |||||||
| Economic spread ratio3 | 4.29% | 9.88% | 12.16% | -7.84% | -13.69% | -12.53% | |
| 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 × 325 ÷ 7,561 = 4.29%
4 Click competitor name to see calculations.
The financial trajectory from 2013 to 2018 is characterized by a significant transition from economic value destruction to value creation, accompanied by a fundamental restructuring of the capital base. An initial period of negative economic profit and negative spread ratios shifted toward positive territory starting in 2016, although a subsequent downward trend in profitability and spread occurred through 2018.
- Economic Profit Trends
- A period of substantial value destruction is evident between 2013 and 2015, with economic profit reaching a low of negative 9,003 million USD in 2014. A reversal occurred in 2016, when economic profit turned positive at 1,097 million USD. However, this peak was not sustained, as values declined to 964 million USD in 2017 and further decreased to 325 million USD by 2018.
- Invested Capital Dynamics
- Invested capital remained relatively high and stable between 2013 and 2015, peaking at 71,569 million USD. A drastic contraction is observed in 2016, where invested capital fell to 9,027 million USD. This represents a significant reduction in the capital base, which remained relatively low through 2018, ending the period at 7,561 million USD.
- Economic Spread Ratio Analysis
- The economic spread ratio mirrored the volatility of economic profit, starting at negative 12.53% in 2013 and dipping to negative 13.69% in 2014. A sharp recovery followed, resulting in a positive spread of 12.16% in 2016. Following this peak, the ratio experienced a consistent compression, falling to 9.88% in 2017 and ending at 4.29% in 2018, indicating a narrowing margin between the return on invested capital and the cost of capital.
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Economic Profit Margin
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 | 325) | 964) | 1,097) | (5,612) | (9,003) | (8,451) | |
| 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 | 0.55% | 1.85% | 2.28% | -5.40% | -8.10% | -7.56% | |
| 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 × 325 ÷ 58,639 = 0.55%
3 Click competitor name to see calculations.
The financial data indicates a significant transition from value destruction to value creation between 2013 and 2018. The period is characterized by an initial phase of substantial economic losses, followed by a structural shift in 2016 that allowed for the achievement of positive economic profit, although this margin has since experienced a gradual decline.
- Economic Profit Trajectory
- A recovery trend is observed in economic profit, which began at -8,451 million US dollars in 2013 and reached its lowest point in 2014 at -9,003 million US dollars. A reversal occurred between 2015 and 2016, with the figure shifting from a loss of 5,612 million US dollars to a positive gain of 1,097 million US dollars. However, this positive momentum decelerated in subsequent years, declining to 964 million US dollars in 2017 and further to 325 million US dollars by 2018.
- Adjusted Net Revenue Dynamics
- Revenue levels remained relatively stable above 100,000 million US dollars from 2013 to 2015. A sharp contraction is noted in 2016, where adjusted net revenue fell to 48,159 million US dollars, representing a reduction of more than 50% from the previous year. Following this drop, a steady upward trajectory was established, with revenue increasing to 52,205 million US dollars in 2017 and reaching 58,639 million US dollars in 2018.
- Economic Profit Margin Analysis
- The economic profit margin mirrors the trends seen in absolute economic profit. The margin deepened to -8.10% in 2014 before improving to -5.40% in 2015. A pivot to positive value creation occurred in 2016, with the margin peaking at 2.28%. This peak was followed by a consistent downward trend, with the margin contracting to 1.85% in 2017 and further eroding to 0.55% by 2018, suggesting a diminishing ability to generate returns above the cost of capital relative to revenue.
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