Microsoft Excel LibreOffice Calc

International Business Machines Corp. (IBM)

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

International Business Machines Corp., economic profit calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net operating profit after taxes (NOPAT)1 9,422  6,297  11,223  13,778  14,649 
Cost of capital2 9.94% 9.98% 10.55% 10.05% 10.49%
Invested capital3 110,894  108,645  106,417  100,468  96,198 
Economic profit4 (1,605) (4,545) (5) 3,681  4,556 

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).

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
= 9,422 – 9.94% × 110,894 = -1,605

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. International Business Machines Corp.’s economic profit declined from 2016 to 2017 but then increased from 2017 to 2018 not reaching 2016 level.

Net Operating Profit after Taxes (NOPAT)

International Business Machines Corp., NOPAT calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income attributable to IBM 8,728  5,753  11,872  13,190  12,022 
Deferred income tax expense (benefit)1 699  (692) (969) 673  (265)
Increase (decrease) in allowances for doubtful notes and accounts receivable2 14  (5) (80) 42  49 
Increase (decrease) in deferred income3 (688) 663  (157) (776) (1,097)
Increase (decrease) in product warranty liability4 (67) 31  (32) (14) (222)
Increase (decrease) in equity equivalents5 (42) (3) (1,238) (75) (1,535)
Interest expense 723  615  630  468  484 
Interest expense, operating lease obligations6 193  194  204  186  168 
Adjusted interest expense 916  809  834  654  652 
Tax benefit of interest expense7 (192) (283) (292) (229) (228)
Adjusted interest expense, after taxes8 724  526  542  425  424 
(Gain) loss on marketable securities –  (1) 34  86  5 
Investment income, before taxes –  (1) 34  86  5 
Tax expense (benefit) of investment income9 –  –  (12) (30) (2)
Investment income, after taxes10 –  (1) 22  56  3 
(Income) loss from discontinued operations, net of tax11 (5) 5  9  174  3,729 
Net income (loss) attributable to noncontrolling interest 17  17  16  8  6 
Net operating profit after taxes (NOPAT) 9,422  6,297  11,223  13,778  14,649 

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).

2018 Calculations

1 Elimination of deferred tax expense. See Details »

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

3 Addition of increase (decrease) in deferred income.

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

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

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

7 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 916 × 21.00% = 192

8 Addition of after taxes interest expense to net income attributable to IBM.

9 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 0 × 21.00% = 0

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. International Business Machines Corp.’s NOPAT declined from 2016 to 2017 but then increased from 2017 to 2018 not reaching 2016 level.

Cash Operating Taxes

International Business Machines Corp., cash operating taxes calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Provision for income taxes 2,619  5,642  449  2,581  4,235 
Less: Deferred income tax expense (benefit) 699  (692) (969) 673  (265)
Add: Tax savings from interest expense 192  283  292  229  228 
Less: Tax imposed on investment income –  –  (12) (30) (2)
Cash operating taxes 2,112  6,617  1,722  2,167  4,730 

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).

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. International Business Machines Corp.’s cash operating taxes increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.

Invested Capital

International Business Machines Corp., invested capital calculation (financing approach)

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Short-term debt 10,207  6,987  7,513  6,461  5,731 
Long-term debt 35,605  39,837  34,655  33,428  35,073 
PV of operating lease payments1 5,192  6,095  6,314  5,925  5,699 
Total reported debt & leases 51,004  52,919  48,482  45,814  46,503 
Total IBM stockholders’ equity 16,796  17,594  18,246  14,262  11,868 
Net deferred tax (assets) liabilities2 (1,520) (4,316) (4,799) (4,569) (6,545)
Allowances for doubtful notes and accounts receivable3 347  333  338  418  376 
Deferred income4 14,610  15,298  14,635  14,792  15,568 
Product warranty liability5 651  718  687  719  733 
Equity equivalents6 14,088  12,033  10,861  11,360  10,132 
Accumulated other comprehensive (income) loss, net of tax7 29,490  26,591  29,398  29,606  27,875 
Noncontrolling interests 134  131  146  162  146 
Adjusted total IBM stockholders’ equity 60,508  56,349  58,651  55,390  50,021 
Marketable securities8 (618) (623) (716) (736) (326)
Invested capital 110,894  108,645  106,417  100,468  96,198 

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).

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 deferred income.

5 Addition of product warranty liability.

6 Addition of equity equivalents to total IBM 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. International Business Machines Corp.’s invested capital increased from 2016 to 2017 and from 2017 to 2018.

Cost of Capital

International Business Machines Corp., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 124,332  124,332  ÷ 176,330  = 0.71 0.71 × 13.18% = 9.30%
Debt3 46,806  46,806  ÷ 176,330  = 0.27 0.27 × 2.78% × (1 – 21.00%) = 0.58%
PV of operating lease payments4 5,192  5,192  ÷ 176,330  = 0.03 0.03 × 2.78% × (1 – 21.00%) = 0.06%
Total: 176,330  1.00 9.94%

Based on: 10-K (filing date: 2019-02-26).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 144,209  144,209  ÷ 199,555  = 0.72 0.72 × 13.18% = 9.53%
Debt3 49,251  49,251  ÷ 199,555  = 0.25 0.25 × 2.51% × (1 – 35.00%) = 0.40%
PV of operating lease payments4 6,095  6,095  ÷ 199,555  = 0.03 0.03 × 2.51% × (1 – 35.00%) = 0.05%
Total: 199,555  1.00 9.98%

Based on: 10-K (filing date: 2018-02-27).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 169,608  169,608  ÷ 220,274  = 0.77 0.77 × 13.18% = 10.15%
Debt3 44,351  44,351  ÷ 220,274  = 0.20 0.20 × 2.68% × (1 – 35.00%) = 0.35%
PV of operating lease payments4 6,314  6,314  ÷ 220,274  = 0.03 0.03 × 2.68% × (1 – 35.00%) = 0.05%
Total: 220,274  1.00 10.55%

Based on: 10-K (filing date: 2017-02-28).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 127,221  127,221  ÷ 174,826  = 0.73 0.73 × 13.18% = 9.59%
Debt3 41,681  41,681  ÷ 174,826  = 0.24 0.24 × 2.58% × (1 – 35.00%) = 0.40%
PV of operating lease payments4 5,925  5,925  ÷ 174,826  = 0.03 0.03 × 2.58% × (1 – 35.00%) = 0.06%
Total: 174,826  1.00 10.05%

Based on: 10-K (filing date: 2016-02-23).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 162,922  162,922  ÷ 211,876  = 0.77 0.77 × 13.18% = 10.14%
Debt3 43,255  43,255  ÷ 211,876  = 0.20 0.20 × 2.36% × (1 – 35.00%) = 0.31%
PV of operating lease payments4 5,699  5,699  ÷ 211,876  = 0.03 0.03 × 2.36% × (1 – 35.00%) = 0.04%
Total: 211,876  1.00 10.49%

Based on: 10-K (filing date: 2015-02-24).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Economic Spread

International Business Machines Corp., economic spread calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Economic profit1 (1,605) (4,545) (5) 3,681  4,556 
Invested capital2 110,894  108,645  106,417  100,468  96,198 
Ratio
Economic spread3 -1.45% -4.18% -0.00% 3.66% 4.74%

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).

2018 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × -1,605 ÷ 110,894 = -1.45%

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. International Business Machines Corp.’s economic spread deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.

Economic Profit Margin

International Business Machines Corp., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Economic profit1 (1,605) (4,545) (5) 3,681  4,556 
Revenue 79,591  79,139  79,919  81,741  92,793 
Add: Increase (decrease) in deferred income (688) 663  (157) (776) (1,097)
Adjusted revenue 78,903  79,802  79,762  80,965  91,696 
Ratio
Economic profit margin2 -2.03% -5.70% -0.01% 4.55% 4.97%

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24).

2018 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Adjusted revenue
= 100 × -1,605 ÷ 78,903 = -2.03%

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. International Business Machines Corp.’s economic profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.