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

Lowe's Cos. Inc., economic profit calculation

USD $ in millions

 
12 months ended Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Net operating profit after taxes (NOPAT)1 4,284  3,920  3,144  3,222  2,705  2,307 
Cost of capital2 12.28% 12.40% 12.79% 13.08% 12.61% 12.41%
Invested capital3 27,890  27,262  24,562  24,623  25,775  26,436 
Economic profit4 860  541  (545) (973)

Source: Based on data from Lowe's Cos. 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
= 4,284 – 12.28% × 27,890 = 860

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. Lowe's Cos. Inc.'s economic profit increased from 2016 to 2017 and from 2017 to 2018.

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Net Operating Profit after Taxes (NOPAT)

Lowe's Cos. Inc., NOPAT calculation

USD $ in millions

 
12 months ended Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Net earnings 3,447  3,093  2,546  2,698  2,286  1,959 
Deferred income tax expense (benefit)1 56  (63) (118) (158) (139)
Increase (decrease) in deferred revenue2 165  209  98  87  83  34 
Increase (decrease) in reserve for exit activities3 (6) (1) 14  (1) (21) (11)
Increase (decrease) in equity equivalents4 215  217  49  (32) (96) (116)
Interest expense, net of amount capitalized 638  647  548  515  474  427 
Interest expense, operating lease obligations5 316  304  300  346  323  297 
Adjusted interest expense, net of amount capitalized 954  951  848  861  797  724 
Tax benefit of interest expense, net of amount capitalized6 (322) (333) (297) (301) (279) (254)
Adjusted interest expense, net of amount capitalized, after taxes7 633  618  551  559  518  471 
(Gain) loss on marketable securities (2)
Interest income (16) (12) (4) (6) (4) (9)
Investment income, before taxes (16) (12) (4) (6) (4) (11)
Tax expense (benefit) of investment income8
Investment income, after taxes9 (11) (8) (3) (4) (3) (7)
Net operating profit after taxes (NOPAT) 4,284  3,920  3,144  3,222  2,705  2,307 

Source: Based on data from Lowe's Cos. Inc. Annual Reports

2018 Calculations

1 Elimination of deferred tax expense. See Details »

2 Addition of increase (decrease) in deferred revenue.

3 Addition of increase (decrease) in reserve for exit activities.

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

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

6 Tax benefit of interest expense, net of amount capitalized = Adjusted interest expense, net of amount capitalized × Statutory income tax rate
= 954 × 34% = 322

7 Addition of after taxes interest expense to net earnings.

8 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 16 × 34% = 5

9 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. Lowe's Cos. Inc.'s NOPAT increased from 2016 to 2017 and from 2017 to 2018.

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Cash Operating Taxes

Lowe's Cos. Inc., cash operating taxes calculation

USD $ in millions

 
12 months ended Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Income tax provision 2,042  2,108  1,873  1,578  1,387  1,178 
Less: Deferred income tax expense (benefit) 56  (63) (118) (158) (139)
Add: Tax savings from interest expense, net of amount capitalized 322  333  297  301  279  254 
Less: Tax imposed on investment income
Cash operating taxes 2,302  2,428  2,231  1,995  1,823  1,567 

Source: Based on data from Lowe's Cos. 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. Lowe's Cos. Inc.'s cash operating taxes increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.

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Invested Capital

Lowe's Cos. Inc., invested capital calculation (financing approach)

USD $ in millions

 
Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Short-term borrowings 1,137  510  43  386 
Current maturities of long-term debt 294  795  1,061  552  49  47 
Long-term debt, excluding current maturities 15,564  14,394  11,545  10,815  10,086  9,030 
PV of operating lease payments1 3,972  3,937  3,274  2,765  2,967  3,030 
Total reported debt & leases 20,967  19,636  15,923  14,132  13,488  12,107 
Shareholders' equity 5,873  6,434  7,654  9,968  11,853  13,857 
Net deferred tax (assets) liabilities2 (140) (200) (241) (133) 39  238 
Deferred revenue3 2,181  2,016  1,807  1,709  1,622  1,539 
Reserve for exit activities4 60  66  67  53  54  75 
Equity equivalents5 2,101  1,882  1,633  1,629  1,715  1,852 
Accumulated other comprehensive (income) loss, net of tax6 (11) 240  394  103  17  (52)
Adjusted shareholders' equity 7,963  8,556  9,681  11,700  13,585  15,657 
Construction in progress7 (530) (464) (513) (730) (834) (932)
Investments8 (510) (466) (529) (479) (464) (396)
Invested capital 27,890  27,262  24,562  24,623  25,775  26,436 

Source: Based on data from Lowe's Cos. 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 deferred revenue.

4 Addition of reserve for exit activities.

5 Addition of equity equivalents to shareholders' equity.

6 Removal of accumulated other comprehensive income.

7 Subtraction of construction in progress.

8 Subtraction of investments.

Item Description The company
Invested capital Capital is an approximation of the economic book value of all cash invested in going-concern business activities. Lowe's Cos. Inc.'s invested capital increased from 2016 to 2017 and from 2017 to 2018.

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Cost of Capital

Lowe's Cos. Inc., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 69,852  69,852  ÷ 91,467  = 0.76 0.76 × 15.15% = 11.57%
Debt, including capitalized lease obligations3 17,643  17,643  ÷ 91,467  = 0.19 0.19 × 3.88% × (1 – 34%) = 0.50%
PV of operating lease payments4 3,972  3,972  ÷ 91,467  = 0.04 0.04 × 7.39% × (1 – 34%) = 0.21%
Total: 91,467  1.00 12.28%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capitalized lease obligations. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 69,950  69,950  ÷ 90,569  = 0.77 0.77 × 15.15% = 11.70%
Debt, including capitalized lease obligations3 16,683  16,683  ÷ 90,569  = 0.18 0.18 × 4.10% × (1 – 35%) = 0.49%
PV of operating lease payments4 3,937  3,937  ÷ 90,569  = 0.04 0.04 × 7.27% × (1 – 35%) = 0.21%
Total: 90,569  1.00 12.40%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capitalized lease obligations. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 67,909  67,909  ÷ 85,053  = 0.80 0.80 × 15.15% = 12.10%
Debt, including capitalized lease obligations3 13,869  13,869  ÷ 85,053  = 0.16 0.16 × 4.48% × (1 – 35%) = 0.47%
PV of operating lease payments4 3,274  3,274  ÷ 85,053  = 0.04 0.04 × 8.70% × (1 – 35%) = 0.22%
Total: 85,053  1.00 12.79%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capitalized lease obligations. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 70,797  70,797  ÷ 86,810  = 0.82 0.82 × 15.15% = 12.36%
Debt, including capitalized lease obligations3 13,247  13,247  ÷ 86,810  = 0.15 0.15 × 4.75% × (1 – 35%) = 0.47%
PV of operating lease payments4 2,765  2,765  ÷ 86,810  = 0.03 0.03 × 12.07% × (1 – 35%) = 0.25%
Total: 86,810  1.00 13.08%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capitalized lease obligations. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 49,818  49,818  ÷ 64,321  = 0.77 0.77 × 15.15% = 11.73%
Debt, including capitalized lease obligations3 11,536  11,536  ÷ 64,321  = 0.18 0.18 × 4.80% × (1 – 35%) = 0.56%
PV of operating lease payments4 2,967  2,967  ÷ 64,321  = 0.05 0.05 × 10.54% × (1 – 35%) = 0.32%
Total: 64,321  1.00 12.61%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capitalized lease obligations. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 41,385  41,385  ÷ 54,728  = 0.76 0.76 × 15.15% = 11.46%
Debt, including capitalized lease obligations3 10,313  10,313  ÷ 54,728  = 0.19 0.19 × 4.98% × (1 – 35%) = 0.61%
PV of operating lease payments4 3,030  3,030  ÷ 54,728  = 0.06 0.06 × 9.47% × (1 – 35%) = 0.34%
Total: 54,728  1.00 12.41%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

1 USD $ in millions

2 Equity. See Details »

3 Debt, including capitalized lease obligations. See Details »

4 PV of operating lease payments. See Details »

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Economic Spread

Lowe's Cos. Inc., economic spread calculation

 
Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 860  541  (545) (973)
Invested capital2 27,890  27,262  24,562  24,623  25,775  26,436 
Ratio
Economic spread3 3.08% 1.98% 0.01% 0.01% -2.11% -3.68%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

2018 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 860 ÷ 27,890 = 3.08%

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. Lowe's Cos. Inc.'s economic spread improved from 2016 to 2017 and from 2017 to 2018.

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Economic Profit Margin

Lowe's Cos. Inc., economic profit margin calculation

 
Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Selected Financial Data (USD $ in millions)
Economic profit1 860  541  (545) (973)
Net sales 68,619  65,017  59,074  56,223  53,417  50,521 
Increase (decrease) in deferred revenue 165  209  98  87  83  34 
Ratio
Economic profit margin2 1.25% 0.83% 0.00% 0.00% -1.02% -1.92%

Source: Based on data from Lowe's Cos. Inc. Annual Reports

2018 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ (Net sales + Change in deferred revenue)
= 100 × 860 ÷ (68,619 + 165) = 1.25%

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. Lowe's Cos. Inc.'s economic profit margin improved from 2016 to 2017 and from 2017 to 2018.

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