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 | 2 | 2 | (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. |
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 | 9 | (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 | 5 | 4 | 1 | 2 | 1 | 4 |
| | 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. |
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 | 9 | (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 | 5 | 4 | 1 | 2 | 1 | 4 |
| | 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. |
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. |
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 »
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 | 2 | 2 | (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. |
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 | 2 | 2 | (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. |