Stock Analysis on Net
Stock Analysis on Net
Microsoft Excel LibreOffice Calc

Merck & Co. Inc. (NYSE:MRK)

Economic Value Added (EVA)

Advanced level

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

Merck & Co. Inc., economic profit calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended: Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Net operating profit after taxes (NOPAT)1 10,065  5,911  342  2,659  3,442 
Cost of capital2 6.98% 7.03% 6.79% 6.92% 6.72%
Invested capital3 53,674  49,066  49,739  52,974  62,852 
 
Economic profit4 6,317  2,462  (3,035) (1,008) (782)

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26).

1 NOPAT. See details »

2 Cost of capital. See details »

3 Invested capital. See details »

4 2019 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 10,065 – 6.98% × 53,674 = 6,317

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. Merck & Co. Inc.’s economic profit increased from 2017 to 2018 and from 2018 to 2019.

Net Operating Profit after Taxes (NOPAT)

Merck & Co. Inc., NOPAT calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended: Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Net income attributable to Merck & Co., Inc. 9,843  6,220  2,394  3,920  4,442 
Deferred income tax expense (benefit)1 (556) (509) (2,621) (1,521) (764)
Increase (decrease) in allowance for doubtful accounts2 (33) (40) 15  30  12 
Increase (decrease) in LIFO reserve3 172  44  257  82  (75)
Increase (decrease) in restructuring reserves4 225  (213) 206  (104) (406)
Increase (decrease) in equity equivalents5 (192) (718) (2,143) (1,513) (1,233)
Interest expense 893  772  754  693  672 
Interest expense, operating lease liability6 32  26  25  22  23 
Adjusted interest expense 925  798  779  715  695 
Tax benefit of interest expense7 (194) (168) (273) (250) (243)
Adjusted interest expense, after taxes8 731  630  506  464  452 
(Gain) loss on marketable securities (44) 97  (291) (31) (73)
Interest income (274) (343) (385) (328) (289)
Investment income, before taxes (318) (246) (676) (359) (362)
Tax expense (benefit) of investment income9 67  52  237  126  127 
Investment income, after taxes10 (251) (194) (439) (233) (235)
Net income (loss) attributable to noncontrolling interest (66) (27) 24  21  17 
Net operating profit after taxes (NOPAT) 10,065  5,911  342  2,659  3,442 

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26).

1 Elimination of deferred tax expense. See details »

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

3 Addition of increase (decrease) in LIFO reserve. See details »

4 Addition of increase (decrease) in restructuring reserves.

5 Addition of increase (decrease) in equity equivalents to net income attributable to Merck & Co., Inc..

6 2019 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 1,004 × 3.20% = 32

7 2019 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 925 × 21.00% = 194

8 Addition of after taxes interest expense to net income attributable to Merck & Co., Inc..

9 2019 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 318 × 21.00% = 67

10 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. Merck & Co. Inc.’s NOPAT increased from 2017 to 2018 and from 2018 to 2019.

Cash Operating Taxes

Merck & Co. Inc., cash operating taxes calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended: Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Taxes on income 1,687  2,508  4,103  718  942 
Less: Deferred income tax expense (benefit) (556) (509) (2,621) (1,521) (764)
Add: Tax savings from interest expense 194  168  273  250  243 
Less: Tax imposed on investment income 67  52  237  126  127 
Cash operating taxes 2,370  3,133  6,760  2,363  1,823 

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26).

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. Merck & Co. Inc.’s cash operating taxes decreased from 2017 to 2018 and from 2018 to 2019.

Invested Capital

Merck & Co. Inc., invested capital calculation (financing approach)

US$ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Loans payable and current portion of long-term debt 3,610  5,308  3,057  568  2,585 
Long-term debt, excluding current portion 22,736  19,806  21,353  24,274  23,929 
Operating lease liability1 1,004  899  776  683  711 
Total reported debt & leases 27,350  26,013  25,186  25,525  27,225 
Total Merck & Co., Inc. stockholders’ equity 25,907  26,701  34,336  40,088  44,676 
Net deferred tax (assets) liabilities2 750  1,046  1,646  4,531  5,927 
Allowance for doubtful accounts3 86  119  210  195  165 
LIFO reserve4 171  (1) (45) (302) (384)
Restructuring reserves5 759  534  747  541  645 
Equity equivalents6 1,766  1,698  2,558  4,965  6,353 
Accumulated other comprehensive (income) loss, net of tax7 6,193  5,545  4,910  5,226  4,148 
Noncontrolling interests 94  181  233  220  91 
Adjusted total Merck & Co., Inc. stockholders’ equity 33,960  34,125  42,037  50,499  55,268 
Construction in progress8 (5,013) (3,355) (2,301) (1,871) (1,525)
Investments in debt and publicly traded equity securities9 (2,623) (7,717) (15,183) (21,179) (18,116)
Invested capital 53,674  49,066  49,739  52,974  62,852 

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26).

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 LIFO reserve. See details »

5 Addition of restructuring reserves.

6 Addition of equity equivalents to total Merck & Co., Inc. stockholders’ equity.

7 Removal of accumulated other comprehensive income.

8 Subtraction of construction in progress.

9 Subtraction of investments in debt and publicly traded equity 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. Merck & Co. Inc.’s invested capital decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.

Cost of Capital

Merck & Co. Inc., cost of capital calculations

Capital (fair value)1 Weights Cost of capital
Equity2 202,749  202,749  ÷ 232,553  = 0.87 0.87 × 7.63% = 6.65%
Loans payable and long-term debt, including current portion3 28,800  28,800  ÷ 232,553  = 0.12 0.12 × 3.23% × (1 – 21.00%) = 0.32%
Operating lease liability4 1,004  1,004  ÷ 232,553  = 0.00 0.00 × 3.20% × (1 – 21.00%) = 0.01%
Total: 232,553  1.00 6.98%

Based on: 10-K (filing date: 2020-02-26).

1 US$ in millions

2 Equity. See details »

3 Loans payable and long-term debt, including current portion. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 208,098  208,098  ÷ 234,597  = 0.89 0.89 × 7.63% = 6.77%
Loans payable and long-term debt, including current portion3 25,600  25,600  ÷ 234,597  = 0.11 0.11 × 2.89% × (1 – 21.00%) = 0.25%
Operating lease liability4 899  899  ÷ 234,597  = 0.00 0.00 × 2.89% × (1 – 21.00%) = 0.01%
Total: 234,597  1.00 7.03%

Based on: 10-K (filing date: 2019-02-27).

1 US$ in millions

2 Equity. See details »

3 Loans payable and long-term debt, including current portion. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 147,536  147,536  ÷ 173,912  = 0.85 0.85 × 7.63% = 6.48%
Loans payable and long-term debt, including current portion3 25,600  25,600  ÷ 173,912  = 0.15 0.15 × 3.19% × (1 – 35.00%) = 0.31%
Operating lease liability4 776  776  ÷ 173,912  = 0.00 0.00 × 3.19% × (1 – 35.00%) = 0.01%
Total: 173,912  1.00 6.79%

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

1 US$ in millions

2 Equity. See details »

3 Loans payable and long-term debt, including current portion. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 180,851  180,851  ÷ 207,234  = 0.87 0.87 × 7.63% = 6.66%
Loans payable and long-term debt, including current portion3 25,700  25,700  ÷ 207,234  = 0.12 0.12 × 3.15% × (1 – 35.00%) = 0.25%
Operating lease liability4 683  683  ÷ 207,234  = 0.00 0.00 × 3.15% × (1 – 35.00%) = 0.01%
Total: 207,234  1.00 6.92%

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

1 US$ in millions

2 Equity. See details »

3 Loans payable and long-term debt, including current portion. See details »

4 Operating lease liability. See details »

Capital (fair value)1 Weights Cost of capital
Equity2 140,539  140,539  ÷ 168,250  = 0.84 0.84 × 7.63% = 6.38%
Loans payable and long-term debt, including current portion3 27,000  27,000  ÷ 168,250  = 0.16 0.16 × 3.23% × (1 – 35.00%) = 0.34%
Operating lease liability4 711  711  ÷ 168,250  = 0.00 0.00 × 3.23% × (1 – 35.00%) = 0.01%
Total: 168,250  1.00 6.72%

Based on: 10-K (filing date: 2016-02-26).

1 US$ in millions

2 Equity. See details »

3 Loans payable and long-term debt, including current portion. See details »

4 Operating lease liability. See details »

Economic Spread Ratio

Merck & Co. Inc., economic spread ratio calculation, comparison to benchmarks

Microsoft Excel LibreOffice Calc
Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US$ in millions)
Economic profit1 6,317  2,462  (3,035) (1,008) (782)
Invested capital2 53,674  49,066  49,739  52,974  62,852 
Performance Ratio
Economic spread ratio3 11.77% 5.02% -6.10% -1.90% -1.24%
Benchmarks
Economic Spread Ratio, Competitors4
Abbott Laboratories -5.99% -6.21% -11.30% -7.73% -2.92%
AbbVie Inc. 5.95% 5.74% -6.23% 2.77% 4.05%
Amgen Inc. 11.26% 26.22% -4.41% 16.17% 9.90%
Biogen Inc. 29.57% 22.20% 9.97% 15.20% 19.08%
Bristol-Myers Squibb Co. -5.44% 19.18% 3.57% 15.67% 0.16%
Eli Lilly & Co. 18.96% 10.45% -8.38% 10.27% 3.14%
Gilead Sciences Inc. 1.23% 7.11% 8.64% 56.50% 55.89%
Illumina Inc. 6.24% 6.72% 7.84% 3.16% 3.94%
Johnson & Johnson 4.32% 5.79% -4.89% 10.69% 12.59%
Pfizer Inc. 6.86% 4.02% -12.30% -1.35% -0.13%
Regeneron Pharmaceuticals Inc. 19.51% 22.33% 14.65% 7.64% 22.69%
Vertex Pharmaceuticals Inc. 10.28% -0.85% -16.29% -16.02% -35.60%
Zoetis Inc. 6.31% 6.31% 4.61% 1.80% -0.97%

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26).

1 Economic profit. See details »

2 Invested capital. See details »

3 2019 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × 6,317 ÷ 53,674 = 11.77%

4 Click competitor name to see calculations.

Performance ratio Description The company
Economic spread ratio The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital. Merck & Co. Inc.’s economic spread ratio improved from 2017 to 2018 and from 2018 to 2019.

Economic Profit Margin

Merck & Co. Inc., economic profit margin calculation, comparison to benchmarks

Microsoft Excel LibreOffice Calc
Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US$ in millions)
Economic profit1 6,317  2,462  (3,035) (1,008) (782)
Sales 46,840  42,294  40,122  39,807  39,498 
Performance Ratio
Economic profit margin2 13.49% 5.82% -7.57% -2.53% -1.98%
Benchmarks
Economic Profit Margin, Competitors3
Abbott Laboratories -10.82% -11.88% -26.98% -16.78% -4.35%
AbbVie Inc. 11.24% 5.86% -9.99% 5.22% 7.78%
Amgen Inc. 18.95% 29.35% -4.88% 23.88% 16.49%
Biogen Inc. 29.09% 21.74% 10.13% 17.13% 19.69%
Bristol-Myers Squibb Co. -20.88% 16.13% 2.84% 14.30% 0.14%
Eli Lilly & Co. 18.26% 10.94% -8.19% 11.03% 3.49%
Gilead Sciences Inc. 1.79% 11.68% 8.28% 37.80% 47.75%
Illumina Inc. 8.80% 8.04% 10.25% 3.79% 4.87%
Johnson & Johnson 5.10% 7.18% -6.82% 12.53% 13.40%
Pfizer Inc. 16.04% 7.62% -24.08% -3.15% -0.28%
Regeneron Pharmaceuticals Inc. 16.09% 20.66% 12.25% 5.28% 14.48%
Vertex Pharmaceuticals Inc. 12.01% -1.08% -20.56% -27.95% -90.21%
Zoetis Inc. 9.92% 10.12% 6.51% 2.49% -1.42%

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26).

1 Economic profit. See details »

2 2019 Calculation
Economic profit margin = 100 × Economic profit ÷ Sales
= 100 × 6,317 ÷ 46,840 = 13.49%

3 Click competitor name to see calculations.

Performance 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. Merck & Co. Inc.’s economic profit margin improved from 2017 to 2018 and from 2018 to 2019.