Microsoft Excel LibreOffice Calc

Merck & Co. Inc. (MRK)

Economic Value Added (EVA)

High level of difficulty

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, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net operating profit after taxes (NOPAT)1 5,911  342  2,659  3,442  8,993 
Cost of capital2 8.28% 7.99% 8.15% 7.90% 8.17%
Invested capital3 49,066  49,739  52,974  62,852  56,196 
 
Economic profit4 1,848  (3,631) (1,660) (1,523) 4,400 

Based on: 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), 10-K (filing date: 2015-02-27).

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
= 5,911 – 8.28% × 49,066 = 1,848

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 declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Net Operating Profit after Taxes (NOPAT)

Merck & Co. Inc., NOPAT calculation

US$ 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 Merck & Co., Inc. 6,220  2,394  3,920  4,442  11,920 
Deferred income tax expense (benefit)1 (509) (2,621) (1,521) (764) (2,600)
Increase (decrease) in allowance for doubtful accounts2 (40) 15  30  12  7 
Increase (decrease) in LIFO reserve3 44  257  82  (75) (236)
Increase (decrease) in restructuring reserves4 (213) 206  (104) (406) (454)
Increase (decrease) in equity equivalents5 (718) (2,143) (1,513) (1,233) (3,283)
Interest expense 772  754  693  672  732 
Interest expense, operating lease liability6 26  25  22  23  17 
Adjusted interest expense 798  779  715  695  749 
Tax benefit of interest expense7 (168) (273) (250) (243) (262)
Adjusted interest expense, after taxes8 630  506  464  452  487 
(Gain) loss on marketable securities 97  (291) (31) (73) 43 
Interest income (343) (385) (328) (289) (266)
Investment income, before taxes (246) (676) (359) (362) (223)
Tax expense (benefit) of investment income9 52  237  126  127  78 
Investment income, after taxes10 (194) (439) (233) (235) (145)
Net income (loss) attributable to noncontrolling interest (27) 24  21  17  14 
Net operating profit after taxes (NOPAT) 5,911  342  2,659  3,442  8,993 

Based on: 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), 10-K (filing date: 2015-02-27).

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 2018 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 899 × 2.89% = 26

7 2018 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 798 × 21.00% = 168

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

9 2018 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 246 × 21.00% = 52

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 declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Cash Operating Taxes

Merck & Co. Inc., cash operating taxes calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Taxes on income 2,508  4,103  718  942  5,349 
Less: Deferred income tax expense (benefit) (509) (2,621) (1,521) (764) (2,600)
Add: Tax savings from interest expense 168  273  250  243  262 
Less: Tax imposed on investment income 52  237  126  127  78 
Cash operating taxes 3,133  6,760  2,363  1,823  8,133 

Based on: 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), 10-K (filing date: 2015-02-27).

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 increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.

Invested Capital

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

US$ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Loans payable and current portion of long-term debt 5,308  3,057  568  2,585  2,704 
Long-term debt, excluding current portion 19,806  21,353  24,274  23,929  18,699 
Operating lease liability1 899  776  683  711  594 
Total reported debt & leases 26,013  25,186  25,525  27,225  21,997 
Total Merck & Co., Inc. stockholders’ equity 26,701  34,336  40,088  44,676  48,647 
Net deferred tax (assets) liabilities2 1,046  1,646  4,531  5,927  3,666 
Allowance for doubtful accounts3 119  210  195  165  153 
LIFO reserve4 (1) (45) (302) (384) (309)
Restructuring reserves5 534  747  541  645  1,051 
Equity equivalents6 1,698  2,558  4,965  6,353  4,561 
Accumulated other comprehensive (income) loss, net of tax7 5,545  4,910  5,226  4,148  4,323 
Noncontrolling interests 181  233  220  91  144 
Adjusted total Merck & Co., Inc. stockholders’ equity 34,125  42,037  50,499  55,268  57,675 
Construction in progress8 (3,355) (2,301) (1,871) (1,525) (1,448)
Investments in debt and publicly traded equity securities9 (7,717) (15,183) (21,179) (18,116) (22,028)
Invested capital 49,066  49,739  52,974  62,852  56,196 

Based on: 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), 10-K (filing date: 2015-02-27).

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 declined from 2016 to 2017 and from 2017 to 2018.

Cost of Capital

Merck & Co. Inc., cost of capital calculations

Capital (fair value)1 Weights Cost of capital
Equity2 208,098  208,098  ÷ 234,597  = 0.89 0.89 × 9.04% = 8.02%
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 capital: 234,597  Total weights: 1.00 Cost of total capital: 8.28%

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 × 9.04% = 7.67%
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 capital: 173,912  Total weights: 1.00 Cost of total capital: 7.99%

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 × 9.04% = 7.89%
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 capital: 207,234  Total weights: 1.00 Cost of total capital: 8.15%

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 × 9.04% = 7.55%
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 capital: 168,250  Total weights: 1.00 Cost of total capital: 7.90%

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 »

Capital (fair value)1 Weights Cost of capital
Equity2 166,148  166,148  ÷ 189,242  = 0.88 0.88 × 9.04% = 7.94%
Loans payable and long-term debt, including current portion3 22,500  22,500  ÷ 189,242  = 0.12 0.12 × 2.93% × (1 – 35.00%) = 0.23%
Operating lease liability4 594  594  ÷ 189,242  = 0.00 0.00 × 2.93% × (1 – 35.00%) = 0.01%
Total capital: 189,242  Total weights: 1.00 Cost of total capital: 8.17%

Based on: 10-K (filing date: 2015-02-27).

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 »

Economic Spread Ratio

Merck & Co. Inc., economic spread ratio calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US$ in millions)
Economic profit1 1,848  (3,631) (1,660) (1,523) 4,400 
Invested capital2 49,066  49,739  52,974  62,852  56,196 
Performance Ratio
Economic spread ratio3 3.77% -7.30% -3.13% -2.42% 7.83%

Based on: 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), 10-K (filing date: 2015-02-27).

1 Economic profit. See details »

2 Invested capital. See details »

3 2018 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × 1,848 ÷ 49,066 = 3.77%

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 deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Economic Profit Margin

Merck & Co. Inc., 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 (US$ in millions)
Economic profit1 1,848  (3,631) (1,660) (1,523) 4,400 
Sales 42,294  40,122  39,807  39,498  42,237 
Performance Ratio
Economic profit margin2 4.37% -9.05% -4.17% -3.86% 10.42%

Based on: 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), 10-K (filing date: 2015-02-27).

1 Economic profit. See details »

2 2018 Calculation
Economic profit margin = 100 × Economic profit ÷ Sales
= 100 × 1,848 ÷ 42,294 = 4.37%

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 deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.