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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
Net Operating Profit after Taxes (NOPAT)
Cash Operating Taxes
Invested Capital
Cost of Capital
Economic Spread Ratio
Economic Profit Margin

Reynolds American Inc., economic profit calculation

US$ in millions

12 months ended:	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012
Net operating profit after taxes (NOPAT)¹	6,935)	2,912)	1,432)	2,217)	1,384)
Cost of capital²	7.75%	7.35%	7.79%	7.55%	7.48%
Invested capital³	44,972)	45,105)	9,728)	10,479)	10,375)

Economic profit⁴	3,450)	(402)	674)	1,425)	608)

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

¹ NOPAT. See details »

² Cost of capital. See details »

³ Invested capital. See details »

⁴ 2016 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 6,935 – 7.75% × 44,972 = 3,450

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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.	Reynolds American Inc. economic profit decreased from 2014 to 2015 but then increased from 2015 to 2016 exceeding 2014 level.

Reynolds American Inc., NOPAT calculation

US$ in millions

12 months ended:	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012
Net income	6,073)	3,253)	1,470)	1,718)	1,272)
Deferred income tax expense (benefit)¹	387)	(659)	(180)	312)	(44)
Increase (decrease) in LIFO reserve²	(15)	(50)	(2)	14)	7)
Increase (decrease) in deferred revenue, related party³	72)	1)	(16)	6)	—)
Increase (decrease) in equity equivalents⁴	444)	(708)	(198)	332)	(37)
Interest and debt expense	626)	570)	286)	259)	234)
Interest expense, operating lease liability⁵	1)	1)	1)	3)	3)
Adjusted interest and debt expense	627)	571)	287)	262)	237)
Tax benefit of interest and debt expense⁶	(220)	(200)	(101)	(92)	(83)
Adjusted interest and debt expense, after taxes⁷	408)	371)	187)	170)	154)
(Gain) loss on marketable securities	24)	—)	—)	—)	—)
Interest income	(8)	(6)	(3)	(5)	(7)
Investment income, before taxes	16)	(6)	(3)	(5)	(7)
Tax expense (benefit) of investment income⁸	(6)	2)	1)	2)	2)
Investment income, after taxes⁹	10)	(4)	(2)	(3)	(5)
(Income) loss from discontinued operations, net of tax¹⁰	—)	—)	(25)	—)	—)
Net operating profit after taxes (NOPAT)	6,935)	2,912)	1,432)	2,217)	1,384)

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

¹ Elimination of deferred tax expense. See details »

² Addition of increase (decrease) in LIFO reserve. See details »

³ Addition of increase (decrease) in deferred revenue, related party.

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

⁵ 2016 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 25 × 5.00% = 1

⁶ 2016 Calculation
Tax benefit of interest and debt expense = Adjusted interest and debt expense × Statutory income tax rate
= 627 × 35.00% = 220

⁷ Addition of after taxes interest expense to net income.

⁸ 2016 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= -16 × 35.00% = -6

⁹ Elimination of after taxes investment income.

¹⁰ Elimination of discontinued operations.

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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.	Reynolds American Inc. NOPAT increased from 2014 to 2015 and from 2015 to 2016.

Reynolds American Inc., cash operating taxes calculation

US$ in millions

12 months ended:	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012
Provision for income taxes	3,618)	3,131)	817)	1,023)	681)
Less: Deferred income tax expense (benefit)	387)	(659)	(180)	312)	(44)
Add: Tax savings from interest and debt expense	220)	200)	101)	92)	83)
Less: Tax imposed on investment income	(6)	2)	1)	2)	2)
Cash operating taxes	3,456)	3,988)	1,096)	801)	805)

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

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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.	Reynolds American Inc. cash operating taxes increased from 2014 to 2015 but then slightly decreased from 2015 to 2016.

Reynolds American Inc., invested capital calculation (financing approach)

US$ in millions

	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012
Current maturities of long-term debt	501)	506)	450)	—)	60)
Long-term debt, less current maturities	12,664)	16,941)	4,633)	5,099)	5,035)
Operating lease liability¹	25)	26)	28)	61)	58)
Total reported debt & leases	13,190)	17,473)	5,111)	5,160)	5,153)
Shareholders’ equity	21,711)	18,252)	4,522)	5,167)	5,257)
Net deferred tax (assets) liabilities²	9,607)	9,204)	(329)	40)	(447)
LIFO allowance³	139)	154)	204)	206)	192)
Deferred revenue, related party⁴	105)	33)	32)	48)	42)
Equity equivalents⁵	9,851)	9,391)	(93)	294)	(213)
Accumulated other comprehensive (income) loss, net of tax⁶	314)	338)	364)	56)	311)
Adjusted shareholders’ equity	31,876)	27,981)	4,793)	5,517)	5,355)
Construction-in-process⁷	(94)	(110)	(83)	(105)	(46)
Marketable securities⁸	—)	(239)	(93)	(93)	(87)
Invested capital	44,972)	45,105)	9,728)	10,479)	10,375)

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

¹ Addition of capitalized operating leases.

² Elimination of deferred taxes from assets and liabilities. See details »

³ Addition of LIFO reserve. See details »

⁴ Addition of deferred revenue, related party.

⁵ Addition of equity equivalents to shareholders’ equity.

⁶ Removal of accumulated other comprehensive income.

⁷ Subtraction of construction-in-process.

⁸ Subtraction of marketable securities.

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Item	Description	The company
Invested capital	Capital is an approximation of the economic book value of all cash invested in going-concern business activities.	Reynolds American Inc. invested capital increased from 2014 to 2015 but then slightly decreased from 2015 to 2016.

Reynolds American Inc., cost of capital calculations

Dec 31, 2016

	Capital (fair value)¹	Weights					Cost of capital
Equity²	86,326)	86,326)	÷	100,651)	=	0.86	0.86	×	8.50%	=	7.29%
Long-term debt³	14,300)	14,300)	÷	100,651)	=	0.14	0.14	×	5.00% × (1 – 35.00%)	=	0.46%
Operating lease liability⁴	25)	25)	÷	100,651)	=	0.00	0.00	×	5.00% × (1 – 35.00%)	=	0.00%
Total:	100,651)					1.00					7.75%

Based on: 10-K (reporting date: 2016-12-31).

¹ US$ in millions

² Equity. See details »

³ Long-term debt. See details »

⁴ Operating lease liability. See details »

Dec 31, 2015

	Capital (fair value)¹	Weights					Cost of capital
Equity²	69,226)	69,226)	÷	87,452)	=	0.79	0.79	×	8.50%	=	6.73%
Long-term debt³	18,200)	18,200)	÷	87,452)	=	0.21	0.21	×	4.60% × (1 – 35.00%)	=	0.62%
Operating lease liability⁴	26)	26)	÷	87,452)	=	0.00	0.00	×	4.60% × (1 – 35.00%)	=	0.00%
Total:	87,452)					1.00					7.35%

Based on: 10-K (reporting date: 2015-12-31).

¹ US$ in millions

² Equity. See details »

³ Long-term debt. See details »

⁴ Operating lease liability. See details »

Dec 31, 2014

	Capital (fair value)¹	Weights					Cost of capital
Equity²	37,349)	37,349)	÷	42,777)	=	0.87	0.87	×	8.50%	=	7.42%
Long-term debt³	5,400)	5,400)	÷	42,777)	=	0.13	0.13	×	4.50% × (1 – 35.00%)	=	0.37%
Operating lease liability⁴	28)	28)	÷	42,777)	=	0.00	0.00	×	4.50% × (1 – 35.00%)	=	0.00%
Total:	42,777)					1.00					7.79%

Based on: 10-K (reporting date: 2014-12-31).

¹ US$ in millions

² Equity. See details »

³ Long-term debt. See details »

⁴ Operating lease liability. See details »

Dec 31, 2013

	Capital (fair value)¹	Weights					Cost of capital
Equity²	25,816)	25,816)	÷	31,078)	=	0.83	0.83	×	8.50%	=	7.06%
Long-term debt³	5,200)	5,200)	÷	31,078)	=	0.17	0.17	×	4.50% × (1 – 35.00%)	=	0.49%
Operating lease liability⁴	61)	61)	÷	31,078)	=	0.00	0.00	×	4.50% × (1 – 35.00%)	=	0.01%
Total:	31,078)					1.00					7.55%

Based on: 10-K (reporting date: 2013-12-31).

¹ US$ in millions

² Equity. See details »

³ Long-term debt. See details »

⁴ Operating lease liability. See details »

Dec 31, 2012

	Capital (fair value)¹	Weights					Cost of capital
Equity²	24,297)	24,297)	÷	29,855)	=	0.81	0.81	×	8.50%	=	6.91%
Long-term debt³	5,500)	5,500)	÷	29,855)	=	0.18	0.18	×	4.70% × (1 – 35.00%)	=	0.56%
Operating lease liability⁴	58)	58)	÷	29,855)	=	0.00	0.00	×	4.70% × (1 – 35.00%)	=	0.01%
Total:	29,855)					1.00					7.48%

Based on: 10-K (reporting date: 2012-12-31).

¹ US$ in millions

² Equity. See details »

³ Long-term debt. See details »

⁴ Operating lease liability. See details »

Reynolds American Inc., economic spread ratio calculation, comparison to benchmarks

	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012
Selected Financial Data (US$ in millions)
Economic profit¹	3,450)	(402)	674)	1,425)	608)
Invested capital²	44,972)	45,105)	9,728)	10,479)	10,375)
Performance Ratio
Economic spread ratio³	7.67%	-0.89%	6.93%	13.60%	5.86%
Benchmarks
Economic Spread Ratio, Competitors⁴
Altria Group Inc.	—	—	—	—	—
Coca-Cola Co.	—	—	—	—	—
Mondelēz International Inc.	—	—	—	—	—
PepsiCo Inc.	—	—	—	—	—

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

¹ Economic profit. See details »

² Invested capital. See details »

³ 2016 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × 3,450 ÷ 44,972 = 7.67%

⁴ Click competitor name to see calculations.

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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.	Reynolds American Inc. economic spread ratio deteriorated from 2014 to 2015 but then improved from 2015 to 2016 exceeding 2014 level.

Reynolds American Inc., economic profit margin calculation, comparison to benchmarks

	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012
Selected Financial Data (US$ in millions)
Economic profit¹	3,450)	(402)	674)	1,425)	608)

Net sales, includes excise taxes	16,846)	14,884)	12,096)	11,966)	12,227)
Add: Increase (decrease) in deferred revenue, related party	72)	1)	(16)	6)	—)
Adjusted net sales, includes excise taxes	16,918)	14,885)	12,080)	11,972)	12,227)
Performance Ratio
Economic profit margin²	20.39%	-2.70%	5.58%	11.91%	4.97%
Benchmarks
Economic Profit Margin, Competitors³
Altria Group Inc.	—	—	—	—	—
Coca-Cola Co.	—	—	—	—	—
Mondelēz International Inc.	—	—	—	—	—
PepsiCo Inc.	—	—	—	—	—

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

¹ Economic profit. See details »

² 2016 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted net sales, includes excise taxes
= 100 × 3,450 ÷ 16,918 = 20.39%

³ Click competitor name to see calculations.

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Performance ratio	Description	The company
Economic profit margin	The ratio of economic profit to sales. It is the company 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.	Reynolds American Inc. economic profit margin deteriorated from 2014 to 2015 but then improved from 2015 to 2016 exceeding 2014 level.

Reynolds American Inc. (NYSE:RAI)

Economic Value Added (EVA)

Economic Profit

Net Operating Profit after Taxes (NOPAT)

Cash Operating Taxes

Invested Capital

Cost of Capital

Economic Spread Ratio

Economic Profit Margin