Economic Value Added (EVA)
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
Reynolds American Inc., economic profit calculation
US$ in millions
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 – 9.29% × 44,972 = 2,756
The financial trajectory from 2012 to 2016 is characterized by a dramatic shift in the company's capital base and a corresponding impact on economic value creation. While the early part of the period showed modest stability, a major capital event in 2015 fundamentally altered the relationship between operating profits and the cost of capital.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT demonstrated an overall upward trajectory despite intermittent fluctuations. Between 2012 and 2014, profits varied between 1,384 million and 2,217 million US$. A notable acceleration occurred in 2015, reaching 2,912 million US$, followed by a substantial surge to 6,935 million US$ in 2016, representing a significant increase in operational earning power toward the end of the period.
- Invested Capital and Cost of Capital
- The cost of capital remained relatively stable throughout the five-year period, fluctuating within a narrow band between 8.77% and 9.36%. In contrast, invested capital experienced a stark increase in 2015, rising from 9,728 million US$ in 2014 to 45,105 million US$. This capital base remained consistent into 2016 at 44,972 million US$, indicating a massive expansion of the asset base or a major corporate acquisition during the 2015 fiscal year.
- Economic Profit Dynamics
- Economic profit remained positive from 2012 through 2014, peaking at 1,269 million US$ in 2013. In 2015, the sharp increase in invested capital generated a capital charge that exceeded the NOPAT, resulting in a negative economic profit of -1,045 million US$. This suggests that the return on invested capital fell below the cost of capital during that year. By 2016, the rapid growth in NOPAT successfully offset the heightened capital charge, returning the company to a state of value creation with a peak economic profit of 2,756 million US$.
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Net Operating Profit after Taxes (NOPAT)
Reynolds American Inc., NOPAT calculation
US$ in millions
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.
- Net Income
- Net income exhibited a positive trend over the five-year period. Starting at 1,272 million US dollars in 2012, it increased to 1,718 million US dollars in 2013, representing a strong growth. A decline occurred in 2014 to 1,470 million US dollars, followed by a substantial rise in 2015 to 3,253 million US dollars. The upward momentum continued sharply in 2016, reaching 6,073 million US dollars. Overall, this reflects significant growth with some volatility, especially the strong rebound after 2014.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT values followed a pattern similar to net income but with greater relative fluctuations. Beginning at 1,384 million US dollars in 2012, NOPAT increased notably to 2,217 million US dollars in 2013. It then declined to 1,432 million US dollars in 2014, mirroring the dip in net income. A strong recovery was observed in 2015, with NOPAT more than doubling from the prior year to 2,912 million US dollars. This trend continued with an even sharper increase to 6,935 million US dollars in 2016, surpassing the net income growth rate during the same period. This indicates improving operational efficiency or profitability after taxes, especially in the later years.
- Overall Analysis
- Both net income and NOPAT demonstrated significant growth between 2012 and 2016, with a noticeable dip in 2014 followed by rapid recovery and acceleration in the subsequent years. The company's profitability, both at the net income level and operational profit after tax level, suggests effective management of operations and potentially enhanced revenue streams or cost efficiencies post-2014. The sharper rise in NOPAT compared to net income in 2015 and 2016 may indicate improved operational performance relative to other income components such as non-operating expenses or taxes. These patterns imply a strong financial performance trajectory in the latter part of the analyzed period.
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Cash Operating Taxes
Reynolds American Inc., cash operating taxes calculation
US$ in millions
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).
- Provision for income taxes
- The provision for income taxes exhibited an overall increasing trend from 2012 to 2016. The value rose notably from 681 million in 2012 to 1023 million in 2013, indicating a significant increase early in the period. However, in 2014, the provision decreased to 817 million, signaling a temporary decline. Subsequently, there was a sharp and substantial increase to 3131 million in 2015, followed by a further increase to 3618 million in 2016. This pattern suggests a considerable rise in tax liability or changes in tax provision accounting during the latter years.
- Cash operating taxes
- Cash operating taxes showed some fluctuations but generally increased over the five-year span. Starting at 805 million in 2012, the amount remained relatively stable at 801 million in 2013. It rose to 1096 million in 2014, marking the beginning of a more pronounced increase. In 2015, cash operating taxes surged dramatically to 3988 million, representing a significant outflow compared to prior years. However, there was a decline to 3456 million in 2016, indicating some reduction in cash taxes paid, though still well above earlier period levels. This suggests modifications in operational cash tax payments or timing differences.
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Invested Capital
Reynolds American Inc., invested capital calculation (financing approach)
US$ in millions
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.
- Total reported debt & leases
-
The total reported debt and leases remained relatively stable between 2012 and 2014, with values hovering slightly above 5,100 million US dollars. However, there was a significant increase in 2015, where the figure more than tripled to 17,473 million US dollars. This substantial rise was followed by a decline in 2016 to 13,190 million US dollars, though the amount remained considerably higher than in the initial three years.
- Shareholders’ equity
-
Shareholders’ equity displayed a slight downward trend from 2012 to 2014, decreasing from 5,257 million US dollars to 4,522 million US dollars. In 2015, it experienced a substantial increase to 18,252 million US dollars, continuing to rise in 2016 to 21,711 million US dollars. This growth mirrors the pattern seen in total reported debt but extends to an even higher level by the end of the period.
- Invested capital
-
Invested capital remained relatively constant and stable from 2012 through 2014, with values just below and around the 10,000 million US dollars mark. There was a marked escalation in 2015 to 45,105 million US dollars, sustaining a similar level in 2016 at 44,972 million US dollars. This sharp increase corresponds with the shifts in both debt and equity, indicating a considerable expansion in the company's capital base during this period.
- Overall Analysis
-
The financial data reveals a period of relative stability from 2012 to 2014, followed by a pronounced transformation starting in 2015. Both total reported debt and shareholders’ equity saw massive increases, which drove a nearly fourfold surge in invested capital. Although total debt decreased somewhat in 2016, it remained significantly elevated compared to the earlier years. The simultaneous rise in equity suggests that the company may have undertaken major financing and capital restructuring initiatives during 2015, resulting in a substantial enlargement of its financial structure. This shift likely reflects strategic decisions impacting the capital composition, potentially involving acquisitions, capital infusion, or other large-scale financial activities.
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Cost of Capital
Reynolds American Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 86,326) | 86,326) | ÷ | 100,651) | = | 0.86 | 0.86 | × | 10.30% | = | 8.83% | ||
| 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 | 9.29% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 69,226) | 69,226) | ÷ | 87,452) | = | 0.79 | 0.79 | × | 10.30% | = | 8.15% | ||
| 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 | 8.77% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 37,349) | 37,349) | ÷ | 42,777) | = | 0.87 | 0.87 | × | 10.30% | = | 8.99% | ||
| 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 | 9.36% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 25,816) | 25,816) | ÷ | 31,078) | = | 0.83 | 0.83 | × | 10.30% | = | 8.55% | ||
| 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 | 9.05% | ||||||||||
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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 24,297) | 24,297) | ÷ | 29,855) | = | 0.81 | 0.81 | × | 10.30% | = | 8.38% | ||
| 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 | 8.95% | ||||||||||
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 »
Economic Spread Ratio
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 | 2,756) | (1,045) | 521) | 1,269) | 456) | |
| Invested capital2 | 44,972) | 45,105) | 9,728) | 10,479) | 10,375) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | 6.13% | -2.32% | 5.36% | 12.11% | 4.40% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International 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 × 2,756 ÷ 44,972 = 6.13%
4 Click competitor name to see calculations.
The financial performance from 2012 to 2016 is characterized by significant volatility in economic profit and a substantial expansion of the capital base starting in 2015. While the period began with positive returns, a dramatic shift in invested capital led to a temporary erosion of economic value followed by a strong recovery in 2016.
- Economic Profit Trends
- Economic profit exhibited an inconsistent trajectory, reaching an early peak of US$ 1,269 million in 2013 before declining in 2014. A significant contraction occurred in 2015, with profit falling to a negative US$ 1,045 million. This was followed by a sharp reversal in 2016, where economic profit climbed to a period high of US$ 2,756 million.
- Invested Capital Expansion
- Invested capital remained relatively stable between 2012 and 2014, ranging from approximately US$ 9.7 billion to US$ 10.5 billion. A structural shift occurred in 2015, as invested capital surged to US$ 45,105 million, representing a more than four-fold increase. This heightened capital level persisted into 2016, ending the period at US$ 44,972 million.
- Economic Spread Ratio Analysis
- The economic spread ratio reflected the volatility of the underlying profit and capital changes. After peaking at 12.11% in 2013, the ratio declined and eventually turned negative in 2015, reaching -2.32%. This negative spread indicates that the return on invested capital was insufficient to cover the cost of capital during the year of the massive capital expansion. By 2016, the ratio recovered to 6.13%, suggesting that the expanded asset base began generating value in excess of its cost.
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Economic Profit Margin
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 | 2,756) | (1,045) | 521) | 1,269) | 456) | |
| 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 | 16.29% | -7.02% | 4.32% | 10.60% | 3.73% | |
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International 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 × 2,756 ÷ 16,918 = 16.29%
3 Click competitor name to see calculations.
The financial performance from 2012 to 2016 is characterized by significant volatility in economic value creation, transitioning from modest gains to a substantial deficit before achieving a period-high peak.
- Economic Profit Volatility
- Economic profit exhibited erratic movement, starting at 456 million US dollars in 2012 and increasing to 1,269 million US dollars in 2013. A contraction followed in 2014, culminating in a significant negative value of -1,045 million US dollars in 2015. This downturn was followed by a sharp recovery in 2016, with economic profit reaching a peak of 2,756 million US dollars.
- Adjusted Net Sales Performance
- Adjusted net sales remained relatively stable between 2012 and 2014, fluctuating slightly around the 12 billion US dollar mark. A notable upward trend emerged in 2015, as sales rose to 14,885 million US dollars, further increasing to 16,918 million US dollars by 2016. This indicates a substantial expansion in the revenue base during the final two years of the analyzed period.
- Economic Profit Margin Analysis
- The economic profit margin mirrored the instability of absolute economic profit. The margin rose to 10.60% in 2013 before declining to 4.32% in 2014 and dropping to -7.02% in 2015. This negative margin in 2015 signifies that the returns generated were insufficient to cover the company's cost of capital, despite the increase in adjusted net sales. The period concluded with a robust rebound in 2016, where the economic profit margin reached its highest level at 16.29%.
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