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 – 9.34% × 44,972 = 2,734
The financial trajectory between 2012 and 2016 is characterized by a significant expansion in both operational earnings and the capital base, leading to volatile swings in economic profit. While the period concludes with a substantial increase in value creation, a notable period of value erosion occurred in 2015 following a massive surge in invested capital.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT exhibited a strong overall growth trend, rising from 1,384 million USD in 2012 to 6,935 million USD by 2016. Despite a temporary decline in 2014 to 1,432 million USD, the growth accelerated sharply in the final two years, with the 2016 figure representing a more than twofold increase over the previous year.
- Invested Capital and Cost of Capital
- Invested capital remained relatively stable between 2012 and 2014, hovering around 10 billion USD. However, a dramatic increase occurred in 2015, where invested capital rose to 45,105 million USD, suggesting a major acquisition or strategic capital infusion. This capital base remained consistent through 2016. Throughout this period, the cost of capital remained stable, fluctuating within a narrow range between 8.82% and 9.41%.
- Economic Profit Dynamics
- Economic profit experienced significant volatility. After peaking at 1,264 million USD in 2013, it declined in 2014 and turned negative in 2015, reaching -1,065 million USD. This negative value indicates that the return on the newly expanded capital base in 2015 was insufficient to cover the associated cost of capital. A rapid recovery followed in 2016, with economic profit surging to 2,734 million USD, signaling that the operational gains from the increased investment were fully realized by the end of the period.
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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.
The financial performance from 2012 to 2016 is characterized by a significant overall increase in both bottom-line profitability and core operating efficiency. While a temporary contraction occurred in 2014, the subsequent growth acceleration indicates a substantial improvement in the company's ability to generate returns from its operations.
- Net Operating Profit After Taxes (NOPAT) Analysis
- NOPAT exhibited a strong upward trajectory, rising from 1,384 million US$ in 2012 to 6,935 million US$ by 2016. A notable volatility is observed in 2014, where NOPAT declined to 1,432 million US$ from 2,217 million US$ in the prior year. However, this was followed by an exponential increase, with the 2016 figure representing an approximately 400% increase over the 2012 baseline, suggesting a vastly improved capacity for value creation.
- Net Income Correlation
- Net income mirrored the general trend of NOPAT, growing from 1,272 million US$ in 2012 to 6,073 million US$ in 2016. The correlation between these two metrics is high, particularly during the sharp ascent observed between 2014 and 2016. The rapid increase in net income during the final two years of the period underscores a period of significant financial expansion.
- Operating Profitability vs. Net Earnings
- The relationship between NOPAT and net income fluctuated over the five-year period. In 2012, 2013, and 2016, NOPAT exceeded net income, indicating that operating performance was stronger than the final net result after accounting for non-operating items. Conversely, in 2014 and 2015, net income was higher than or nearly equal to NOPAT, which may suggest the influence of non-operating gains or changes in the cost of debt and financing structures during those specific years.
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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).
A significant escalation in both tax-related metrics is observed between 2012 and 2016, characterized by a substantial surge starting in 2015. While the initial three years showed relative stability or moderate fluctuations, the latter two years reflect a fundamental shift in the company's tax obligations.
- Cash Operating Taxes Trend
- Cash operating taxes remained nearly flat between 2012 and 2013, moving from 805 million to 801 million US dollars. A moderate increase occurred in 2014, reaching 1,096 million US dollars, followed by a sharp spike to 3,988 million US dollars in 2015. The period concluded with a slight reduction to 3,456 million US dollars in 2016, although the value remained significantly higher than pre-2015 levels.
- Provision for Income Taxes Trend
- The provision for income taxes exhibited volatility in the early period, rising to 1,023 million US dollars in 2013 before dipping to 817 million US dollars in 2014. Similar to the cash tax trend, a dramatic increase is noted in 2015, where the provision rose to 3,131 million US dollars, further climbing to 3,618 million US dollars by 2016.
- Analysis of Divergence
- A notable divergence between cash operating taxes and tax provisions is evident in 2015, where cash taxes exceeded the provision by approximately 857 million US dollars. Conversely, by 2016, the trend reversed, with the provision for income taxes exceeding cash operating taxes by 162 million US dollars. This indicates fluctuations in the timing of tax payments relative to the accrual of tax expenses.
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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.
The capital structure underwent a significant transformation between 2012 and 2016, characterized by a period of relative stability followed by a substantial expansion of the capital base in 2015.
- Invested Capital Trends
- Invested capital remained relatively constant from 2012 to 2014, fluctuating within a narrow range between 9,728 million and 10,479 million US$. A sharp escalation occurred in 2015, where invested capital increased to 45,105 million US$, representing an increase of approximately 363% over the 2014 level. This figure remained largely stable through December 31, 2016, ending at 44,972 million US$.
- Debt and Lease Obligations
- Total reported debt and leases showed minimal variance from 2012 to 2014, maintaining a baseline of approximately 5,100 million US$. In 2015, these obligations surged to 17,473 million US$, indicating a significant increase in leverage. By the end of 2016, debt and leases decreased to 13,190 million US$, although they remained substantially higher than the pre-2015 levels.
- Shareholders' Equity Evolution
- Shareholders' equity experienced a gradual decline from 5,257 million US$ in 2012 to 4,522 million US$ in 2014. This trend reversed sharply in 2015 with a rise to 18,252 million US$, followed by further growth to 21,711 million US$ by the end of 2016. The equity component demonstrated more consistent growth in the final two years of the period compared to the volatility observed in debt levels.
The dramatic increase in invested capital in 2015 suggests a major corporate transaction or strategic capitalization event. From an Economic Value Added (EVA) perspective, the quadrupling of the invested capital base significantly increases the capital charge. Consequently, a proportional increase in net operating profit after taxes would be required to prevent a decline in EVA given the expanded capital requirement.
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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 | × | 10.35% | = | 8.88% | ||
| 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 | 9.34% | ||||||||||
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 | × | 10.35% | = | 8.20% | ||
| 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 | 8.82% | ||||||||||
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 | × | 10.35% | = | 9.04% | ||
| 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 | 9.41% | ||||||||||
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 | × | 10.35% | = | 8.60% | ||
| 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 | 9.10% | ||||||||||
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 | × | 10.35% | = | 8.43% | ||
| 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 | 8.99% | ||||||||||
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 | 2,734) | (1,065) | 516) | 1,264) | 451) | |
| Invested capital2 | 44,972) | 45,105) | 9,728) | 10,479) | 10,375) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | 6.08% | -2.36% | 5.31% | 12.06% | 4.35% | |
| 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 × 2,734 ÷ 44,972 = 6.08%
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 invested capital base. While the period began and ended with positive economic value creation, a notable contraction occurred in 2015, coinciding with a major increase in capital deployment.
- Invested Capital Trends
- A period of relative stability was observed between 2012 and 2014, with invested capital hovering around 10 billion USD. This stability was interrupted in 2015 by a sharp increase to 45,105 million USD, representing a more than fourfold expansion of the capital base. This level remained largely consistent into 2016 at 44,972 million USD, indicating a permanent structural shift in the company's asset base or funding requirements.
- Economic Profit Analysis
- Economic profit exhibited significant fluctuations, rising from 451 million USD in 2012 to a peak of 1,264 million USD in 2013. A subsequent decline occurred in 2014, followed by a transition into negative territory in 2015, where a loss of 1,065 million USD was recorded. However, a strong recovery was achieved by 2016, with economic profit reaching its highest point in the analyzed period at 2,734 million USD.
- Economic Spread Ratio Interpretation
- The economic spread ratio mirrored the volatility of economic profit, peaking at 12.06% in 2013. The ratio contracted to 5.31% in 2014 and turned negative in 2015, reaching -2.36%. This negative spread indicates that during 2015, the return on invested capital fell below the cost of capital. By 2016, the ratio recovered to 6.08%, suggesting that the company successfully improved its operational efficiency or return on the newly expanded capital base to once again exceed its cost of capital.
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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 | 2,734) | (1,065) | 516) | 1,264) | 451) | |
| 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 | 16.16% | -7.16% | 4.27% | 10.56% | 3.69% | |
| 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 × 2,734 ÷ 16,918 = 16.16%
3 Click competitor name to see calculations.
The economic profit margin exhibited significant volatility over the five-year period from 2012 to 2016, characterized by sharp fluctuations, a period of value destruction, and a substantial recovery in the final year.
- Economic Profit Trends
- Economic profit showed an inconsistent trajectory, starting at 451 million USD in 2012 and peaking at 2,734 million USD in 2016. A notable decline occurred between 2013 and 2015, with the figure dropping from 1,264 million USD to a deficit of -1,065 million USD. The 2016 result represents a significant reversal, marking the highest absolute economic profit in the analyzed period.
- Adjusted Net Sales Performance
- Revenue growth remained relatively stagnant from 2012 through 2014, with adjusted net sales fluctuating slightly around the 12 billion USD mark. A period of accelerated growth began in 2015, as sales rose to 14,885 million USD, followed by a further increase to 16,918 million USD in 2016.
- Economic Profit Margin Analysis
- The economic profit margin mirrored the instability of the absolute profit figures. The margin rose from 3.69% in 2012 to 10.56% in 2013 before contracting to 4.27% in 2014. In 2015, despite a significant increase in adjusted net sales, the margin fell to -7.16%, indicating that the cost of capital exceeded the operating returns. The trend concluded with a sharp recovery in 2016, reaching a period high of 16.16%, suggesting a substantial improvement in the efficiency of capital utilization relative to sales.
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