Economic Value Added (EVA)
Difficulty: Advanced
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
TJX Cos. Inc., economic profit calculation
USD $ in thousands
| 12 months ended | Feb 3, 2018 | Jan 28, 2017 | Jan 30, 2016 | Jan 31, 2015 | Feb 1, 2014 | Feb 2, 2013 | |
|---|---|---|---|---|---|---|---|
| | Net operating profit after taxes (NOPAT)1 | 2,657,254 | 2,466,478 | 2,529,147 | 2,524,474 | 2,412,743 | 2,164,875 |
| | Cost of capital2 | 8.06% | 8.11% | 8.37% | 8.33% | 8.39% | 8.47% |
| | Invested capital3 | 16,160,847 | 14,935,402 | 13,469,411 | 13,017,789 | 11,971,690 | 10,137,306 |
| | Economic profit4 | 1,354,666 | 1,255,680 | 1,401,233 | 1,439,598 | 1,408,413 | 1,306,751 |
Source: Based on data from TJX Cos. Inc. Annual Reports
2018 Calculations
1 NOPAT. See Details »
2 Cost of capital. See Details »
3 Invested capital. See Details »
4 Economic profit = NOPAT – Cost of capital × Invested capital
= 2,657,254 – 8.06% × 16,160,847 = 1,354,666
| 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. | TJX Cos. Inc.'s economic profit declined from 2016 to 2017 but then increased from 2017 to 2018 not reaching 2016 level. |
Net Operating Profit after Taxes (NOPAT)
TJX Cos. Inc., NOPAT calculation
USD $ in thousands
| 12 months ended | Feb 3, 2018 | Jan 28, 2017 | Jan 30, 2016 | Jan 31, 2015 | Feb 1, 2014 | Feb 2, 2013 | |
|---|---|---|---|---|---|---|---|
| | Net income | 2,607,948 | 2,298,234 | 2,277,658 | 2,215,128 | 2,137,396 | 1,906,687 |
| | Deferred income tax expense (benefit)1 | (137,125) | (5,841) | 30,783 | 102,070 | 52,647 | 13,232 |
| | Increase (decrease) in equity equivalents2 | (137,125) | (5,841) | 30,783 | 102,070 | 52,647 | 13,232 |
| | Interest expense, excluding capitalized interest | 64,295 | 61,671 | 60,269 | 55,380 | 46,091 | 40,832 |
| | Interest expense, operating lease obligations3 | 249,605 | 224,289 | 293,148 | 279,100 | 311,534 | 347,681 |
| | Adjusted interest expense, excluding capitalized interest | 313,900 | 285,960 | 353,417 | 334,480 | 357,625 | 388,513 |
| | Tax benefit of interest expense, excluding capitalized interest4 | (105,784) | (100,086) | (123,696) | (117,068) | (125,169) | (135,980) |
| | Adjusted interest expense, excluding capitalized interest, after taxes5 | 208,116 | 185,874 | 229,721 | 217,412 | 232,456 | 252,533 |
| | Interest income | (32,707) | (18,137) | (13,869) | (15,593) | (15,010) | (11,657) |
| | Investment income, before taxes | (32,707) | (18,137) | (13,869) | (15,593) | (15,010) | (11,657) |
| | Tax expense (benefit) of investment income6 | 11,022 | 6,348 | 4,854 | 5,458 | 5,254 | 4,080 |
| | Investment income, after taxes7 | (21,685) | (11,789) | (9,015) | (10,135) | (9,757) | (7,577) |
| | Net operating profit after taxes (NOPAT) | 2,657,254 | 2,466,478 | 2,529,147 | 2,524,474 | 2,412,743 | 2,164,875 |
Source: Based on data from TJX Cos. Inc. Annual Reports
2018 Calculations
1 Elimination of deferred tax expense. See Details »
2 Addition of increase (decrease) in equity equivalents to net income.
3 Addition of interest expense on capitalized operating leases. See Details »
4 Tax benefit of interest expense, excluding capitalized interest = Adjusted interest expense, excluding capitalized interest × Statutory income tax rate
= 313,900 × 34% = 105,784
5 Addition of after taxes interest expense to net income.
6 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 32,707 × 34% = 11,022
7 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. | TJX Cos. Inc.'s NOPAT declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level. |
Cash Operating Taxes
TJX Cos. Inc., cash operating taxes calculation
USD $ in thousands
| 12 months ended | Feb 3, 2018 | Jan 28, 2017 | Jan 30, 2016 | Jan 31, 2015 | Feb 1, 2014 | Feb 2, 2013 | |
|---|---|---|---|---|---|---|---|
| | Provision for income taxes | 1,248,640 | 1,424,809 | 1,380,642 | 1,334,756 | 1,182,093 | 1,170,664 |
| | Less: Deferred income tax expense (benefit) | (137,125) | (5,841) | 30,783 | 102,070 | 52,647 | 13,232 |
| | Add: Tax savings from interest expense, excluding capitalized interest | 105,784 | 100,086 | 123,696 | 117,068 | 125,169 | 135,980 |
| | Less: Tax imposed on investment income | 11,022 | 6,348 | 4,854 | 5,458 | 5,254 | 4,080 |
| | Cash operating taxes | 1,480,527 | 1,524,388 | 1,468,701 | 1,344,296 | 1,249,361 | 1,289,332 |
Source: Based on data from TJX Cos. Inc. Annual Reports
| 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. | TJX Cos. Inc.'s cash operating taxes increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level. |
Invested Capital
TJX Cos. Inc., invested capital calculation (financing approach)
USD $ in thousands
| Feb 3, 2018 | Jan 28, 2017 | Jan 30, 2016 | Jan 31, 2015 | Feb 1, 2014 | Feb 2, 2013 | ||
|---|---|---|---|---|---|---|---|
| | Long-term debt | 2,230,607 | 2,227,599 | 1,624,054 | 1,623,864 | 1,274,216 | 774,552 |
| | PV of operating lease payments1 | 8,619,738 | 7,738,413 | 6,951,852 | 6,597,580 | 6,249,827 | 5,466,011 |
| | Total reported debt & leases | 10,850,345 | 9,966,012 | 8,575,906 | 8,221,444 | 7,524,043 | 6,240,563 |
| | Shareholders' equity | 5,148,309 | 4,510,599 | 4,307,075 | 4,264,230 | 4,229,893 | 3,665,937 |
| | Net deferred tax (assets) liabilities2 | 226,499 | 307,807 | 271,271 | 260,353 | 312,924 | 253,267 |
| | Equity equivalents3 | 226,499 | 307,807 | 271,271 | 260,353 | 312,924 | 253,267 |
| | Accumulated other comprehensive (income) loss, net of tax4 | 441,859 | 694,226 | 667,472 | 554,385 | 199,532 | 213,392 |
| | Adjusted shareholders' equity | 5,816,667 | 5,512,632 | 5,245,818 | 5,078,968 | 4,742,349 | 4,132,596 |
| | Short-term investments5 | (506,165) | (543,242) | (352,313) | (282,623) | (294,702) | (235,853) |
| | Invested capital | 16,160,847 | 14,935,402 | 13,469,411 | 13,017,789 | 11,971,690 | 10,137,306 |
Source: Based on data from TJX Cos. Inc. Annual Reports
1 Addition of capitalized operating leases. See Details »
2 Elimination of deferred taxes from assets and liabilities. See Details »
3 Addition of equity equivalents to shareholders' equity.
4 Removal of accumulated other comprehensive income.
5 Subtraction of short-term investments.
| Item | Description | The company |
|---|---|---|
| Invested capital | Capital is an approximation of the economic book value of all cash invested in going-concern business activities. | TJX Cos. Inc.'s invested capital increased from 2016 to 2017 and from 2017 to 2018. |
Cost of Capital
TJX Cos. Inc., cost of capital calculations
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 52,655,268 | 52,655,268 | ÷ | 63,435,006 | = | 0.83 | 0.83 | × | 9.37% | = | 7.78% |
| Long-term debt3 | 2,160,000 | 2,160,000 | ÷ | 63,435,006 | = | 0.03 | 0.03 | × | 2.51% × (1 – 34%) | = | 0.06% |
| PV of operating lease payments4 | 8,619,738 | 8,619,738 | ÷ | 63,435,006 | = | 0.14 | 0.14 | × | 2.51% × (1 – 34%) | = | 0.23% |
| Total: | 63,435,006 | 1.00 | 8.06% | ||||||||
Source: Based on data from TJX Cos. Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Long-term debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 50,814,379 | 50,814,379 | ÷ | 60,722,792 | = | 0.84 | 0.84 | × | 9.37% | = | 7.84% |
| Long-term debt3 | 2,170,000 | 2,170,000 | ÷ | 60,722,792 | = | 0.04 | 0.04 | × | 2.51% × (1 – 35%) | = | 0.06% |
| PV of operating lease payments4 | 7,738,413 | 7,738,413 | ÷ | 60,722,792 | = | 0.13 | 0.13 | × | 2.51% × (1 – 35%) | = | 0.21% |
| Total: | 60,722,792 | 1.00 | 8.11% | ||||||||
Source: Based on data from TJX Cos. Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Long-term debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 52,092,920 | 52,092,920 | ÷ | 60,744,773 | = | 0.86 | 0.86 | × | 9.37% | = | 8.04% |
| Long-term debt3 | 1,700,000 | 1,700,000 | ÷ | 60,744,773 | = | 0.03 | 0.03 | × | 3.66% × (1 – 35%) | = | 0.07% |
| PV of operating lease payments4 | 6,951,852 | 6,951,852 | ÷ | 60,744,773 | = | 0.11 | 0.11 | × | 3.66% × (1 – 35%) | = | 0.27% |
| Total: | 60,744,773 | 1.00 | 8.37% | ||||||||
Source: Based on data from TJX Cos. Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Long-term debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 47,877,323 | 47,877,323 | ÷ | 56,204,904 | = | 0.85 | 0.85 | × | 9.37% | = | 7.98% |
| Long-term debt3 | 1,730,000 | 1,730,000 | ÷ | 56,204,904 | = | 0.03 | 0.03 | × | 3.66% × (1 – 35%) | = | 0.07% |
| PV of operating lease payments4 | 6,597,580 | 6,597,580 | ÷ | 56,204,904 | = | 0.12 | 0.12 | × | 3.66% × (1 – 35%) | = | 0.28% |
| Total: | 56,204,904 | 1.00 | 8.33% | ||||||||
Source: Based on data from TJX Cos. Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Long-term debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 43,058,380 | 43,058,380 | ÷ | 50,648,207 | = | 0.85 | 0.85 | × | 9.37% | = | 7.97% |
| Long-term debt3 | 1,340,000 | 1,340,000 | ÷ | 50,648,207 | = | 0.03 | 0.03 | × | 4.35% × (1 – 35%) | = | 0.07% |
| PV of operating lease payments4 | 6,249,827 | 6,249,827 | ÷ | 50,648,207 | = | 0.12 | 0.12 | × | 4.35% × (1 – 35%) | = | 0.35% |
| Total: | 50,648,207 | 1.00 | 8.39% | ||||||||
Source: Based on data from TJX Cos. Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Long-term debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 34,291,238 | 34,291,238 | ÷ | 40,668,249 | = | 0.84 | 0.84 | × | 9.37% | = | 7.90% |
| Long-term debt3 | 911,000 | 911,000 | ÷ | 40,668,249 | = | 0.02 | 0.02 | × | 5.54% × (1 – 35%) | = | 0.08% |
| PV of operating lease payments4 | 5,466,011 | 5,466,011 | ÷ | 40,668,249 | = | 0.13 | 0.13 | × | 5.54% × (1 – 35%) | = | 0.48% |
| Total: | 40,668,249 | 1.00 | 8.47% | ||||||||
Source: Based on data from TJX Cos. Inc. Annual Reports
1 USD $ in thousands
2 Equity. See Details »
3 Long-term debt. See Details »
4 PV of operating lease payments. See Details »
Economic Spread
TJX Cos. Inc., economic spread calculation
| Feb 3, 2018 | Jan 28, 2017 | Jan 30, 2016 | Jan 31, 2015 | Feb 1, 2014 | Feb 2, 2013 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in thousands) | |||||||
| | Economic profit1 | 1,354,666 | 1,255,680 | 1,401,233 | 1,439,598 | 1,408,413 | 1,306,751 |
| | Invested capital2 | 16,160,847 | 14,935,402 | 13,469,411 | 13,017,789 | 11,971,690 | 10,137,306 |
| Ratio | |||||||
| | Economic spread3 | 8.38% | 8.41% | 10.40% | 11.06% | 11.76% | 12.89% |
Source: Based on data from TJX Cos. Inc. Annual Reports
2018 Calculations
1 Economic profit. See Details »
2 Invested capital. See Details »
3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 1,354,666 ÷ 16,160,847 = 8.38%
| Ratio | Description | The company |
|---|---|---|
| Economic spread | The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital. | TJX Cos. Inc.'s economic spread deteriorated from 2016 to 2017 and from 2017 to 2018. |
Economic Profit Margin
TJX Cos. Inc., economic profit margin calculation
| Feb 3, 2018 | Jan 28, 2017 | Jan 30, 2016 | Jan 31, 2015 | Feb 1, 2014 | Feb 2, 2013 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in thousands) | |||||||
| | Economic profit1 | 1,354,666 | 1,255,680 | 1,401,233 | 1,439,598 | 1,408,413 | 1,306,751 |
| | Net sales | 35,864,664 | 33,183,744 | 30,944,938 | 29,078,407 | 27,422,696 | 25,878,372 |
| Ratio | |||||||
| | Economic profit margin2 | 3.78% | 3.78% | 4.53% | 4.95% | 5.14% | 5.05% |
Source: Based on data from TJX Cos. Inc. Annual Reports
2018 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ Net sales
= 100 × 1,354,666 ÷ 35,864,664 = 3.78%
| 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. | TJX Cos. Inc.'s economic profit margin deteriorated from 2016 to 2017 and from 2017 to 2018. |