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
Time Warner Inc., economic profit calculation
US$ in millions
Based on: 10-K (reporting date: 2017-12-31), 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).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2017 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 5,040 – 13.22% × 57,150 = -2,516
The financial performance from 2013 to 2017 is characterized by a consistent negative economic profit, indicating that the returns generated from operations were insufficient to cover the cost of the capital employed. This persistent deficit demonstrates a trend of shareholder value destruction throughout the observed period.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT remained relatively stagnant over the five-year horizon. After reaching 5,167 million in 2014, a decline occurred in 2015 to 4,751 million, followed by a marginal recovery to 5,040 million by 2017. The lack of significant growth in operational profitability failed to provide the necessary lift to achieve a positive economic profit.
- Invested Capital and Cost of Capital
- Following a reduction in invested capital in 2014 to 52,455 million, a steady upward trend was observed, with capital increasing to 57,150 million by 2017. Concurrently, the cost of capital remained elevated, fluctuating between a low of 12.40% in 2015 and a high of 13.25% in 2016, which maintained a high threshold for value creation.
- Economic Profit Dynamics
- Economic profit remained negative for the entire duration of the analysis. A temporary narrowing of the loss was observed in 2014, reaching -1,712 million. However, from 2015 through 2017, the economic loss expanded steadily, culminating in a deficit of -2,516 million. This deterioration indicates that the increase in invested capital occurred without a corresponding increase in NOPAT, effectively widening the gap between operational returns and the cost of capital.
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Net Operating Profit after Taxes (NOPAT)
Time Warner Inc., NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2017-12-31), 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).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for doubtful accounts.
3 Addition of increase (decrease) in deferred revenue.
4 Addition of increase (decrease) in accrued restructuring and severance costs.
5 Addition of increase (decrease) in equity equivalents to net income attributable to Time Warner Inc. shareholders.
6 2017 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 976 × 4.10% = 40
7 2017 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 1,254 × 35.00% = 439
8 Addition of after taxes interest expense to net income attributable to Time Warner Inc. shareholders.
9 2017 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 205 × 35.00% = 72
10 Elimination of after taxes investment income.
11 Elimination of discontinued operations.
Analysis of the financial performance between 2013 and 2017 reveals a divergence between net income and net operating profit after taxes (NOPAT), suggesting that the primary drivers of profitability shifted over the five-year period.
- Net Income Trajectory
- A consistent upward trend is observed in net income attributable to shareholders. From 2013 to 2016, growth was gradual, increasing from 3,691 million US$ to 3,926 million US$. This trend culminated in a significant acceleration in 2017, where net income rose to 5,247 million US$, representing a substantial year-over-year increase.
- NOPAT Performance
- Net operating profit after taxes exhibited greater volatility and slower growth compared to net income. After remaining stable between 2013 and 2014 at approximately 5.1 billion US$, NOPAT experienced a decline to 4,751 million US$ in 2015. A recovery followed in 2016 and 2017, with values reaching 4,943 million US$ and 5,040 million US$, respectively, though these levels remained below the 2014 peak.
- Comparative Analysis of Profitability
- A persistent gap existed where NOPAT exceeded net income throughout the analyzed period, indicating that non-operating expenses or financing costs consistently reduced the final net income. Notably, this disparity narrowed significantly in 2017; while NOPAT grew by only approximately 2% from 2016 to 2017, net income grew by approximately 33%. This suggests that the surge in net income in 2017 was primarily driven by non-operating factors rather than an increase in core operating performance.
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Cash Operating Taxes
Time Warner Inc., cash operating taxes calculation
US$ in millions
Based on: 10-K (reporting date: 2017-12-31), 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).
An analysis of tax obligations reveals a fluctuating but generally upward trajectory in cash operating taxes between 2013 and 2017. While the reported income tax expenses on continuing operations exhibited significant volatility, the actual cash outflows for taxes reached their highest point at the end of the observed period.
- Cash Operating Tax Trends
- Cash operating taxes began at 1,442 million US$ in 2013 and increased to 2,078 million US$ by 2017. Although there were periodic declines in 2014 and 2016, the overall trend indicates a rising requirement for cash liquidity to satisfy tax obligations over the five-year window.
- Divergence Between Accrual and Cash Taxes
- A significant divergence is observed between the taxes provided on income from continuing operations and the actual cash operating taxes paid. This gap became most pronounced in 2017, where cash operating taxes reached 2,078 million US$ while the reported tax provision dropped to 701 million US$. Such a discrepancy suggests substantial timing differences, the settlement of deferred tax liabilities, or the impact of non-deductible expenses.
- Volatility of Reported Tax Provisions
- The current and deferred income taxes provided on income from continuing operations showed an inconsistent pattern, falling from 1,749 million US$ in 2013 to 701 million US$ in 2017. The lack of a direct correlation between these accrual-based figures and the cash operating taxes indicates that reported tax expenses were driven by accounting adjustments and deferred tax movements rather than immediate cash requirements.
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Invested Capital
Time Warner Inc., invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2017-12-31), 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).
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 deferred revenue.
5 Addition of accrued restructuring and severance costs.
6 Addition of equity equivalents to total Time Warner Inc. shareholders’ equity.
7 Removal of accumulated other comprehensive income.
8 Subtraction of construction in progress.
9 Subtraction of marketable securities.
The total invested capital exhibited a non-linear trajectory between 2013 and 2017. Following an initial decline between 2013 and 2014, the capital base entered a period of steady expansion, eventually exceeding its 2013 levels by the end of the observed period.
- Total Reported Debt and Leases
- A consistent upward trend was observed from 2013 to 2016, with obligations increasing from 21,765 million to a peak of 25,355 million. This growth trend reversed slightly in 2017, as the balance decreased to 24,720 million.
- Total Shareholders' Equity
- Equity underwent a significant contraction during the first three years of the period, declining from 29,904 million in 2013 to 23,619 million in 2015. A subsequent recovery phase occurred between 2016 and 2017, with equity rising to 28,375 million by the end of 2017.
- Invested Capital Trends
- The initial reduction in invested capital from 56,262 million in 2013 to 52,455 million in 2014 was primarily driven by a sharp decrease in shareholders' equity that offset the increase in debt. From 2015 onward, invested capital grew incrementally, reaching 57,150 million in 2017. This final increase was supported by the simultaneous recovery of shareholders' equity and the maintenance of relatively high debt levels.
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Cost of Capital
Time Warner Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 73,595) | 73,595) | ÷ | 99,897) | = | 0.74 | 0.74 | × | 16.94% | = | 12.48% | ||
| Debt3 | 25,327) | 25,327) | ÷ | 99,897) | = | 0.25 | 0.25 | × | 4.32% × (1 – 35.00%) | = | 0.71% | ||
| Operating lease liability4 | 976) | 976) | ÷ | 99,897) | = | 0.01 | 0.01 | × | 4.10% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 99,897) | 1.00 | 13.22% | ||||||||||
Based on: 10-K (reporting date: 2017-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 75,157) | 75,157) | ÷ | 102,750) | = | 0.73 | 0.73 | × | 16.94% | = | 12.39% | ||
| Debt3 | 26,577) | 26,577) | ÷ | 102,750) | = | 0.26 | 0.26 | × | 4.97% × (1 – 35.00%) | = | 0.84% | ||
| Operating lease liability4 | 1,016) | 1,016) | ÷ | 102,750) | = | 0.01 | 0.01 | × | 3.91% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 102,750) | 1.00 | 13.25% | ||||||||||
Based on: 10-K (reporting date: 2016-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 52,672) | 52,672) | ÷ | 80,037) | = | 0.66 | 0.66 | × | 16.94% | = | 11.15% | ||
| Debt3 | 26,282) | 26,282) | ÷ | 80,037) | = | 0.33 | 0.33 | × | 5.65% × (1 – 35.00%) | = | 1.21% | ||
| Operating lease liability4 | 1,083) | 1,083) | ÷ | 80,037) | = | 0.01 | 0.01 | × | 5.45% × (1 – 35.00%) | = | 0.05% | ||
| Total: | 80,037) | 1.00 | 12.40% | ||||||||||
Based on: 10-K (reporting date: 2015-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 68,452) | 68,452) | ÷ | 96,458) | = | 0.71 | 0.71 | × | 16.94% | = | 12.02% | ||
| Debt3 | 26,745) | 26,745) | ÷ | 96,458) | = | 0.28 | 0.28 | × | 5.80% × (1 – 35.00%) | = | 1.05% | ||
| Operating lease liability4 | 1,262) | 1,262) | ÷ | 96,458) | = | 0.01 | 0.01 | × | 5.38% × (1 – 35.00%) | = | 0.05% | ||
| Total: | 96,458) | 1.00 | 13.12% | ||||||||||
Based on: 10-K (reporting date: 2014-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 57,746) | 57,746) | ÷ | 82,265) | = | 0.70 | 0.70 | × | 16.94% | = | 11.89% | ||
| Debt3 | 22,919) | 22,919) | ÷ | 82,265) | = | 0.28 | 0.28 | × | 6.11% × (1 – 35.00%) | = | 1.11% | ||
| Operating lease liability4 | 1,600) | 1,600) | ÷ | 82,265) | = | 0.02 | 0.02 | × | 5.83% × (1 – 35.00%) | = | 0.07% | ||
| Total: | 82,265) | 1.00 | 13.07% | ||||||||||
Based on: 10-K (reporting date: 2013-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Time Warner Inc., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (2,516) | (2,341) | (1,844) | (1,712) | (2,206) | |
| Invested capital2 | 57,150) | 54,961) | 53,163) | 52,455) | 56,262) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | -4.40% | -4.26% | -3.47% | -3.26% | -3.92% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2017-12-31), 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).
1 Economic profit. See details »
2 Invested capital. See details »
3 2017 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -2,516 ÷ 57,150 = -4.40%
4 Click competitor name to see calculations.
The financial performance from 2013 to 2017 is characterized by a persistent failure to generate positive economic value added. The company operated with a negative economic profit throughout the entire five-year period, indicating that the returns on invested capital remained consistently below the required cost of capital. While a marginal recovery occurred in 2014, the subsequent years show a steady deterioration in economic efficiency.
- Economic Profit
- Economic profit remained negative across all reporting periods, starting at -2,206 million USD in 2013. A temporary improvement was noted in 2014, where the deficit narrowed to -1,712 million USD. However, this trend reversed immediately, with losses widening annually to reach -2,516 million USD by 2017. This suggests an increasing gap between the company's actual operating returns and its cost of capital.
- Invested Capital
- The capital base experienced a slight contraction in 2014, dropping from 56,262 million USD to 52,455 million USD. Following this decline, invested capital grew steadily for three consecutive years, ending the period at 57,150 million USD in 2017. The increase in invested capital, coinciding with declining economic profit, indicates that additional capital deployment did not yield a corresponding increase in value creation.
- Economic Spread Ratio
- The economic spread ratio remained negative throughout the period, mirroring the trajectory of the economic profit. After improving from -3.92% in 2013 to -3.26% in 2014, the ratio declined progressively to -4.40% by 2017. This downward trend confirms a diminishing ability to cover the cost of capital, reflecting an erosion of economic efficiency over the observed timeframe.
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Economic Profit Margin
Time Warner Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (2,516) | (2,341) | (1,844) | (1,712) | (2,206) | |
| Revenues | 31,271) | 29,318) | 28,118) | 27,359) | 29,795) | |
| Add: Increase (decrease) in deferred revenue | 129) | 82) | 74) | 1) | (57) | |
| Adjusted revenues | 31,400) | 29,400) | 28,192) | 27,360) | 29,738) | |
| Performance Ratio | ||||||
| Economic profit margin2 | -8.01% | -7.96% | -6.54% | -6.26% | -7.42% | |
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2017-12-31), 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).
1 Economic profit. See details »
2 2017 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted revenues
= 100 × -2,516 ÷ 31,400 = -8.01%
3 Click competitor name to see calculations.
Between 2013 and 2017, a consistent pattern of economic value destruction is evident. Despite fluctuations and eventual growth in revenue, the entity failed to generate a positive economic profit, indicating that the returns on invested capital were insufficient to cover the cost of capital employed throughout the five-year period.
- Economic Profit Trend
- Economic profit remained negative for the entirety of the analyzed period. Following a temporary improvement in 2014, where losses narrowed to -1,712 million USD, a steady downward trend emerged. By December 31, 2017, the economic profit declined to -2,516 million USD, marking the lowest point in the sequence and reflecting an increase in the amount of value destroyed over time.
- Adjusted Revenue Trajectory
- Adjusted revenues experienced an initial contraction in 2014, falling to 27,360 million USD from 29,738 million USD in 2013. However, a recovery phase followed, with revenues increasing annually from 2015 through 2017, reaching a peak of 31,400 million USD. The divergence between increasing revenues and decreasing economic profit suggests that the growth in scale did not translate into improved economic efficiency.
- Economic Profit Margin Analysis
- The economic profit margin remained negative throughout the period, mirroring the trend of absolute economic profit. While the margin saw a slight improvement to -6.26% in 2014, it deteriorated consistently thereafter, reaching -8.01% by the end of 2017. This widening negative margin indicates a diminishing ability to generate returns above the cost of capital relative to the volume of revenue generated.
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