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
Time Warner Inc., economic profit calculation
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | Net operating profit after taxes (NOPAT)1 | 5,048 | 4,951 | 4,760 | 5,178 | 5,163 |
| | Cost of capital2 | 9.66% | 9.72% | 9.23% | 9.69% | 9.68% |
| | Invested capital3 | 57,150 | 54,961 | 53,163 | 52,455 | 56,262 |
| | Economic profit4 | (474) | (392) | (144) | 97 | (285) |
Source: Based on data from Time Warner Inc. Annual Reports
2017 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
= 5,048 – 9.66% × 57,150 = -474
| 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. | Time Warner Inc.'s economic profit declined from 2015 to 2016 and from 2016 to 2017. |
Net Operating Profit after Taxes (NOPAT)
Time Warner Inc., NOPAT calculation
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | Net income attributable to Time Warner Inc. shareholders | 5,247 | 3,926 | 3,833 | 3,827 | 3,691 |
| | Deferred income tax expense (benefit)1 | (1,010) | 236 | 328 | 166 | 759 |
| | Increase (decrease) in allowance for doubtful accounts2 | (31) | 13 | 28 | (39) | (23) |
| | Increase (decrease) in deferred revenue3 | 129 | 82 | 74 | 1 | (57) |
| | Increase (decrease) in accrued restructuring and severance costs4 | 26 | (82) | (281) | 348 | 78 |
| | Increase (decrease) in equity equivalents5 | (886) | 249 | 149 | 476 | 757 |
| | Interest expense | 1,214 | 1,388 | 1,382 | 1,353 | 1,283 |
| | Interest expense, operating lease obligations6 | 52 | 51 | 74 | 84 | 114 |
| | Adjusted interest expense | 1,266 | 1,439 | 1,456 | 1,437 | 1,397 |
| | Tax benefit of interest expense7 | (443) | (504) | (510) | (503) | (489) |
| | Adjusted interest expense, after taxes8 | 823 | 935 | 946 | 934 | 908 |
| | (Gain) loss on marketable securities | 4 | – | 19 | (10) | 7 |
| | Interest income | (209) | (227) | (219) | (184) | (93) |
| | Investment income, before taxes | (205) | (227) | (200) | (194) | (86) |
| | Tax expense (benefit) of investment income9 | 72 | 79 | 70 | 68 | 30 |
| | Investment income, after taxes10 | (133) | (148) | (130) | (126) | (56) |
| | (Income) loss from discontinued operations, net of tax11 | – | (11) | (37) | 67 | (137) |
| | Net income (loss) attributable to noncontrolling interest | (3) | (1) | (1) | – | – |
| | Net operating profit after taxes (NOPAT) | 5,048 | 4,951 | 4,760 | 5,178 | 5,163 |
Source: Based on data from Time Warner Inc. Annual Reports
2017 Calculations
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 Addition of interest expense on capitalized operating leases. See Details »
7 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 1,266 × 35% = 443
8 Addition of after taxes interest expense to net income attributable to Time Warner Inc. shareholders.
9 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 205 × 35% = 72
10 Elimination of after taxes investment income.
11 Elimination of discontinued operations.
| 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. | Time Warner Inc.'s NOPAT increased from 2015 to 2016 and from 2016 to 2017. |
Cash Operating Taxes
Time Warner Inc., cash operating taxes calculation
USD $ in millions
| 12 months ended | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | |
|---|---|---|---|---|---|---|
| | Current and deferred income taxes provided on Income from continuing operations | 701 | 1,281 | 1,651 | 785 | 1,749 |
| | Less: Deferred income tax expense (benefit) | (1,010) | 236 | 328 | 166 | 759 |
| | Add: Tax savings from interest expense | 443 | 504 | 510 | 503 | 489 |
| | Less: Tax imposed on investment income | 72 | 79 | 70 | 68 | 30 |
| | Cash operating taxes | 2,082 | 1,469 | 1,763 | 1,054 | 1,449 |
Source: Based on data from Time Warner 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. | Time Warner Inc.'s cash operating taxes declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Invested Capital
Time Warner Inc., invested capital calculation (financing approach)
USD $ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| | Debt due within one year | 5,450 | 1,947 | 198 | 1,118 | 66 |
| | Long-term debt, excluding due within one year | 18,294 | 22,392 | 23,594 | 21,376 | 20,099 |
| | PV of operating lease payments1 | 976 | 1,016 | 1,083 | 1,262 | 1,600 |
| | Total reported debt & leases | 24,720 | 25,355 | 24,875 | 23,756 | 21,765 |
| | Total Time Warner Inc. shareholders' equity | 28,375 | 24,335 | 23,619 | 24,476 | 29,904 |
| | Net deferred tax (assets) liabilities2 | 1,473 | 2,553 | 2,320 | 2,020 | 2,195 |
| | Allowance for doubtful accounts3 | 162 | 193 | 180 | 152 | 261 |
| | Deferred revenue4 | 1,179 | 1,050 | 968 | 894 | 1,477 |
| | Accrued restructuring and severance costs5 | 197 | 171 | 253 | 534 | 244 |
| | Equity equivalents6 | 3,011 | 3,967 | 3,721 | 3,600 | 4,177 |
| | Accumulated other comprehensive (income) loss, net of tax7 | 1,437 | 1,510 | 1,446 | 1,164 | 852 |
| | Redeemable noncontrolling interest | 35 | 29 | 29 | – | – |
| | Noncontrolling interest | 1 | 2 | – | – | – |
| | Adjusted total Time Warner Inc. shareholders' equity | 32,859 | 29,843 | 28,815 | 29,240 | 34,933 |
| | Construction in progress8 | (380) | (183) | (174) | (223) | (339) |
| | Marketable securities9 | (49) | (54) | (353) | (318) | (97) |
| | Invested capital | 57,150 | 54,961 | 53,163 | 52,455 | 56,262 |
Source: Based on data from Time Warner 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 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.
| Item | Description | The company |
|---|---|---|
| Invested capital | Capital is an approximation of the economic book value of all cash invested in going-concern business activities. | Time Warner Inc.'s invested capital increased from 2015 to 2016 and from 2016 to 2017. |
Cost of Capital
Time Warner Inc., cost of capital calculations
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 73,595 | 73,595 | ÷ | 99,897 | = | 0.74 | 0.74 | × | 12.11% | = | 8.92% |
| Debt3 | 25,327 | 25,327 | ÷ | 99,897 | = | 0.25 | 0.25 | × | 4.32% × (1 – 35%) | = | 0.71% |
| PV of operating lease payments4 | 976 | 976 | ÷ | 99,897 | = | 0.01 | 0.01 | × | 4.10% × (1 – 35%) | = | 0.03% |
| Total: | 99,897 | 1.00 | 9.66% | ||||||||
Source: Based on data from Time Warner Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 75,157 | 75,157 | ÷ | 102,750 | = | 0.73 | 0.73 | × | 12.11% | = | 8.86% |
| Debt3 | 26,577 | 26,577 | ÷ | 102,750 | = | 0.26 | 0.26 | × | 4.97% × (1 – 35%) | = | 0.84% |
| PV of operating lease payments4 | 1,016 | 1,016 | ÷ | 102,750 | = | 0.01 | 0.01 | × | 3.91% × (1 – 35%) | = | 0.03% |
| Total: | 102,750 | 1.00 | 9.72% | ||||||||
Source: Based on data from Time Warner Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 52,672 | 52,672 | ÷ | 80,037 | = | 0.66 | 0.66 | × | 12.11% | = | 7.97% |
| Debt3 | 26,282 | 26,282 | ÷ | 80,037 | = | 0.33 | 0.33 | × | 5.65% × (1 – 35%) | = | 1.21% |
| PV of operating lease payments4 | 1,083 | 1,083 | ÷ | 80,037 | = | 0.01 | 0.01 | × | 5.45% × (1 – 35%) | = | 0.05% |
| Total: | 80,037 | 1.00 | 9.23% | ||||||||
Source: Based on data from Time Warner Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 68,452 | 68,452 | ÷ | 96,458 | = | 0.71 | 0.71 | × | 12.11% | = | 8.60% |
| Debt3 | 26,745 | 26,745 | ÷ | 96,458 | = | 0.28 | 0.28 | × | 5.80% × (1 – 35%) | = | 1.05% |
| PV of operating lease payments4 | 1,262 | 1,262 | ÷ | 96,458 | = | 0.01 | 0.01 | × | 5.38% × (1 – 35%) | = | 0.05% |
| Total: | 96,458 | 1.00 | 9.69% | ||||||||
Source: Based on data from Time Warner Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
| Fair Value1 | Weights | Cost of Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 57,746 | 57,746 | ÷ | 82,265 | = | 0.70 | 0.70 | × | 12.11% | = | 8.50% |
| Debt3 | 22,919 | 22,919 | ÷ | 82,265 | = | 0.28 | 0.28 | × | 6.11% × (1 – 35%) | = | 1.11% |
| PV of operating lease payments4 | 1,600 | 1,600 | ÷ | 82,265 | = | 0.02 | 0.02 | × | 5.83% × (1 – 35%) | = | 0.07% |
| Total: | 82,265 | 1.00 | 9.68% | ||||||||
Source: Based on data from Time Warner Inc. Annual Reports
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Economic Spread
Time Warner Inc., economic spread calculation
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | ||||||
| | Economic profit1 | (474) | (392) | (144) | 97 | (285) |
| | Invested capital2 | 57,150 | 54,961 | 53,163 | 52,455 | 56,262 |
| Ratio | ||||||
| | Economic spread3 | -0.83% | -0.71% | -0.27% | 0.19% | -0.51% |
Source: Based on data from Time Warner Inc. Annual Reports
2017 Calculations
1 Economic profit. See Details »
2 Invested capital. See Details »
3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × -474 ÷ 57,150 = -0.83%
| 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. | Time Warner Inc.'s economic spread deteriorated from 2015 to 2016 and from 2016 to 2017. |
Economic Profit Margin
Time Warner Inc., economic profit margin calculation
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | ||||||
| | Economic profit1 | (474) | (392) | (144) | 97 | (285) |
| | Revenues | 31,271 | 29,318 | 28,118 | 27,359 | 29,795 |
| | Increase (decrease) in deferred revenue | 129 | 82 | 74 | 1 | (57) |
| Ratio | ||||||
| | Economic profit margin2 | -1.51% | -1.33% | -0.51% | 0.35% | -0.96% |
Source: Based on data from Time Warner Inc. Annual Reports
2017 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ (Revenues + Change in deferred revenue)
= 100 × -474 ÷ (31,271 + 129) = -1.51%
| 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. | Time Warner Inc.'s economic profit margin deteriorated from 2015 to 2016 and from 2016 to 2017. |