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.

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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  (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 19  (10)
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.

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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.

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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
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.

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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 »

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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.

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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  (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.

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