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
Waste Management Inc., economic profit calculation
US$ in millions
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2021 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 2,064 – 12.72% × 22,932 = -852
The analysis of economic value added from 2017 to 2021 reveals a persistent trend of negative economic profit, indicating that the company did not generate returns sufficient to cover its cost of capital during this period. While operating profits remained relatively stable, a significant increase in the capital base led to a deterioration in economic value creation.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT exhibited a peak in 2018 at 2,286 million US$, followed by a period of slight contraction and stabilization. Between 2019 and 2021, the figure fluctuated within a narrow range between 2,018 million US$ and 2,064 million US$, suggesting that operating profitability remained stagnant despite changes in the underlying capital structure.
- Invested Capital and Cost of Capital
- Invested capital grew substantially, rising from 17,686 million US$ in 2017 to a peak of 23,729 million US$ in 2020, before slightly declining to 22,932 million US$ in 2021. Concurrently, the cost of capital remained relatively stable, oscillating between 12.04% and 12.92%. The combination of a rising capital base and a consistent cost of capital increased the total capital charge required to achieve a positive economic profit.
- Economic Profit Trends
- Economic profit remained negative throughout the five-year period, reflecting a consistent destruction of shareholder value in economic terms. The deficit widened significantly starting in 2019, moving from -96 million US$ in 2018 to -852 million US$ by 2021. This downward trajectory is primarily attributed to the fact that the growth in invested capital was not matched by a corresponding increase in NOPAT.
The divergence between stagnant operating profits and expanding invested capital resulted in a marked increase in the economic loss. The widening gap observed from 2019 onward indicates that the additional capital deployed did not yield a return exceeding the 12% to 13% cost of capital, thereby compounding the negative economic profit over time.
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Net Operating Profit after Taxes (NOPAT)
Waste Management Inc., NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
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 revenues.
4 Addition of increase (decrease) in equity equivalents to net income attributable to Waste Management, Inc..
5 2021 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 523 × 2.80% = 15
6 2021 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 390 × 21.00% = 82
7 Addition of after taxes interest expense to net income attributable to Waste Management, Inc..
8 2021 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 10 × 21.00% = 2
9 Elimination of after taxes investment income.
An analysis of financial performance from 2017 to 2021 reveals a divergence between core operating profitability and bottom-line net income. While net income experienced a period of volatility and decline, the net operating profit after taxes (NOPAT) demonstrated greater resilience, suggesting that the company's fundamental operational efficiency remained more stable than its final accounting profit.
- Net Income Trends
- Net income attributable to the company exhibited a downward trajectory between 2017 and 2020. Starting at US$ 1,949 million in 2017, the figure declined to a five-year low of US$ 1,496 million in 2020. This period of contraction was followed by a notable recovery in 2021, where net income rose to US$ 1,816 million, although it remained below 2017 levels.
- NOPAT Performance
- Net operating profit after taxes showed a different pattern, characterized by an initial increase and subsequent stabilization. NOPAT grew from US$ 1,952 million in 2017 to a peak of US$ 2,286 million in 2018. A gradual decline followed over the next two years, reaching US$ 2,018 million in 2020, before stabilizing with a slight increase to US$ 2,064 million in 2021.
- Comparative Analysis of Operational vs. Net Profitability
- A widening gap between NOPAT and net income is observable starting in 2018. In 2017, the two figures were nearly identical; however, by 2020, NOPAT exceeded net income by US$ 522 million. This variance indicates that the decline in net income during the 2018-2020 period was driven more by non-operating factors—such as interest expenses, tax adjustments, or non-operating losses—rather than a deterioration in the core operating business.
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Cash Operating Taxes
Waste Management Inc., cash operating taxes calculation
US$ in millions
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
An analysis of tax expenditures from 2017 to 2021 reveals a divergent relationship between accounting-based income tax expenses and actual cash operating taxes, with a significant volatility peak occurring in the final year of the period.
- Cash Operating Taxes Trend
- A consistent downward trajectory is observed from 2017 through 2020, with cash operating taxes decreasing from 626 million US$ to a period low of 324 million US$. This represents a reduction of approximately 48% over four years. However, this trend reversed sharply in 2021, where cash operating taxes surged to 689 million US$, the highest value recorded in the five-year sequence.
- Income Tax Expense Pattern
- Income tax expense exhibited higher volatility in the early stages of the period, nearly doubling between 2017 and 2018, rising from 242 million US$ to 453 million US$. Following this spike, the expense remained relatively stable, experiencing slight declines in 2019 and 2020 before increasing to a peak of 532 million US$ in 2021.
- Comparative Variance and EVA Implications
- For the purposes of Economic Value Added (EVA) calculations, the variance between cash operating taxes and income tax expense is critical. From 2017 to 2020, cash operating taxes were frequently higher than the reported income tax expense, though the gap narrowed significantly by 2020. In 2021, a substantial divergence emerged, with cash operating taxes exceeding income tax expenses by 157 million US$, indicating a higher immediate cash outflow for taxes relative to the accounting expense recognized on the income statement.
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Invested Capital
Waste Management Inc., invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
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 revenues.
5 Addition of equity equivalents to total Waste Management, Inc. stockholders’ equity.
6 Removal of accumulated other comprehensive income.
7 Subtraction of available-for-sale securities.
Invested capital exhibited a sustained upward trajectory from 2017 through 2020, peaking at 23,729 million US$ before experiencing a slight contraction in 2021. The overall growth in the capital base was primarily driven by an increase in leveraged financing, with a notable acceleration in debt accumulation occurring between 2018 and 2019.
- Total Reported Debt and Leases
- A significant escalation in debt and lease obligations is observed, particularly between 2018 and 2019, where the balance rose from 10,518 million US$ to 13,943 million US$. This represents the most substantial single-year increase in the capital structure. Following a peak in 2020 at 14,326 million US$, a modest reduction to 13,928 million US$ was recorded by the end of 2021.
- Stockholders' Equity
- Equity increased steadily from 6,019 million US$ in 2017 to a peak of 7,452 million US$ in 2020. This growth indicates a consistent increase in the book value of equity over a four-year period, followed by a moderate decline to 7,124 million US$ in 2021, aligning with the broader trend of capital reduction seen in the final year of the period.
- Invested Capital Dynamics
- The total invested capital expanded from 17,686 million US$ in 2017 to 22,932 million US$ in 2021. The most aggressive expansion occurred in 2019, coinciding with the sharp rise in debt obligations. The subsequent decline in 2021 suggests a shift toward capital optimization or debt repayment, as both debt and equity balances decreased simultaneously.
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Cost of Capital
Waste Management Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 59,153) | 59,153) | ÷ | 73,776) | = | 0.80 | 0.80 | × | 15.38% | = | 12.33% | ||
| Debt3 | 14,100) | 14,100) | ÷ | 73,776) | = | 0.19 | 0.19 | × | 2.46% × (1 – 21.00%) | = | 0.37% | ||
| Operating lease liability4 | 523) | 523) | ÷ | 73,776) | = | 0.01 | 0.01 | × | 2.80% × (1 – 21.00%) | = | 0.02% | ||
| Total: | 73,776) | 1.00 | 12.72% | ||||||||||
Based on: 10-K (reporting date: 2021-12-31).
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 | 46,784) | 46,784) | ÷ | 62,500) | = | 0.75 | 0.75 | × | 15.38% | = | 11.51% | ||
| Debt3 | 15,200) | 15,200) | ÷ | 62,500) | = | 0.24 | 0.24 | × | 2.67% × (1 – 21.00%) | = | 0.51% | ||
| Operating lease liability4 | 516) | 516) | ÷ | 62,500) | = | 0.01 | 0.01 | × | 2.90% × (1 – 21.00%) | = | 0.02% | ||
| Total: | 62,500) | 1.00 | 12.04% | ||||||||||
Based on: 10-K (reporting date: 2020-12-31).
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 | 52,762) | 52,762) | ÷ | 67,707) | = | 0.78 | 0.78 | × | 15.38% | = | 11.98% | ||
| Debt3 | 14,500) | 14,500) | ÷ | 67,707) | = | 0.21 | 0.21 | × | 3.61% × (1 – 21.00%) | = | 0.61% | ||
| Operating lease liability4 | 445) | 445) | ÷ | 67,707) | = | 0.01 | 0.01 | × | 3.50% × (1 – 21.00%) | = | 0.02% | ||
| Total: | 67,707) | 1.00 | 12.61% | ||||||||||
Based on: 10-K (reporting date: 2019-12-31).
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 | 41,886) | 41,886) | ÷ | 52,479) | = | 0.80 | 0.80 | × | 15.38% | = | 12.27% | ||
| Debt3 | 10,100) | 10,100) | ÷ | 52,479) | = | 0.19 | 0.19 | × | 4.06% × (1 – 21.00%) | = | 0.62% | ||
| Operating lease liability4 | 492) | 492) | ÷ | 52,479) | = | 0.01 | 0.01 | × | 4.06% × (1 – 21.00%) | = | 0.03% | ||
| Total: | 52,479) | 1.00 | 12.92% | ||||||||||
Based on: 10-K (reporting date: 2018-12-31).
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 | 36,437) | 36,437) | ÷ | 46,822) | = | 0.78 | 0.78 | × | 15.38% | = | 11.97% | ||
| Debt3 | 9,900) | 9,900) | ÷ | 46,822) | = | 0.21 | 0.21 | × | 3.84% × (1 – 35.00%) | = | 0.53% | ||
| Operating lease liability4 | 485) | 485) | ÷ | 46,822) | = | 0.01 | 0.01 | × | 3.84% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 46,822) | 1.00 | 12.52% | ||||||||||
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 »
Economic Spread Ratio
Waste Management Inc., economic spread ratio calculation
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2021 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -852 ÷ 22,932 = -3.72%
The financial performance concerning economic value added demonstrates a consistent period of negative economic profit and a deteriorating economic spread ratio between 2017 and 2021.
- Economic Profit Trends
- Economic profit remained negative throughout the five-year observation period. Following a moderate recovery in 2018, where losses narrowed to 96 million US$, a significant decline occurred in 2019, with losses expanding to 736 million US$. This downward trajectory persisted through 2021, reaching a period low of 852 million US$.
- Invested Capital Dynamics
- Invested capital exhibited a general growth trend, increasing from 17,686 million US$ in 2017 to a peak of 23,729 million US$ in 2020. A slight contraction was observed in 2021, with capital decreasing to 22,932 million US$. The most substantial increase in invested capital occurred between 2018 and 2019, which corresponds with the period of most significant decline in economic profit.
- Economic Spread Ratio Analysis
- The economic spread ratio remained negative for the entire duration, indicating that the return on invested capital did not exceed the cost of capital. While the ratio improved from -1.49% in 2017 to -0.52% in 2018, it deteriorated sharply to -3.25% in 2019. This negative trend continued through 2020 and 2021, concluding at -3.72%, reflecting a widening gap between the actual return and the required cost of capital.
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Economic Profit Margin
Waste Management Inc., economic profit margin calculation
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 Economic profit. See details »
2 2021 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted operating revenues
= 100 × -852 ÷ 17,963 = -4.75%
An analysis of the financial performance from 2017 to 2021 reveals a consistent trend of negative economic profit, indicating that the company did not generate returns sufficient to cover its cost of capital throughout the period. While operating revenues grew, the economic profit margin experienced significant volatility and remained in negative territory, signifying sustained value destruction relative to the invested capital.
- Economic Profit Trends
- Absolute economic profit remained negative for all five years. A peak in performance occurred in 2018, where the deficit narrowed to -96 million USD. However, a sharp deterioration followed in 2019, with the economic profit dropping to -736 million USD. This downward trend continued through 2020 and 2021, with losses widening to -840 million USD and -852 million USD, respectively.
- Adjusted Operating Revenues
- Revenue growth followed a generally positive trajectory, rising from 14,495 million USD in 2017 to 17,963 million USD by 2021. A slight contraction was observed in 2020, when revenues dipped to 15,223 million USD, but this was followed by a substantial increase in 2021, representing the highest revenue figure in the analyzed period.
- Economic Profit Margin Analysis
- The economic profit margin reflected the company's inability to convert revenue growth into economic value. The margin improved from -1.81% in 2017 to -0.64% in 2018, marking the most efficient point of the period. Subsequently, the margin declined sharply to -4.76% in 2019 and reached a low of -5.52% in 2020. In 2021, the margin slightly recovered to -4.75%, although this improvement occurred despite the significant increase in total operating revenues.
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