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
Paycom Software Inc., economic profit calculation
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 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).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2022 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 297,371 – 21.62% × 1,478,485 = -22,344
The financial trajectory between 2018 and 2022 reveals a transition from positive economic value creation to a period of sustained economic value destruction. While operating profits have increased over the long term, the scale of invested capital has expanded at a rate that exceeds the growth in returns, leading to a decline in economic profit.
- Net Operating Profit After Taxes (NOPAT)
- An overall upward trend is observed in NOPAT, which grew from 172,096 thousand dollars in 2018 to 297,371 thousand dollars in 2022. A notable contraction occurred in 2020, where profit dipped to 176,158 thousand dollars, before recovering strongly in the subsequent two years.
- Invested Capital
- There is a consistent and aggressive increase in invested capital throughout the analyzed period. Capital deployment grew from 522,609 thousand dollars in 2018 to 1,478,485 thousand dollars by 2022, representing a nearly threefold increase in the capital base.
- Cost of Capital
- The cost of capital remained remarkably stable, fluctuating minimally between 21.58% and 21.65%. This stability indicates that the threshold for achieving a positive economic profit remained constant throughout the five-year period.
- Economic Profit
- A significant reversal in economic profit is evident. The period began with a positive economic profit of 59,342 thousand dollars in 2018, which remained relatively stable in 2019. However, the metric turned negative in 2020 and continued to deteriorate, reaching -22,344 thousand dollars by 2022. This trend indicates that the returns generated by the expanded capital base are insufficient to cover the associated cost of capital.
The divergence between the growth of NOPAT and the growth of invested capital explains the erosion of economic profit. Although the company is generating higher absolute profits, the return on invested capital has fallen below the 21.6% cost of capital threshold, resulting in a loss of economic value for shareholders from 2020 onward.
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Net Operating Profit after Taxes (NOPAT)
Paycom Software Inc., NOPAT calculation
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 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).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in deferred revenue.
3 Addition of increase (decrease) in equity equivalents to net income.
4 2022 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 41,012 × 3.70% = 1,517
5 2022 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 4,053 × 21.00% = 851
6 Addition of after taxes interest expense to net income.
The financial performance from 2018 to 2022 is characterized by an overall upward trajectory in both Net Income and Net Operating Profit After Taxes (NOPAT), despite a synchronized contraction in 2020. The convergence of these two metrics toward the end of the period indicates a shifting relationship between operating performance and bottom-line earnings.
- NOPAT Growth Trends
- NOPAT exhibited a compound growth pattern, rising from 172,096 thousand USD in 2018 to 297,371 thousand USD by 2022. A significant increase was noted between 2018 and 2019, followed by an 17.9% decline in 2020. A strong recovery occurred in 2021, with NOPAT increasing by approximately 38.7%, and continuing to grow by 21.8% in 2022.
- Comparative Analysis of Net Income and NOPAT
- Throughout the observed period, NOPAT remained consistently higher than Net Income. This gap suggests that the adjustments used to determine operating profit—such as the add-back of after-tax interest expenses—consistently enhanced the operating profit figure relative to the final net profit. The variance between the two metrics was most pronounced in 2018 and 2021, while 2022 showed the narrowest margin, suggesting that operating results and net earnings reached a higher level of alignment.
- Profitability Volatility
- Both metrics experienced a notable dip in 2020, with Net Income falling by approximately 20.6% and NOPAT falling by 17.9%. However, the subsequent rebound in 2021 and 2022 surpassed pre-2020 levels, with Net Income achieving its most aggressive annual growth rate of 43.6% in the final year of the analysis.
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Cash Operating Taxes
Paycom Software Inc., cash operating taxes calculation
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 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).
The financial trajectory from 2018 to 2022 indicates a significant escalation in tax-related expenditures, characterized by a pronounced surge in the final year of the observed period.
- Provision for Income Taxes
- A general upward trajectory is observed, with the provision rising from 37,646 thousand USD in 2018 to 108,189 thousand USD in 2022. Although a slight contraction occurred in 2020, the subsequent growth accelerated sharply between 2021 and 2022, resulting in a year-over-year increase of approximately 80%.
- Cash Operating Taxes
- Cash tax outflows exhibited moderate fluctuations between 2018 and 2021, ranging from 16,816 thousand USD to 27,310 thousand USD. A substantial spike is recorded in 2022, where payments reached 112,250 thousand USD, representing a more than fourfold increase compared to the previous year.
- Relationship Between Provisions and Cash Outflows
- Between 2018 and 2021, cash operating taxes remained consistently lower than the provision for income taxes. This pattern diverged in 2022, when cash operating taxes exceeded the provision for the first time. This shift suggests a significant realignment of tax obligations, potentially due to the settlement of deferred tax liabilities or changes in tax jurisdiction requirements.
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Invested Capital
Paycom Software Inc., invested capital calculation (financing approach)
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 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).
1 Addition of capitalized operating leases.
2 Elimination of deferred taxes from assets and liabilities. See details »
3 Addition of deferred revenue.
4 Addition of equity equivalents to stockholders’ equity.
5 Removal of accumulated other comprehensive income.
6 Subtraction of construction in progress.
Invested capital exhibited a consistent and significant upward trajectory between 2018 and 2022, increasing from 522,609 thousand US$ to 1,478,485 thousand US$. This represents a substantial expansion of the capital base utilized to generate economic value over the five-year period.
- Growth in Stockholders' Equity
- The primary driver of the increase in invested capital is the aggressive growth in stockholders' equity. Equity rose steadily from 334,753 thousand US$ in 2018 to 1,182,607 thousand US$ by the end of 2022. This consistent expansion indicates a strong reliance on retained earnings or equity financing to fund the company's operational growth.
- Debt and Lease Obligations
- In contrast to the equity growth, total reported debt and leases remained relatively stagnant. Obligations fluctuated minimally, starting at 61,588 thousand US$ in 2018, dipping to 58,790 thousand US$ in 2020, and ending at 70,012 thousand US$ in 2022. The marginal change in debt levels suggests a low-leverage strategy during this period of capital expansion.
- Capital Composition and Trends
- The composition of invested capital shifted heavily toward equity funding. While debt remained a negligible component of the total capital structure, the overall invested capital grew by approximately 183% over the analyzed period. This indicates that the company scaled its investment base primarily through internal accruals or equity injections rather than through credit markets.
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Cost of Capital
Paycom Software Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 17,792,735) | 17,792,735) | ÷ | 17,862,747) | = | 1.00 | 1.00 | × | 21.70% | = | 21.61% | ||
| Long-term debt3 | 29,000) | 29,000) | ÷ | 17,862,747) | = | 0.00 | 0.00 | × | 3.70% × (1 – 21.00%) | = | 0.00% | ||
| Operating lease liability4 | 41,012) | 41,012) | ÷ | 17,862,747) | = | 0.00 | 0.00 | × | 3.70% × (1 – 21.00%) | = | 0.01% | ||
| Total: | 17,862,747) | 1.00 | 21.62% | ||||||||||
Based on: 10-K (reporting date: 2022-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 19,012,528) | 19,012,528) | ÷ | 19,072,595) | = | 1.00 | 1.00 | × | 21.70% | = | 21.63% | ||
| Long-term debt3 | 29,155) | 29,155) | ÷ | 19,072,595) | = | 0.00 | 0.00 | × | 3.30% × (1 – 21.00%) | = | 0.00% | ||
| Operating lease liability4 | 30,912) | 30,912) | ÷ | 19,072,595) | = | 0.00 | 0.00 | × | 3.30% × (1 – 21.00%) | = | 0.00% | ||
| Total: | 19,072,595) | 1.00 | 21.64% | ||||||||||
Based on: 10-K (reporting date: 2021-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 23,185,491) | 23,185,491) | ÷ | 23,244,281) | = | 1.00 | 1.00 | × | 21.70% | = | 21.64% | ||
| Long-term debt3 | 30,894) | 30,894) | ÷ | 23,244,281) | = | 0.00 | 0.00 | × | 3.30% × (1 – 21.00%) | = | 0.00% | ||
| Operating lease liability4 | 27,896) | 27,896) | ÷ | 23,244,281) | = | 0.00 | 0.00 | × | 3.30% × (1 – 21.00%) | = | 0.00% | ||
| Total: | 23,244,281) | 1.00 | 21.65% | ||||||||||
Based on: 10-K (reporting date: 2020-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 17,488,062) | 17,488,062) | ÷ | 17,549,380) | = | 1.00 | 1.00 | × | 21.70% | = | 21.62% | ||
| Long-term debt3 | 32,633) | 32,633) | ÷ | 17,549,380) | = | 0.00 | 0.00 | × | 3.90% × (1 – 21.00%) | = | 0.01% | ||
| Operating lease liability4 | 28,685) | 28,685) | ÷ | 17,549,380) | = | 0.00 | 0.00 | × | 3.90% × (1 – 21.00%) | = | 0.01% | ||
| Total: | 17,549,380) | 1.00 | 21.63% | ||||||||||
Based on: 10-K (reporting date: 2019-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 10,217,070) | 10,217,070) | ÷ | 10,278,658) | = | 0.99 | 0.99 | × | 21.70% | = | 21.57% | ||
| Long-term debt3 | 34,389) | 34,389) | ÷ | 10,278,658) | = | 0.00 | 0.00 | × | 1.50% × (1 – 21.00%) | = | 0.00% | ||
| Operating lease liability4 | 27,199) | 27,199) | ÷ | 10,278,658) | = | 0.00 | 0.00 | × | 1.50% × (1 – 21.00%) | = | 0.00% | ||
| Total: | 10,278,658) | 1.00 | 21.58% | ||||||||||
Based on: 10-K (reporting date: 2018-12-31).
1 US$ in thousands
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Paycom Software Inc., economic spread ratio calculation
Based on: 10-K (reporting date: 2022-12-31), 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).
1 Economic profit. See details »
2 Invested capital. See details »
3 2022 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -22,344 ÷ 1,478,485 = -1.51%
An analysis of the financial metrics reveals a transition from value creation to value destruction over the five-year period ending December 31, 2022. The period is characterized by a significant expansion of the capital base that has not been matched by proportional increases in returns, leading to a deterioration of economic performance.
- Economic Spread Ratio
- A sharp downward trend is observed in the economic spread ratio, which declined from 11.36% in 2018 to -1.51% in 2022. The ratio shifted into negative territory in 2020, signaling that the return on invested capital fell below the company's cost of capital. This negative spread persisted through 2021 and 2022, indicating a sustained failure to generate returns above the required threshold.
- Invested Capital
- Invested capital grew consistently and aggressively throughout the analyzed period. Starting at US$ 522,609 thousand in 2018, the capital base increased to US$ 1,478,485 thousand by 2022. This substantial increase in the amount of capital deployed suggests a period of heavy investment or expansion.
- Economic Profit
- Economic profit mirrored the decline of the spread ratio, moving from a positive US$ 59,342 thousand in 2018 to a deficit of US$ 22,344 thousand in 2022. The transition to negative economic profit in 2020 demonstrates that the company began destroying shareholder value during this time, as the earnings generated were insufficient to cover the cost of the capital employed.
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Economic Profit Margin
Paycom Software Inc., economic profit margin calculation
Based on: 10-K (reporting date: 2022-12-31), 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).
1 Economic profit. See details »
2 2022 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted revenues
= 100 × -22,344 ÷ 1,391,208 = -1.61%
A significant divergence is observed between revenue growth and economic value creation over the five-year period from 2018 to 2022. While top-line growth remained consistently strong, the capacity to generate economic profit deteriorated, shifting from a state of value creation to sustained value destruction.
- Economic Profit Performance
- Economic profit experienced a severe decline, starting at 59,342 thousand USD in 2018 and falling to a deficit of 22,344 thousand USD by 2022. The most critical inflection point occurred between 2019 and 2020, when economic profit transitioned from a positive 58,154 thousand USD to a negative 10,036 thousand USD, with the deficit widening progressively in each subsequent year.
- Adjusted Revenue Trajectory
- Adjusted revenues exhibited a robust and uninterrupted upward trajectory, increasing from 579,363 thousand USD in 2018 to 1,391,208 thousand USD in 2022. This represents a substantial expansion in the scale of operations, more than doubling the revenue base over the analyzed period.
- Economic Profit Margin Analysis
- The economic profit margin mirrored the decline in absolute economic profit, falling from 10.24% in 2018 to -1.61% in 2022. The margin contraction from 10.24% to 7.76% in 2019 preceded a sharp drop into negative territory in 2020 (-1.18%), followed by further erosion to -1.22% in 2021 and -1.61% in 2022. This trend indicates that the returns on invested capital failed to cover the cost of capital, despite the rapid increase in adjusted revenues.
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