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 – 21.75% × 1,478,485 = -24,143
A critical transition in value creation is observed between 2018 and 2022, characterized by a shift from positive economic profit to consistent value destruction. While operating profitability increased over the period, the rate of capital investment significantly outpaced the growth in net operating profit after taxes, leading to a deteriorating economic profit position.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT exhibited a general upward trajectory, growing from 172,096 thousand US$ in 2018 to 297,371 thousand US$ by 2022. A temporary contraction occurred in 2020, where profit fell to 176,158 thousand US$, before recovering strongly in 2021 and 2022. Despite this growth, the absolute increase in operating profit was insufficient to cover the rising costs of the capital employed.
- Invested Capital and Cost of Capital
- Invested capital grew aggressively and consistently throughout the five-year period, increasing from 522,609 thousand US$ in 2018 to 1,478,485 thousand US$ in 2022. This represents a nearly threefold increase in the capital base. Simultaneously, the cost of capital remained remarkably stable, fluctuating narrowly between 21.70% and 21.77%. The combination of a high, static cost of capital and a rapidly expanding capital base created a substantial and increasing capital charge.
- Economic Profit Performance
- Economic profit moved from a positive position of 58,708 thousand US$ in 2018 to a deficit of 24,143 thousand US$ in 2022. The company ceased creating economic value in 2020, when economic profit first turned negative. The subsequent decline in 2021 and 2022 indicates that the marginal return on new invested capital has fallen below the cost of capital, resulting in an increasing erosion of shareholder value despite the growth in absolute NOPAT.
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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 data reveals notable fluctuations and overall growth in key profitability metrics over the five-year period ending December 31, 2022.
- Net Income
-
Net income exhibited an upward trend, increasing significantly from $137,065 thousand in 2018 to $281,389 thousand in 2022. Despite a dip in 2020, when net income fell to $143,453 thousand from $180,576 thousand in 2019, the subsequent years showed robust recovery and growth, particularly with a substantial rise in 2022 to a new high.
- Net Operating Profit After Taxes (NOPAT)
-
NOPAT followed a similar trajectory to net income but on a generally higher scale. It rose from $172,096 thousand in 2018 to $297,371 thousand in 2022. Although there was a decline in 2020, dropping to $176,158 thousand from $214,806 thousand in 2019, the profit metric rebounded strongly in the following years, reaching the peak in 2022. The increases in NOPAT were more pronounced in magnitude compared to net income, indicating increasing operational efficiency or improved core business profitability.
Overall, the data suggests a company experiencing notable profit growth, with a momentary setback in 2020 likely due to specific operational or market challenges during that year. The recovery and growth in NOPAT and net income in 2021 and 2022 demonstrate improved performance and potentially effective strategic or operational adjustments.
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Cash Operating Taxes
Paycom Software Inc., cash operating taxes calculation
US$ 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).
- Provision for income taxes
- The provision for income taxes showed a general increasing trend from 2018 to 2022. Starting at 37,646 thousand USD in 2018, it increased moderately to 45,511 thousand USD in 2019, then slightly declined to 42,483 thousand USD in 2020. Following this, there was a significant increase to 60,002 thousand USD in 2021, which was further amplified by a substantial rise to 108,189 thousand USD in 2022. This pattern indicates growing income tax obligations over the five-year period, with the most notable escalation occurring in the last two years.
- Cash operating taxes
- Cash operating taxes also exhibited an overall upward trajectory throughout the years analyzed. Initially, it stood at 16,816 thousand USD in 2018 and increased sharply to 24,932 thousand USD in 2019. There was a slight dip in 2020 to 21,299 thousand USD, followed by a recovery to 27,310 thousand USD in 2021. The year 2022 saw a dramatic increase to 112,250 thousand USD, which mirrors the substantial rise observed in the provision for income taxes. This suggests that cash outflows related to operating taxes have grown significantly, particularly in the most recent year.
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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.
- Total Reported Debt & Leases
- The total reported debt and leases exhibited a relatively stable trend from 2018 through 2021, decreasing slightly from 61,588 thousand USD in 2018 to 58,790 thousand USD in 2020, followed by a marginal increase to 60,067 thousand USD in 2021. In 2022, however, there was a noticeable increase to 70,012 thousand USD, marking a significant rise compared to previous years.
- Stockholders’ Equity
- Stockholders’ equity demonstrated a strong upward progression over the five-year period. Beginning at 334,753 thousand USD in 2018, equity more than doubled to 526,628 thousand USD in 2019 and continued to climb to 655,643 thousand USD in 2020. The growth accelerated thereafter, reaching 893,714 thousand USD in 2021 and further increasing to 1,182,607 thousand USD in 2022. This consistent increase indicates substantial equity growth and strengthening of the company’s financial position.
- Invested Capital
- Invested capital showed a continuous and significant rise throughout the entire period. Starting at 522,609 thousand USD in 2018, the invested capital increased by approximately 38.6% to 724,133 thousand USD in 2019 and then continued to expand sharply to 860,024 thousand USD in 2020. The momentum persisted with a considerable jump to 1,189,369 thousand USD in 2021, followed by another substantial increase to 1,478,485 thousand USD in 2022. This trend reflects ongoing investment and expansion activities within the company.
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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 | × | 21.82% | = | 21.73% | ||
| 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 | 21.75% | ||||||||||
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 | × | 21.82% | = | 21.75% | ||
| 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 | 21.76% | ||||||||||
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 | × | 21.82% | = | 21.77% | ||
| 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 | 21.77% | ||||||||||
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 | × | 21.82% | = | 21.74% | ||
| 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 | 21.75% | ||||||||||
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 | × | 21.82% | = | 21.69% | ||
| 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 | 21.70% | ||||||||||
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 × -24,143 ÷ 1,478,485 = -1.63%
The financial performance from 2018 to 2022 reveals a significant divergence between the growth of invested capital and the generation of economic profit. While the capital base expanded aggressively, the company transitioned from a state of value creation to consistent value destruction starting in 2020.
- Economic Profit Trend
- A sharp downward trajectory is observed in economic profit, which declined from US$ 58,708 thousand in 2018 to a deficit of US$ 24,143 thousand by December 31, 2022. The shift to negative values in 2020 indicates that the net operating profit after tax was no longer sufficient to cover the cost of the capital employed.
- Invested Capital Growth
- Invested capital exhibits a consistent and substantial increase throughout the period, rising from US$ 522,609 thousand in 2018 to US$ 1,478,485 thousand in 2022. This represents a near-tripling of the capital base, suggesting significant investment in growth or operational infrastructure.
- Economic Spread Ratio Analysis
- The economic spread ratio shows a severe contraction, falling from 11.23% in 2018 to -1.63% in 2022. The transition into negative territory in 2020 signifies that the return on invested capital fell below the weighted average cost of capital. The continued negative spread through 2022 confirms that the additional capital deployed has not yielded returns exceeding the required cost of that capital.
Overall, the data indicates that while the scale of investment has increased, the efficiency of that capital in generating economic value has deteriorated, resulting in a sustained period of economic value destruction over the latter three years of the analyzed period.
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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 × -24,143 ÷ 1,391,208 = -1.74%
An analysis of the financial performance from 2018 to 2022 reveals a significant divergence between revenue growth and economic value creation. While adjusted revenues experienced consistent and substantial expansion, the company's ability to generate economic profit deteriorated, eventually shifting from positive value creation to value destruction.
- Adjusted Revenue Trends
- Adjusted revenues demonstrated a strong upward trajectory throughout the period, growing from 579,363 thousand US dollars in 2018 to 1,391,208 thousand US dollars by 2022. This represents a consistent year-over-year increase in the scale of operations.
- Economic Profit Trajectory
- Economic profit exhibited a sharp decline and a subsequent transition into negative territory. After peaking at 58,708 thousand US dollars in 2018, the figure decreased slightly in 2019 before falling to -11,084 thousand US dollars in 2020. This downward trend accelerated through 2022, reaching a deficit of -24,143 thousand US dollars.
- Economic Profit Margin Analysis
- The economic profit margin reflects a systemic erosion of value relative to revenue. In 2018, the margin stood at 10.13%, indicating that the company was generating returns well above its cost of capital. This margin contracted to 7.64% in 2019 and collapsed to -1.30% in 2020. The negative margin continued to widen slightly over the following two years, ending at -1.74% in 2022.
The combination of rising revenues and falling economic profit suggests that the cost of capital or the operational investments required to drive revenue growth have exceeded the actual economic returns generated. The transition to a negative economic profit margin indicates that, since 2020, the company has not been creating economic value for its shareholders despite its increasing top-line growth.
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