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
Reynolds American Inc., economic profit calculation
US$ in millions
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2016 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 6,935 – 9.13% × 44,972 = 2,827
The financial performance between 2012 and 2016 is characterized by significant volatility in economic profit, driven primarily by a substantial expansion of the capital base in 2015 and a subsequent surge in operating profitability in 2016.
- Net Operating Profit After Taxes (NOPAT)
- A general upward trajectory in NOPAT is observed, growing from 1,384 million USD in 2012 to 6,935 million USD by 2016. While a temporary decline occurred in 2014, the most notable increase occurred between 2015 and 2016, where NOPAT more than doubled, indicating a significant improvement in operational efficiency or scale.
- Invested Capital and Cost of Capital
- Invested capital remained relatively stable between 2012 and 2014, averaging approximately 10 billion USD. However, a dramatic increase is noted in 2015, with invested capital rising to 45,105 million USD, a level that remained consistent through 2016. During this same period, the cost of capital exhibited minimal fluctuation, remaining within a tight range between 8.63% and 9.20%.
- Economic Profit and Value Creation
- Economic profit showed inconsistent patterns, reflecting the relationship between operational returns and the cost of capital. Positive economic profit was maintained from 2012 to 2014, peaking in 2013 at 1,285 million USD. In 2015, economic profit turned negative to -979 million USD, as the surge in invested capital outweighed the growth in NOPAT, resulting in temporary value destruction. This trend reversed sharply in 2016, with economic profit rising to 2,827 million USD, signaling that the expanded capital base began generating returns well in excess of its cost.
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Net Operating Profit after Taxes (NOPAT)
Reynolds American Inc., NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in LIFO reserve. See details »
3 Addition of increase (decrease) in deferred revenue, related party.
4 Addition of increase (decrease) in equity equivalents to net income.
5 2016 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 25 × 5.00% = 1
6 2016 Calculation
Tax benefit of interest and debt expense = Adjusted interest and debt expense × Statutory income tax rate
= 627 × 35.00% = 220
7 Addition of after taxes interest expense to net income.
8 2016 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= -16 × 35.00% = -6
9 Elimination of after taxes investment income.
10 Elimination of discontinued operations.
- Net Income
- Net income exhibited a positive trend over the five-year period. Starting at 1,272 million US dollars in 2012, it increased to 1,718 million US dollars in 2013, representing a strong growth. A decline occurred in 2014 to 1,470 million US dollars, followed by a substantial rise in 2015 to 3,253 million US dollars. The upward momentum continued sharply in 2016, reaching 6,073 million US dollars. Overall, this reflects significant growth with some volatility, especially the strong rebound after 2014.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT values followed a pattern similar to net income but with greater relative fluctuations. Beginning at 1,384 million US dollars in 2012, NOPAT increased notably to 2,217 million US dollars in 2013. It then declined to 1,432 million US dollars in 2014, mirroring the dip in net income. A strong recovery was observed in 2015, with NOPAT more than doubling from the prior year to 2,912 million US dollars. This trend continued with an even sharper increase to 6,935 million US dollars in 2016, surpassing the net income growth rate during the same period. This indicates improving operational efficiency or profitability after taxes, especially in the later years.
- Overall Analysis
- Both net income and NOPAT demonstrated significant growth between 2012 and 2016, with a noticeable dip in 2014 followed by rapid recovery and acceleration in the subsequent years. The company's profitability, both at the net income level and operational profit after tax level, suggests effective management of operations and potentially enhanced revenue streams or cost efficiencies post-2014. The sharper rise in NOPAT compared to net income in 2015 and 2016 may indicate improved operational performance relative to other income components such as non-operating expenses or taxes. These patterns imply a strong financial performance trajectory in the latter part of the analyzed period.
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Cash Operating Taxes
Reynolds American Inc., cash operating taxes calculation
US$ in millions
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
- Provision for income taxes
- The provision for income taxes exhibited an overall increasing trend from 2012 to 2016. The value rose notably from 681 million in 2012 to 1023 million in 2013, indicating a significant increase early in the period. However, in 2014, the provision decreased to 817 million, signaling a temporary decline. Subsequently, there was a sharp and substantial increase to 3131 million in 2015, followed by a further increase to 3618 million in 2016. This pattern suggests a considerable rise in tax liability or changes in tax provision accounting during the latter years.
- Cash operating taxes
- Cash operating taxes showed some fluctuations but generally increased over the five-year span. Starting at 805 million in 2012, the amount remained relatively stable at 801 million in 2013. It rose to 1096 million in 2014, marking the beginning of a more pronounced increase. In 2015, cash operating taxes surged dramatically to 3988 million, representing a significant outflow compared to prior years. However, there was a decline to 3456 million in 2016, indicating some reduction in cash taxes paid, though still well above earlier period levels. This suggests modifications in operational cash tax payments or timing differences.
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Invested Capital
Reynolds American Inc., invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 Addition of capitalized operating leases.
2 Elimination of deferred taxes from assets and liabilities. See details »
3 Addition of LIFO reserve. See details »
4 Addition of deferred revenue, related party.
5 Addition of equity equivalents to shareholders’ equity.
6 Removal of accumulated other comprehensive income.
7 Subtraction of construction-in-process.
8 Subtraction of marketable securities.
- Total reported debt & leases
-
The total reported debt and leases remained relatively stable between 2012 and 2014, with values hovering slightly above 5,100 million US dollars. However, there was a significant increase in 2015, where the figure more than tripled to 17,473 million US dollars. This substantial rise was followed by a decline in 2016 to 13,190 million US dollars, though the amount remained considerably higher than in the initial three years.
- Shareholders’ equity
-
Shareholders’ equity displayed a slight downward trend from 2012 to 2014, decreasing from 5,257 million US dollars to 4,522 million US dollars. In 2015, it experienced a substantial increase to 18,252 million US dollars, continuing to rise in 2016 to 21,711 million US dollars. This growth mirrors the pattern seen in total reported debt but extends to an even higher level by the end of the period.
- Invested capital
-
Invested capital remained relatively constant and stable from 2012 through 2014, with values just below and around the 10,000 million US dollars mark. There was a marked escalation in 2015 to 45,105 million US dollars, sustaining a similar level in 2016 at 44,972 million US dollars. This sharp increase corresponds with the shifts in both debt and equity, indicating a considerable expansion in the company's capital base during this period.
- Overall Analysis
-
The financial data reveals a period of relative stability from 2012 to 2014, followed by a pronounced transformation starting in 2015. Both total reported debt and shareholders’ equity saw massive increases, which drove a nearly fourfold surge in invested capital. Although total debt decreased somewhat in 2016, it remained significantly elevated compared to the earlier years. The simultaneous rise in equity suggests that the company may have undertaken major financing and capital restructuring initiatives during 2015, resulting in a substantial enlargement of its financial structure. This shift likely reflects strategic decisions impacting the capital composition, potentially involving acquisitions, capital infusion, or other large-scale financial activities.
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Cost of Capital
Reynolds American Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 86,326) | 86,326) | ÷ | 100,651) | = | 0.86 | 0.86 | × | 10.11% | = | 8.67% | ||
| Long-term debt3 | 14,300) | 14,300) | ÷ | 100,651) | = | 0.14 | 0.14 | × | 5.00% × (1 – 35.00%) | = | 0.46% | ||
| Operating lease liability4 | 25) | 25) | ÷ | 100,651) | = | 0.00 | 0.00 | × | 5.00% × (1 – 35.00%) | = | 0.00% | ||
| Total: | 100,651) | 1.00 | 9.13% | ||||||||||
Based on: 10-K (reporting date: 2016-12-31).
1 US$ in millions
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 | 69,226) | 69,226) | ÷ | 87,452) | = | 0.79 | 0.79 | × | 10.11% | = | 8.00% | ||
| Long-term debt3 | 18,200) | 18,200) | ÷ | 87,452) | = | 0.21 | 0.21 | × | 4.60% × (1 – 35.00%) | = | 0.62% | ||
| Operating lease liability4 | 26) | 26) | ÷ | 87,452) | = | 0.00 | 0.00 | × | 4.60% × (1 – 35.00%) | = | 0.00% | ||
| Total: | 87,452) | 1.00 | 8.63% | ||||||||||
Based on: 10-K (reporting date: 2015-12-31).
1 US$ in millions
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 | 37,349) | 37,349) | ÷ | 42,777) | = | 0.87 | 0.87 | × | 10.11% | = | 8.83% | ||
| Long-term debt3 | 5,400) | 5,400) | ÷ | 42,777) | = | 0.13 | 0.13 | × | 4.50% × (1 – 35.00%) | = | 0.37% | ||
| Operating lease liability4 | 28) | 28) | ÷ | 42,777) | = | 0.00 | 0.00 | × | 4.50% × (1 – 35.00%) | = | 0.00% | ||
| Total: | 42,777) | 1.00 | 9.20% | ||||||||||
Based on: 10-K (reporting date: 2014-12-31).
1 US$ in millions
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 | 25,816) | 25,816) | ÷ | 31,078) | = | 0.83 | 0.83 | × | 10.11% | = | 8.40% | ||
| Long-term debt3 | 5,200) | 5,200) | ÷ | 31,078) | = | 0.17 | 0.17 | × | 4.50% × (1 – 35.00%) | = | 0.49% | ||
| Operating lease liability4 | 61) | 61) | ÷ | 31,078) | = | 0.00 | 0.00 | × | 4.50% × (1 – 35.00%) | = | 0.01% | ||
| Total: | 31,078) | 1.00 | 8.89% | ||||||||||
Based on: 10-K (reporting date: 2013-12-31).
1 US$ in millions
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 | 24,297) | 24,297) | ÷ | 29,855) | = | 0.81 | 0.81 | × | 10.11% | = | 8.23% | ||
| Long-term debt3 | 5,500) | 5,500) | ÷ | 29,855) | = | 0.18 | 0.18 | × | 4.70% × (1 – 35.00%) | = | 0.56% | ||
| Operating lease liability4 | 58) | 58) | ÷ | 29,855) | = | 0.00 | 0.00 | × | 4.70% × (1 – 35.00%) | = | 0.01% | ||
| Total: | 29,855) | 1.00 | 8.80% | ||||||||||
Based on: 10-K (reporting date: 2012-12-31).
1 US$ in millions
2 Equity. See details »
3 Long-term debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Reynolds American Inc., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | 2,827) | (979) | 537) | 1,285) | 472) | |
| Invested capital2 | 44,972) | 45,105) | 9,728) | 10,479) | 10,375) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | 6.29% | -2.17% | 5.52% | 12.26% | 4.55% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2016 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × 2,827 ÷ 44,972 = 6.29%
4 Click competitor name to see calculations.
The financial trajectory between 2012 and 2016 is characterized by significant volatility in value creation and a substantial expansion of the capital base during the 2015 fiscal year.
- Economic Profit Trends
- Economic profit exhibited inconsistent movement, increasing from 472 million USD in 2012 to 1.285 billion USD in 2013, before retreating to 537 million USD in 2014. A notable deficit of 979 million USD was recorded in 2015, marking a period of economic value destruction. However, a strong recovery occurred in 2016, with economic profit reaching a period peak of 2.827 billion USD.
- Invested Capital Dynamics
- Invested capital remained relatively stable from 2012 through 2014, fluctuating within the 9.7 billion to 10.5 billion USD range. A massive escalation occurred in 2015, with invested capital surging to 45.105 billion USD, representing a nearly 4.6-fold increase. This expanded capital base remained consistent into 2016 at 44.972 billion USD.
- Economic Spread Ratio Analysis
- The economic spread ratio peaked at 12.26% in 2013, indicating high efficiency in generating returns above the cost of capital. This ratio declined to 5.52% in 2014 and turned negative in 2015 at -2.17%, coinciding with the surge in invested capital. The negative spread in 2015 suggests that the immediate returns on the expanded capital base were insufficient to cover the cost of that capital. By 2016, the ratio returned to a positive 6.29%, signaling that the substantial investment began generating positive economic value.
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Economic Profit Margin
Reynolds American Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | 2,827) | (979) | 537) | 1,285) | 472) | |
| Net sales, includes excise taxes | 16,846) | 14,884) | 12,096) | 11,966) | 12,227) | |
| Add: Increase (decrease) in deferred revenue, related party | 72) | 1) | (16) | 6) | —) | |
| Adjusted net sales, includes excise taxes | 16,918) | 14,885) | 12,080) | 11,972) | 12,227) | |
| Performance Ratio | ||||||
| Economic profit margin2 | 16.71% | -6.57% | 4.44% | 10.73% | 3.86% | |
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 Economic profit. See details »
2 2016 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted net sales, includes excise taxes
= 100 × 2,827 ÷ 16,918 = 16.71%
3 Click competitor name to see calculations.
The economic performance from 2012 to 2016 is characterized by significant volatility in value creation, despite a general upward trend in adjusted net sales. The relationship between revenue growth and economic profit suggests varying levels of efficiency in generating returns above the cost of capital over the five-year period.
- Economic Profit Trends
- Absolute economic profit exhibited substantial fluctuations, starting at 472 million USD in 2012 and peaking initially at 1,285 million USD in 2013. A subsequent decline occurred in 2014, followed by a sharp contraction in 2015, where economic profit fell to a deficit of 979 million USD. This negative trend was reversed in 2016 with a significant recovery, resulting in a peak value of 2,827 million USD.
- Economic Profit Margin Analysis
- The economic profit margin followed a similar volatile trajectory, rising from 3.86% in 2012 to 10.73% in 2013. A downward trend ensued, with the margin dropping to 4.44% in 2014 and reaching a low of -6.57% in 2015. The period concluded with a strong expansion in 2016, where the margin reached 16.71%, indicating a marked improvement in the ability to generate economic value relative to sales.
- Divergence Between Sales and Profitability
- A notable divergence is observed between 2014 and 2015. During this interval, adjusted net sales increased from 12,080 million USD to 14,885 million USD, yet the economic profit margin transitioned from positive to negative. This indicates that the growth in sales during this specific timeframe was not sufficient to cover the cost of capital employed. However, by 2016, the growth in sales to 16,918 million USD aligned with a substantial increase in economic profit, suggesting a restoration of operational efficiency and value creation.
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