NOPAT is the total amount of operating profit of a company after the reduction of tax while net income is the remains of the net earnings of a company from Gross Profit after the decline of all interest, taxes, expenses, and preferred stock dividend. Companies use the net income to judge their performance while NOPAT makes comparisons between firms. Companies use NOPAT as a better measure of its performance operations because if in debt the net income decreases and vice versa (Surbhi, 2015). Also, NOPAT does not include the tax savings as they have existing debt in most companies, and to calculate the operating performance of the company, one has to remove the debt of the company.
The Economic Value Added is a measure of the financial performance of a company based on the residual wealth. Companies calculate EVA by deducting the company’s capital cost from its operating profit. Basically, it is the difference between costs and revenues, for the costs, one includes both the expenses and the cost of capital. Monsanto NOPAT was 2,588, cost of capital at 12. 17%, and the invested capital was 16,366. EVA= NOPAT-Cost of capital * Invested capital, therefore, EVA= 2,588 – 12.17% * 16,366 = 596 (Monsanto Co).
Delegate your assignment to our experts and they will do the rest.
Based on Monsanto Co.’ annual report, the EVA amount reduced from (221) in 2015 to (52) in 2016 but from 2016 to 2017 it increased passing the 2015 level. The 2017 EVA from the calculation is 596. Companies use EVA as an indicator of the projects undertaken profitability. It is believed that real profitability occurs when the projects that the company took create returns that surpasses their cost of capital (Monsanto Co).
Some financial analysts believe that if a company has no debt, then it is in a good position financially. However, for some business having debt is not ominous, the interest payments that a company makes on certain loan repayments, the borrower may claim it as a tax deduction on his/her federal income tax return. Monsanto should borrow more money because the option of giving up equity becomes more costly in the long run than taking on debt. The company will incur high debt interests’ payments when repaying the original which is the reason businesses avoid borrowing money (Lifshitz, 2018). However, the company needs to note that the interest payments unlike on equity money they will be temporary and usually covered after the business picks up.
Moreover, if Monsanto pays its interest on the debt, there is a high chance of reducing the company’s tax burden. The cost of interests reduces the company’s taxable profit, therefore, in the long run, it also reduces the tax expense. This situation happens because the compelling interest the company is paying is lower than the nominal interest (Lifshitz, 2018). Therefore, Monsanto should consider the benefit of lower cost of capital on the returns when deciding whether to take on debt. Most leveraged firms use this strategy of debt to improve their finances and rake in the money (Lifshitz, 2018). However, the company should take on borrowing as opted for selling equity as a way of financing its business growth. Debt gives the company the benefit of lower taxes, while equity cash, one pays off that equity holder with the business money without giving any benefits to the company. With the competitive environment among businesses, Monsanto should consider borrowing more money as a strategic tool for the growth of the business.
References
Lifshitz, E. (2018). 4 Reasons Why Borrowing Money Is Usually Better Than Giving Up Equity . Retrieved from https://www.entrepreneur.com/article/240191
Monsanto Co. Monsanto Co. (MON). Retrieved from https://www.stock-analysis-on.net/NYSE/Company/Monsanto-Co/Performance-Measure/Economic-Value-Added
Surbhi, S. (2015). Difference between NOPAT and Net Income. Retrieved from https://keydifferences.com/difference-between-nopat-and-net-income.html
