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
Air Products & Chemicals Inc., economic profit calculation
US$ in thousands
Based on: 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2020 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 2,189,491 – 14.13% × 20,884,500 = -760,788
The analysis of economic performance from 2015 to 2020 reveals a persistent inability to generate positive economic profit, as the cost of capital consistently exceeded the returns generated from the invested capital base.
- Net Operating Profit After Taxes (NOPAT) Trends
- An overall upward trajectory is observed in NOPAT, which grew from 1,418,609 thousand US dollars in 2015 to 2,189,491 thousand US dollars by 2020. Although a notable contraction occurred in 2017, the subsequent recovery was robust, with the most significant growth occurring between 2018 and 2020.
- Invested Capital and Cost of Capital Dynamics
- Invested capital exhibited consistent growth over the analyzed period, increasing from 14,344,261 thousand US dollars in 2015 to 20,884,500 thousand US dollars in 2020. A substantial increase in capital investment is evident in 2020. During this time, the cost of capital remained relatively stable, fluctuating within a narrow range between 13.36% and 15.06%.
- Economic Profit Analysis
- Economic profit remained negative throughout the entire six-year duration, signifying that the business did not create economic value above its cost of funding. The deficit peaked in 2017 at -985,772 thousand US dollars. Despite the growth in NOPAT, the expanded capital base exerted upward pressure on the capital charge; this is particularly evident in 2020, where a sharp increase in invested capital contributed to a decline in economic profit from -507,199 thousand US dollars in 2019 to -760,788 thousand US dollars.
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Net Operating Profit after Taxes (NOPAT)
Air Products & Chemicals Inc., NOPAT calculation
US$ in thousands
Based on: 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for doubtful accounts.
3 Addition of increase (decrease) in LIFO reserve. See details »
4 Addition of increase (decrease) in accrual for cost reduction actions.
5 Addition of increase (decrease) in equity equivalents to net income attributable to Air Products.
6 2020 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 406,500 × 2.10% = 8,537
7 2020 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 117,837 × 21.00% = 24,746
8 Addition of after taxes interest expense to net income attributable to Air Products.
9 Elimination of discontinued operations.
The financial performance between 2015 and 2020 reveals a distinct divergence between net income attributable to shareholders and net operating profit after taxes (NOPAT), particularly in the early part of the period. While net income experienced significant volatility, NOPAT demonstrated a more resilient and eventually consistent upward trajectory, indicating that core operational profitability remained more stable than the final bottom-line figures.
- Net Operating Profit After Taxes (NOPAT) Trend
- NOPAT exhibited a general growth trend over the six-year period. After an initial increase to 1,657,195 thousand US$ in 2016 and a subsequent dip to 1,274,219 thousand US$ in 2017, the metric entered a phase of steady expansion. From 2018 through 2020, NOPAT grew consistently, rising from 1,476,037 thousand US$ to 2,189,491 thousand US$, representing a significant strengthening of the company's core earning power independent of its capital structure.
- Net Income Volatility and Divergence
- Net income showed extreme fluctuations that did not align with operational results. A notable anomaly occurred in 2016, where net income fell to 631,100 thousand US$ despite a rise in NOPAT, suggesting the impact of significant non-operating expenses or losses. Conversely, in 2017, net income peaked at 3,000,400 thousand US$ while NOPAT declined, indicating the presence of substantial non-operating gains or one-time tax benefits that temporarily inflated the bottom line without reflecting operational growth.
- Operational Correlation and Convergence
- Beginning in 2018, a stronger correlation emerged between operational profit and net income. Both metrics trended upward in tandem from 2018 to 2020. By September 30, 2020, the alignment of NOPAT at 2,189,491 thousand US$ and net income at 1,886,700 thousand US$ suggests that the growth in shareholder earnings became more directly driven by improvements in operating efficiency and core business performance rather than non-recurring items.
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Cash Operating Taxes
Air Products & Chemicals Inc., cash operating taxes calculation
US$ in thousands
Based on: 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30).
An analysis of the tax expenditures from 2015 to 2020 reveals significant volatility in both the income tax provision and the cash operating taxes. While both metrics generally trend in the same direction, there are notable periods of divergence that impact the calculation of economic value added.
- Cash Operating Tax Trends
- Cash operating taxes exhibited considerable fluctuations over the six-year period. After an initial increase from 451.6 million US$ in 2015 to 577.1 million US$ in 2016, a sharp decline occurred in 2017 to 350.4 million US$. This was followed by a peak in 2018, where cash taxes reached their highest point at 617.8 million US$, before trending downward to 338.1 million US$ by 2020.
- Comparison Between Provision and Cash Outflows
- The relationship between the income tax provision and cash operating taxes is inconsistent. In 2017 and 2018, cash operating taxes exceeded the income tax provision, which may suggest the payment of deferred tax liabilities or the presence of permanent differences. Specifically, in 2018, the cash outflow exceeded the provision by approximately 93.5 million US$.
- Analysis of Recent Divergence
- A significant divergence is observed in the final year of the period. By September 30, 2020, the income tax provision remained relatively stable at 478.4 million US$, while cash operating taxes dropped to 338.1 million US$. This creates a gap of 140.3 million US$, indicating that a substantial portion of the tax expense for that period was deferred rather than paid in cash.
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Invested Capital
Air Products & Chemicals Inc., invested capital calculation (financing approach)
US$ in thousands
Based on: 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30).
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 LIFO reserve. See details »
5 Addition of accrual for cost reduction actions.
6 Addition of equity equivalents to total Air Products shareholders’ equity.
7 Removal of accumulated other comprehensive income.
8 Subtraction of construction in progress.
9 Subtraction of short-term investments.
Invested capital exhibited a consistent upward trajectory from 2015 to 2020, characterized by moderate growth through 2019 and a substantial acceleration in 2020. The total capital base expanded from 14.34 billion to 20.88 billion over the period, indicating a significant increase in the resources deployed to generate economic value.
- Invested Capital Growth
- A steady increase in invested capital is observed from 2015 through 2019, with the total rising from 14.34 billion to 16.92 billion. A sharp inflection point occurred in 2020, where invested capital surged to 20.88 billion, representing a year-over-year increase of approximately 23%.
- Shareholders' Equity Trends
- Shareholders' equity grew from 7.25 billion in 2015 to 12.08 billion in 2020. A notable increase occurred between 2016 and 2017, where equity rose from 7.08 billion to 10.09 billion. Following this period, equity maintained a stable and gradual upward trend.
- Debt and Lease Volatility
- Total reported debt and leases displayed significant fluctuations. A period of active deleveraging is evident between 2016 and 2019, with debt levels declining from 6.42 billion to a low of 3.59 billion. This trend reversed abruptly in 2020, with debt spiking to 8.31 billion, the highest level recorded in the analyzed timeframe.
- Capital Structure Composition
- The composition of invested capital shifted throughout the period. From 2017 to 2019, the expansion of the capital base was driven predominantly by equity growth, which more than offset the reduction in debt. In contrast, the 2020 increase in invested capital was primarily fueled by a substantial increase in debt and leases, signaling a shift toward higher financial leverage.
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Cost of Capital
Air Products & Chemicals Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 59,756,749) | 59,756,749) | ÷ | 68,449,349) | = | 0.87 | 0.87 | × | 15.95% | = | 13.93% | ||
| Debt3 | 8,286,100) | 8,286,100) | ÷ | 68,449,349) | = | 0.12 | 0.12 | × | 1.98% × (1 – 21.00%) | = | 0.19% | ||
| Operating lease liability4 | 406,500) | 406,500) | ÷ | 68,449,349) | = | 0.01 | 0.01 | × | 2.10% × (1 – 21.00%) | = | 0.01% | ||
| Total: | 68,449,349) | 1.00 | 14.13% | ||||||||||
Based on: 10-K (reporting date: 2020-09-30).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 51,669,712) | 51,669,712) | ÷ | 55,342,851) | = | 0.93 | 0.93 | × | 15.95% | = | 14.89% | ||
| Debt3 | 3,409,100) | 3,409,100) | ÷ | 55,342,851) | = | 0.06 | 0.06 | × | 2.48% × (1 – 21.00%) | = | 0.12% | ||
| Operating lease liability4 | 264,039) | 264,039) | ÷ | 55,342,851) | = | 0.00 | 0.00 | × | 10.92% × (1 – 21.00%) | = | 0.04% | ||
| Total: | 55,342,851) | 1.00 | 15.06% | ||||||||||
Based on: 10-K (reporting date: 2019-09-30).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 34,589,703) | 34,589,703) | ÷ | 38,643,920) | = | 0.90 | 0.90 | × | 15.95% | = | 14.28% | ||
| Debt3 | 3,842,500) | 3,842,500) | ÷ | 38,643,920) | = | 0.10 | 0.10 | × | 2.71% × (1 – 24.50%) | = | 0.20% | ||
| Operating lease liability4 | 211,716) | 211,716) | ÷ | 38,643,920) | = | 0.01 | 0.01 | × | 11.83% × (1 – 24.50%) | = | 0.05% | ||
| Total: | 38,643,920) | 1.00 | 14.53% | ||||||||||
Based on: 10-K (reporting date: 2018-09-30).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 35,236,905) | 35,236,905) | ÷ | 39,481,900) | = | 0.89 | 0.89 | × | 15.95% | = | 14.24% | ||
| Debt3 | 4,072,200) | 4,072,200) | ÷ | 39,481,900) | = | 0.10 | 0.10 | × | 2.22% × (1 – 35.00%) | = | 0.15% | ||
| Operating lease liability4 | 172,795) | 172,795) | ÷ | 39,481,900) | = | 0.00 | 0.00 | × | 15.34% × (1 – 35.00%) | = | 0.04% | ||
| Total: | 39,481,900) | 1.00 | 14.43% | ||||||||||
Based on: 10-K (reporting date: 2017-09-30).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 30,375,996) | 30,375,996) | ÷ | 36,973,472) | = | 0.82 | 0.82 | × | 15.95% | = | 13.11% | ||
| Debt3 | 6,403,000) | 6,403,000) | ÷ | 36,973,472) | = | 0.17 | 0.17 | × | 2.42% × (1 – 35.00%) | = | 0.27% | ||
| Operating lease liability4 | 194,476) | 194,476) | ÷ | 36,973,472) | = | 0.01 | 0.01 | × | 19.16% × (1 – 35.00%) | = | 0.07% | ||
| Total: | 36,973,472) | 1.00 | 13.44% | ||||||||||
Based on: 10-K (reporting date: 2016-09-30).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 30,045,544) | 30,045,544) | ÷ | 36,519,904) | = | 0.82 | 0.82 | × | 15.95% | = | 13.13% | ||
| Debt3 | 6,140,000) | 6,140,000) | ÷ | 36,519,904) | = | 0.17 | 0.17 | × | 2.04% × (1 – 35.00%) | = | 0.22% | ||
| Operating lease liability4 | 334,361) | 334,361) | ÷ | 36,519,904) | = | 0.01 | 0.01 | × | 2.04% × (1 – 35.00%) | = | 0.01% | ||
| Total: | 36,519,904) | 1.00 | 13.36% | ||||||||||
Based on: 10-K (reporting date: 2015-09-30).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Air Products & Chemicals Inc., economic spread ratio calculation, comparison to benchmarks
| Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | |||||||
| Economic profit1 | (760,788) | (507,199) | (950,372) | (985,772) | (384,490) | (497,816) | |
| Invested capital2 | 20,884,500) | 16,921,739) | 16,696,916) | 15,661,095) | 15,185,876) | 14,344,261) | |
| Performance Ratio | |||||||
| Economic spread ratio3 | -3.64% | -3.00% | -5.69% | -6.29% | -2.53% | -3.47% | |
| Benchmarks | |||||||
| Economic Spread Ratio, Competitors4 | |||||||
| Linde plc | — | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30).
1 Economic profit. See details »
2 Invested capital. See details »
3 2020 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -760,788 ÷ 20,884,500 = -3.64%
4 Click competitor name to see calculations.
Between 2015 and 2020, the organization experienced a consistent failure to generate positive economic value, as evidenced by negative economic profit and economic spread ratios throughout the entire period. Despite a steady increase in the capital base, the returns generated were insufficient to cover the cost of the invested capital, resulting in continuous economic value destruction.
- Economic Profit Trends
- Economic profit remained negative for six consecutive years, exhibiting significant volatility. The most pronounced deficit occurred in 2017, with a loss of 985.8 million USD, followed closely by 2018. A notable recovery was observed in 2019, where losses narrowed to 507.2 million USD, before deteriorating again to 760.8 million USD in 2020.
- Invested Capital Expansion
- A consistent upward trend in invested capital is observed, growing from 14.3 billion USD in 2015 to 20.9 billion USD in 2020. The most significant increase occurred between 2019 and 2020, where invested capital rose by approximately 3.96 billion USD, indicating an aggressive expansion of the asset base.
- Economic Spread Ratio Performance
- The economic spread ratio remained in negative territory, correlating closely with the fluctuations in economic profit. The ratio reached its lowest point of -6.29% in 2017, indicating the widest gap between the actual return and the cost of capital. Although the ratio improved to -3.00% in 2019, it declined to -3.64% in 2020. This suggests that the substantial increase in invested capital during the final year did not yield a corresponding improvement in the spread, further confirming an inability to achieve a positive economic return on new investments.
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Economic Profit Margin
Air Products & Chemicals Inc., economic profit margin calculation, comparison to benchmarks
| Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | |||||||
| Economic profit1 | (760,788) | (507,199) | (950,372) | (985,772) | (384,490) | (497,816) | |
| Sales | 8,856,300) | 8,918,900) | 8,930,200) | 8,187,600) | 9,524,400) | 9,894,900) | |
| Performance Ratio | |||||||
| Economic profit margin2 | -8.59% | -5.69% | -10.64% | -12.04% | -4.04% | -5.03% | |
| Benchmarks | |||||||
| Economic Profit Margin, Competitors3 | |||||||
| Linde plc | — | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30).
1 Economic profit. See details »
2 2020 Calculation
Economic profit margin = 100 × Economic profit ÷ Sales
= 100 × -760,788 ÷ 8,856,300 = -8.59%
3 Click competitor name to see calculations.
The analysis of economic value added from 2015 to 2020 reveals a consistent failure to achieve positive economic profit, indicating that the operating returns did not exceed the cost of capital throughout the entire six-year period.
- Economic Profit Trends
- Economic profit remained negative for the duration of the period, signaling a persistent destruction of economic value. The most significant deficit was recorded in 2017, reaching negative 985.8 million US dollars. Although a relative improvement occurred in 2016, with the deficit narrowing to 384.5 million US dollars, the trend remained volatile, ending the period at negative 760.8 million US dollars in 2020.
- Sales Performance and Correlation
- Sales figures demonstrated volatility, peaking at 9.89 billion US dollars in 2015 before dropping to a period low of 8.19 billion US dollars in 2017. This decline in revenue coincided with the most severe contraction in economic profit, suggesting a strong correlation between sales volume and the ability to cover the cost of capital.
- Economic Profit Margin Analysis
- The economic profit margin remained negative across all observed years, fluctuating between a high of negative 4.04% in 2016 and a low of negative 12.04% in 2017. A marginal recovery was observed in 2019, where the margin improved to negative 5.69%, but this gain was not sustained, as the margin deteriorated to negative 8.59% by September 30, 2020.
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