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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
Net Operating Profit after Taxes (NOPAT)
Cash Operating Taxes
Invested Capital
Cost of Capital
Economic Spread Ratio
Economic Profit Margin

Air Products & Chemicals Inc., economic profit calculation

US$ in thousands

12 months ended:	Sep 30, 2020	Sep 30, 2019	Sep 30, 2018	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015
Net operating profit after taxes (NOPAT)¹	2,189,491)	2,040,608)	1,476,037)	1,274,219)	1,657,195)	1,418,609)
Cost of capital²	14.12%	15.04%	14.52%	14.42%	13.43%	13.35%
Invested capital³	20,884,500)	16,921,739)	16,696,916)	15,661,095)	15,185,876)	14,344,261)

Economic profit⁴	(758,539)	(505,251)	(948,529)	(984,048)	(382,951)	(496,360)

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 – 14.12% × 20,884,500 = -758,539

The financial performance from 2015 to 2020 is characterized by a consistent inability to generate positive economic profit, indicating that the returns on invested capital remained below the weighted average cost of capital throughout the analyzed period.

Net Operating Profit After Taxes (NOPAT): A general upward trajectory is observed in NOPAT, which grew from 1,418,609 thousand US$ in 2015 to 2,189,491 thousand US$ in 2020. Although a notable contraction occurred in 2017, the subsequent recovery and growth through 2020 demonstrate an improvement in the scale of operational profitability.
Cost of Capital: The cost of capital exhibited relative stability with a gradual increase from 13.35% in 2015 to a peak of 15.04% in 2019, before moderating to 14.12% in 2020. This upward pressure on the required rate of return increased the threshold for achieving positive economic value added.
Invested Capital: Invested capital showed a continuous increase over the six-year period, rising from 14,344,261 thousand US$ in 2015 to 20,884,500 thousand US$ in 2020. A significant acceleration in capital deployment is evident in 2020, where invested capital increased by approximately 3.96 billion US$ compared to the previous year.
Economic Profit Analysis: Economic profit remained negative throughout the entire period, signifying a persistent destruction of shareholder value. The most significant deficits were recorded in 2017 and 2018, with losses exceeding 900 million US$. Despite the growth in NOPAT, the substantial expansion of the invested capital base in 2020 contributed to a widening of the economic profit deficit to 758,539 thousand US$, suggesting that the returns generated from the increased capital investment were insufficient to cover the associated cost of capital.

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Air Products & Chemicals Inc., NOPAT calculation

US$ in thousands

12 months ended:	Sep 30, 2020	Sep 30, 2019	Sep 30, 2018	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015
Net income attributable to Air Products	1,886,700)	1,760,000)	1,497,800)	3,000,400)	631,100)	1,277,900)
Deferred income tax expense (benefit)¹	165,000)	57,600)	(55,400)	(38,000)	62,900)	2,900)
Increase (decrease) in allowance for doubtful accounts²	(900)	24,800)	(21,800)	24,000)	(3,500)	9,900)
Increase (decrease) in LIFO reserve³	—)	—)	(23,300)	11,600)	(21,800)	(4,600)
Increase (decrease) in accrual for cost reduction actions⁴	(13,100)	17,800)	(31,600)	25,800)	(25,400)	21,100)
Increase (decrease) in equity equivalents⁵	151,000)	100,200)	(132,100)	23,400)	12,200)	29,300)
Interest expense	109,300)	137,000)	130,500)	120,600)	115,500)	103,500)
Interest expense, operating lease liability⁶	8,537)	28,833)	25,046)	26,507)	37,262)	6,821)
Adjusted interest expense	117,837)	165,833)	155,546)	147,107)	152,762)	110,321)
Tax benefit of interest expense⁷	(24,746)	(34,825)	(38,109)	(51,487)	(53,467)	(38,612)
Adjusted interest expense, after taxes⁸	93,091)	131,008)	117,437)	95,619)	99,295)	71,709)
(Income) loss from discontinued operations, net of tax⁹	14,300)	—)	(42,200)	(1,866,000)	884,200)	—)
Net income (loss) attributable to noncontrolling interest	44,400)	49,400)	35,100)	20,800)	30,400)	39,700)
Net operating profit after taxes (NOPAT)	2,189,491)	2,040,608)	1,476,037)	1,274,219)	1,657,195)	1,418,609)

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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Air Products & Chemicals Inc., cash operating taxes calculation

US$ in thousands

12 months ended:	Sep 30, 2020	Sep 30, 2019	Sep 30, 2018	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015
Income tax provision	478,400)	480,100)	524,300)	260,900)	586,500)	415,900)
Less: Deferred income tax expense (benefit)	165,000)	57,600)	(55,400)	(38,000)	62,900)	2,900)
Add: Tax savings from interest expense	24,746)	34,825)	38,109)	51,487)	53,467)	38,612)
Cash operating taxes	338,146)	457,325)	617,809)	350,387)	577,067)	451,612)

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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Air Products & Chemicals Inc., invested capital calculation (financing approach)

US$ in thousands

	Sep 30, 2020	Sep 30, 2019	Sep 30, 2018	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015
Short-term borrowings	7,700)	58,200)	54,300)	144,000)	935,800)	1,494,300)
Current portion of long-term debt	470,000)	40,400)	406,600)	416,400)	371,300)	435,600)
Long-term debt, excluding current portion	7,132,900)	2,907,300)	2,967,400)	3,402,400)	4,918,100)	3,949,100)
Long-term debt, related party	297,200)	320,100)	384,300)	—)	—)	—)
Operating lease liability¹	406,500)	264,039)	211,716)	172,795)	194,476)	334,361)
Total reported debt & leases	8,314,300)	3,590,039)	4,024,316)	4,135,595)	6,419,676)	6,213,361)
Total Air Products shareholders’ equity	12,079,800)	11,053,600)	10,857,500)	10,086,200)	7,079,600)	7,249,000)
Net deferred tax (assets) liabilities²	847,500)	678,600)	653,700)	603,900)	574,400)	720,700)
Allowance for doubtful accounts³	23,900)	48,800)	24,000)	45,800)	22,800)	26,300)
LIFO reserve⁴	—)	—)	—)	23,300)	79,000)	100,800)
Accrual for cost reduction actions⁵	4,700)	17,800)	9,900)	41,500)	16,300)	41,700)
Equity equivalents⁶	876,100)	745,200)	687,600)	714,500)	692,500)	889,500)
Accumulated other comprehensive (income) loss, net of tax⁷	2,140,100)	2,375,600)	1,741,900)	1,847,400)	2,388,300)	2,125,900)
Noncontrolling interests	363,300)	334,700)	318,800)	99,300)	133,800)	132,100)
Adjusted total Air Products shareholders’ equity	15,459,300)	14,509,100)	13,605,800)	12,747,400)	10,294,200)	10,396,500)
Construction in progress⁸	(1,784,200)	(1,011,400)	(748,500)	(817,900)	(1,528,000)	(2,265,600)
Short-term investments⁹	(1,104,900)	(166,000)	(184,700)	(404,000)	—)	—)
Invested capital	20,884,500)	16,921,739)	16,696,916)	15,661,095)	15,185,876)	14,344,261)

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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Air Products & Chemicals Inc., cost of capital calculations

Sep 30, 2020

	Capital (fair value)¹	Weights					Cost of capital
Equity²	59,756,749)	59,756,749)	÷	68,449,349)	=	0.87	0.87	×	15.94%	=	13.92%
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					14.12%

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 »

Sep 30, 2019

	Capital (fair value)¹	Weights					Cost of capital
Equity²	51,669,712)	51,669,712)	÷	55,342,851)	=	0.93	0.93	×	15.94%	=	14.88%
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					15.04%

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 »

Sep 30, 2018

	Capital (fair value)¹	Weights					Cost of capital
Equity²	34,589,703)	34,589,703)	÷	38,643,920)	=	0.90	0.90	×	15.94%	=	14.27%
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					14.52%

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 »

Sep 30, 2017

	Capital (fair value)¹	Weights					Cost of capital
Equity²	35,236,905)	35,236,905)	÷	39,481,900)	=	0.89	0.89	×	15.94%	=	14.23%
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					14.42%

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 »

Sep 30, 2016

	Capital (fair value)¹	Weights					Cost of capital
Equity²	30,375,996)	30,375,996)	÷	36,973,472)	=	0.82	0.82	×	15.94%	=	13.10%
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					13.43%

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 »

Sep 30, 2015

	Capital (fair value)¹	Weights					Cost of capital
Equity²	30,045,544)	30,045,544)	÷	36,519,904)	=	0.82	0.82	×	15.94%	=	13.11%
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					13.35%

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 »

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	(758,539)	(505,251)	(948,529)	(984,048)	(382,951)	(496,360)
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	-3.63%	-2.99%	-5.68%	-6.28%	-2.52%	-3.46%
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 × -758,539 ÷ 20,884,500 = -3.63%

⁴ Click competitor name to see calculations.

The financial data from 2015 to 2020 indicates a consistent period of value destruction, as economic profit remained negative throughout the entire six-year duration. Despite a steady increase in the capital base, the company failed to generate returns exceeding its cost of capital, resulting in a persistently negative economic spread ratio.

Economic Profit: Economic profit was consistently negative, reflecting a failure to create economic value. The most significant loss occurred in 2017, reaching negative 984.05 million USD. While there was a notable recovery in 2019, where the loss narrowed to negative 505.25 million USD, the trend reversed in 2020 with the loss widening again to negative 758.54 million USD.
Invested Capital: A consistent upward trend is observed in invested capital, which grew from 14.34 billion USD in 2015 to 20.88 billion USD in 2020. This steady expansion of the capital base suggests ongoing investment in assets or operations; however, this growth did not translate into positive economic profit.
Economic Spread Ratio: The economic spread ratio remained in negative territory for the entire period, confirming that the return on invested capital stayed below the weighted average cost of capital. The ratio reached its lowest point in 2017 at negative 6.28%, representing the peak of value erosion. A relative improvement was noted in 2016 and 2019, with the ratio rising to negative 2.52% and negative 2.99%, respectively, before declining again to negative 3.63% by 2020.

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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	(758,539)	(505,251)	(948,529)	(984,048)	(382,951)	(496,360)
Sales	8,856,300)	8,918,900)	8,930,200)	8,187,600)	9,524,400)	9,894,900)
Performance Ratio
Economic profit margin²	-8.56%	-5.66%	-10.62%	-12.02%	-4.02%	-5.02%
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 × -758,539 ÷ 8,856,300 = -8.56%

³ Click competitor name to see calculations.

The analysis of economic value added metrics from 2015 to 2020 reveals a consistent failure to generate positive economic profit, indicating that returns remained below the cost of capital throughout the entire observed period.

Economic Profit Performance: Economic profit remained negative for all six years, characterized by significant volatility. After a slight improvement in 2016, a substantial decline occurred in 2017, reaching a peak deficit of 984,048 thousand USD. Although a recovery trend was evident through 2019, where losses narrowed to 505,251 thousand USD, the deficit widened again in 2020 to 758,539 thousand USD.
Sales Trajectory: Revenue showed a general downward trend, decreasing from 9,894,900 thousand USD in 2015 to 8,856,300 thousand USD in 2020. A sharp contraction was observed in 2017, with sales falling to 8,187,600 thousand USD, which correlates with the period of highest economic loss. Sales subsequently stabilized between 2018 and 2020, fluctuating within a narrow range around 8.9 billion USD.
Economic Profit Margin Analysis: The economic profit margin remained consistently negative, reflecting a persistent inability to create economic value relative to sales. The margin reached its most critical point in 2017 at -12.02%, representing the lowest efficiency in the period. The best performance was recorded in 2016 with a margin of -4.02%. The period concluded with a margin of -8.56% in 2020, suggesting that the volatility in economic profit was driven more by costs or capital charges than by fluctuations in sales volume.

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Air Products & Chemicals Inc. (NYSE:APD)

Economic Value Added (EVA)

Economic Profit

Net Operating Profit after Taxes (NOPAT)

Cash Operating Taxes

Invested Capital

Cost of Capital

Economic Spread Ratio

Economic Profit Margin