Carrier Global Corp. (NYSE:CARR)

The total balance of goodwill and intangible assets exhibited a U-shaped trend over the three-year period, decreasing from 11,176 million US dollars in 2020 to 9,858 million US dollars in 2021, before recovering to a peak of 11,319 million US dollars by December 31, 2022. This trajectory was primarily driven by fluctuations in goodwill and a significant expansion of net intangible assets in the final year.

Goodwill Trends

Goodwill represents the largest component of the total balance. A decrease of approximately 7.8% occurred between 2020 and 2021, falling from 10,139 million US dollars to 9,349 million US dollars. However, this was reversed in 2022 with an increase to 9,977 million US dollars, indicating a recovery in the valuation of acquired synergies or new acquisitions.

Amortized Intangible Assets

The gross amount of amortized assets showed significant volatility, dipping to 1,865 million US dollars in 2021 before surging to 2,785 million US dollars in 2022. This growth was particularly evident in customer relationships, which rose to 1,431 million US dollars, and patents and trademarks, which reached 401 million US dollars. Service portfolios and other assets also demonstrated a consistent upward trend, increasing from 644 million US dollars in 2020 to 953 million US dollars in 2022.

Net Intangible Asset Valuation

Net intangible assets experienced a sharp contraction in 2021, falling to 509 million US dollars, but rebounded strongly to 1,342 million US dollars by the end of 2022. The net amortized amount specifically grew from 445 million US dollars in 2021 to 1,279 million US dollars in 2022, suggesting a substantial addition of new amortizable assets that outweighed the period's amortization expense.

Unamortized Assets and Adjustments

A notable reduction occurred in unamortized trademarks and other assets, which plummeted from 571 million US dollars in 2020 to 64 million US dollars in 2021, remaining relatively stagnant at 63 million US dollars in 2022. Additionally, monitoring lines, recorded at 71 million US dollars in 2020, were no longer reported in the subsequent years, indicating a complete amortization or reclassification of these assets.

The removal of goodwill and intangible assets reveals a substantial divergence between reported financial positions and the underlying tangible asset base from 2020 through 2022.

Asset Base Composition

Reported total assets exhibited relative stability, peaking at 26,172 million in 2021 before a slight decrease to 26,086 million in 2022. In contrast, adjusted total assets were significantly lower, ranging from 14,954 million to 16,823 million. The consistent gap indicates that non-tangible assets comprise approximately 38% to 40% of the total asset structure throughout the observed period.

Equity Valuation Shift

A profound transformation occurs in the equity attributable to common shareowners upon adjustment. Reported equity shows a steady growth trend, rising from 6,252 million in 2020 to 7,758 million in 2022. However, the adjusted equity remains negative for all three years, moving from -3,887 million in 2020 to -2,219 million in 2022. This indicates that the reported positive equity is entirely dependent on the carrying value of goodwill and intangible assets.

Tangible Net Worth Trends

While the adjusted equity remains in negative territory, an upward trajectory is observable. The deficit narrowed by 1,668 million over the three-year period. This improvement in adjusted equity mirrors the growth seen in reported equity, suggesting a strengthening of the company's financial position through means other than the appreciation or acquisition of intangible assets.

An analysis of the financial ratios reveals a significant divergence between reported metrics and adjusted metrics when goodwill and intangible assets are removed from the calculations. The removal of these non-physical assets consistently enhances both efficiency and profitability ratios, suggesting that a substantial portion of the asset base is comprised of intangible value which dilutes reported performance.

Total Asset Turnover

A consistent improvement in asset utilization is observed in the adjusted figures. While the reported total asset turnover fluctuated slightly, rising from 0.70 in 2020 to 0.78 in 2022, the adjusted total asset turnover demonstrated a steady upward trend, increasing from 1.17 to 1.27 over the same period. This gap indicates that the core operating assets are generating revenue more efficiently than the total asset base suggests.

Return on Assets (ROA)

The impact of goodwill and intangible assets is most pronounced in the ROA metrics. Reported ROA experienced volatility, dipping to 6.36% in 2021 before rebounding to 13.55% in 2022. In contrast, the adjusted ROA remained significantly higher across all periods, starting at 13.25% in 2020 and peaking at 21.94% in 2022. The substantial premium of the adjusted ROA over the reported ROA underscores the dilutive effect of intangible assets on the perceived profitability of the company's investment base.

Financial Leverage and Return on Equity (ROE)

A downward trend is observed in reported financial leverage, which decreased from 4.01 in 2020 to 3.36 by 2022, indicating a reduction in the reliance on debt relative to equity. Simultaneously, the reported ROE exhibited significant volatility, declining from 31.70% in 2020 to 24.59% in 2021, before surging to 45.55% in 2022. This suggests that the increase in ROE in the final year was not driven by increased leverage, as the leverage ratio actually declined during that period.

A significant variance exists between reported total assets and adjusted total assets over the three-year period ending December 31, 2022. This gap indicates a substantial portion of the asset base is comprised of goodwill and intangible assets, which are excluded from the adjusted calculations to provide a clearer view of operational efficiency.

Reported Total Asset Turnover

The reported turnover ratio experienced an initial increase from 0.70 in 2020 to 0.79 in 2021, followed by a slight contraction to 0.78 in 2022. This suggests that while there was an early improvement in the ability to generate sales from the total asset base, this growth plateaued in the final year of the period.

Adjusted Total Asset Turnover

In contrast to the reported figures, the adjusted total asset turnover demonstrated a consistent upward trajectory, rising from 1.17 in 2020 to 1.23 in 2021, and further reaching 1.27 by 2022. This steady improvement indicates an increase in the efficiency of the company's tangible, operating assets in generating revenue.

Comparative Analysis of Asset Efficiency

The adjusted turnover ratios are significantly higher than the reported ratios across all three years. The widening gap between the two metrics suggests that the underlying operational assets are performing more efficiently than the total reported asset base implies. Because the adjusted turnover continued to rise even as the reported turnover dipped in 2022, it is evident that operational productivity is improving independently of the valuation of intangible assets.

An analysis of the financial structure between 2020 and 2022 reveals a significant divergence between reported and adjusted financial metrics, primarily driven by the exclusion of goodwill and intangible assets. While reported assets and equity suggest a stable and growing financial position, the adjusted figures indicate a deficit in tangible net worth.

Asset Composition and Tangibility

Reported total assets remained relatively stable, fluctuating between US$ 25,093 million and US$ 26,172 million. However, adjusted total assets were consistently and significantly lower, ranging from US$ 14,954 million to US$ 16,823 million. This gap indicates that a substantial portion of the balance sheet—approximately 40% to 43%—is comprised of goodwill and intangible assets, reducing the proportion of tangible assets available to secure obligations.

Equity Divergence

Reported equity attributable to common shareowners exhibited a steady upward trend, increasing from US$ 6,252 million in 2020 to US$ 7,758 million in 2022. Conversely, adjusted equity remained negative throughout the period. Although there was a trend of improvement, moving from US$ -3,887 million in 2020 to US$ -2,219 million in 2022, the persistence of negative adjusted equity suggests that tangible liabilities exceed tangible assets.

Financial Leverage Trends

Reported financial leverage showed a consistent decline from 4.01 in 2020 to 3.36 in 2022, suggesting an improvement in the reported solvency profile and a reduction in relative debt. However, the adjusted financial leverage cannot be expressed as a positive ratio due to the negative adjusted equity. The transition from a more negative to a less negative adjusted equity position indicates a gradual recovery in tangible net worth, even though the adjusted leverage remains in a deficit state.

The financial data reveals a significant divergence between reported equity and adjusted equity over the three-year period from 2020 to 2022. While reported equity shows a consistent upward trajectory, adjusted equity remains negative, indicating a substantial presence of goodwill and intangible assets that inflate the reported book value.

Reported Equity Trends

Reported equity attributable to common shareowners demonstrated steady growth, increasing from 6,252 million US dollars in 2020 to 7,758 million US dollars in 2022. This represents a consistent expansion of the reported capital base over the analyzed period.

Adjusted Equity Analysis

Adjusted equity remained negative throughout the period, although a gradual improvement is observed. The value moved from -3,887 million US dollars in 2020 to -2,219 million US dollars in 2022. The persistent negative balance suggests that the company's tangible assets are insufficient to cover its total liabilities when goodwill and other intangible assets are excluded.

Impact of Goodwill and Intangible Assets

The stark contrast between the positive reported equity and the negative adjusted equity indicates that the company's balance sheet is heavily weighted toward intangible assets. The gap between these two figures highlights a reliance on non-physical assets to maintain a positive reported net worth.

Reported Return on Equity (ROE)

Reported ROE exhibited volatility, decreasing from 31.70% in 2020 to 24.59% in 2021, before rising sharply to 45.55% in 2022. While these percentages are high, the underlying negative adjusted equity suggests that the reported ROE is calculated against a capital base primarily composed of intangibles, which may mask the actual return on tangible capital invested.

An analysis of the financial metrics from 2020 to 2022 reveals a significant divergence between reported and adjusted asset valuations and their corresponding returns. The consistent gap between reported and adjusted total assets indicates a substantial presence of goodwill and intangible assets on the balance sheet, which effectively dilutes the reported return on assets.

Asset Valuation Trends

Reported total assets remained relatively stable over the three-year period, moving from 25,093 million US$ in 2020 to 26,086 million US$ in 2022. In contrast, adjusted total assets showed more fluctuation, peaking at 16,823 million US$ in 2021 before settling at 16,109 million US$ in 2022. The persistent difference between these two figures underscores the material impact of non-physical assets on the overall asset base.

Return on Assets (ROA) Performance

Both reported and adjusted ROA followed a similar trajectory, experiencing a decline in 2021 followed by a sharp increase in 2022. Reported ROA grew from 7.90% in 2020 to 13.55% in 2022. Adjusted ROA exhibited a more pronounced recovery and growth pattern, rising from 13.25% in 2020 to a peak of 21.94% in 2022, indicating a substantial increase in productivity relative to the adjusted asset base.

Impact of Asset Adjustments on Profitability Metrics

The variance between reported and adjusted ROA widened significantly by 2022, where the adjusted figure exceeded the reported figure by 8.39 percentage points. This indicates that while the reported ROA provides a comprehensive view of the balance sheet, the adjusted ROA offers a more aggressive measure of operational efficiency by removing the distortion caused by goodwill and intangible assets.