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.
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Carrier Global Corp. pages available for free this week:
- Income Statement
- Common-Size Income Statement
- Common-Size Balance Sheet: Assets
- Analysis of Long-term (Investment) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Selected Financial Data since 2020
- Net Profit Margin since 2020
- Price to Operating Profit (P/OP) since 2020
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Economic Profit
Carrier Global Corp., economic profit calculation
US$ in millions
| 12 months ended: | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | |
|---|---|---|---|---|
| Net operating profit after taxes (NOPAT)1 | ||||
| Cost of capital2 | ||||
| Invested capital3 | ||||
| Economic profit4 | ||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2022 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= – × =
The analysis of value creation between 2020 and 2022 reveals a significant turnaround in economic performance. After two consecutive years of value destruction, where the company failed to generate returns exceeding its cost of capital, a pivot to positive economic profit was achieved by the end of the 2022 fiscal year.
- Net Operating Profit After Taxes (NOPAT)
- A fluctuating trend is observed in operating profitability. NOPAT decreased from 2,367 million US dollars in 2020 to 1,932 million US dollars in 2021, representing a decline in operational efficiency or revenue. However, a substantial recovery occurred in 2022, with NOPAT rising to 3,800 million US dollars, nearly doubling the previous year's result.
- Cost of Capital
- The cost of capital exhibited a consistent upward trajectory over the period, increasing from 14.81% in 2020 to 15.76% in 2021, and further reaching 16.40% in 2022. This steady increase raised the financial threshold required for the company to generate a positive economic return on its investments.
- Invested Capital
- The level of invested capital remained relatively stable, with a slight contraction in 2021 to 18,835 million US dollars followed by an increase to 19,880 million US dollars in 2022. The relative stability of this figure indicates that the surge in 2022 profitability was driven by operational improvements rather than a massive expansion of the capital base.
- Economic Profit
- Economic profit shifted from a deficit of 451 million US dollars in 2020 to a deeper deficit of 1,037 million US dollars in 2021, coinciding with the dip in NOPAT and the rise in the cost of capital. By 2022, a significant reversal occurred, resulting in a positive economic profit of 540 million US dollars, signifying that the company successfully generated returns in excess of its weighted average cost of capital.
The convergence of a sharp increase in NOPAT and a stabilized capital base allowed the company to overcome the headwinds of a rising cost of capital. The transition to a positive economic profit in 2022 indicates a successful shift toward genuine value creation for shareholders.
Net Operating Profit after Taxes (NOPAT)
Carrier Global Corp., NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for expected credit losses.
3 Addition of increase (decrease) in LIFO reserve. See details »
4 Addition of increase (decrease) in product warranty provisions.
5 Addition of increase (decrease) in restructuring reserve.
6 Addition of increase (decrease) in equity equivalents to net income attributable to common shareowners.
7 2022 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= × =
8 2022 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= × 21.00% =
9 Addition of after taxes interest expense to net income attributable to common shareowners.
The analysis of the financial data over the three reported years reveals notable fluctuations in key profitability metrics, specifically net income attributable to common shareowners and net operating profit after taxes (NOPAT).
- Net income attributable to common shareowners
- This measure shows a decrease from 1982 million US dollars in 2020 to 1664 million US dollars in 2021, indicating a reduction of approximately 16%. However, in 2022, there is a significant recovery and growth, with net income rising sharply to 3534 million US dollars. This represents more than a doubling from the prior year and an overall increase compared to 2020. The pattern suggests that while 2021 experienced a dip in profitability, 2022 saw a robust improvement and strong earnings performance.
- Net operating profit after taxes (NOPAT)
- Like net income, NOPAT declined from 2367 million US dollars in 2020 to 1932 million US dollars in 2021, reflecting a decrease of approximately 18%. In 2022, NOPAT rebounded substantially to 3800 million US dollars, surpassing both previous years. This improvement in NOPAT illustrates enhanced operational efficiency and a stronger bottom-line operating profit after accounting for taxes during the most recent year.
Overall, the data presents a trend of initial earnings contraction in 2021, potentially due to external or internal challenges affecting profitability, followed by a marked recovery and growth in 2022. The increase in both net income and NOPAT in 2022 underscores a positive shift in financial performance and operational results. This recovery phase suggests successful strategic or operational adjustments leading to substantial value creation for shareholders.
Cash Operating Taxes
Carrier Global Corp., cash operating taxes calculation
US$ in millions
| 12 months ended: | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | |
|---|---|---|---|---|
| Income tax expense | ||||
| Less: Deferred income tax expense (benefit) | ||||
| Add: Tax savings from interest expense | ||||
| Cash operating taxes |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
The financial data for the periods ending December 31, 2020, 2021, and 2022 reveal the following trends in tax-related expenses.
- Income Tax Expense
- The income tax expense shows a decline from US$ 849 million in 2020 to US$ 699 million in 2021, representing a significant decrease. However, in 2022, income tax expense exhibited a slight increase to US$ 708 million. Overall, the expense decreased year-over-year from 2020 to 2022, but the change from 2021 to 2022 indicates a modest upward adjustment.
- Cash Operating Taxes
- The cash operating taxes consistently increased over the three years. Starting from US$ 820 million in 2020, it rose to US$ 844 million in 2021, and further increased to US$ 900 million in 2022. This steady upward trend may indicate higher cash tax obligations or changes in operating taxable income over the observed period.
In summary, while reported income tax expenses decreased initially and then slightly increased, cash taxes paid showed a consistent rise. This divergence may suggest timing differences between recognized tax expense and actual cash tax payments, or changes in tax planning, credits, or provisions affecting the income tax expense recognition.
Invested Capital
Carrier Global Corp., invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
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 product warranty provisions.
6 Addition of restructuring reserve.
7 Addition of equity equivalents to equity attributable to common shareowners.
8 Removal of accumulated other comprehensive income.
- Total reported debt & leases
- There is a clear downward trend in total reported debt and leases over the three-year period. The value decreased from $11,030 million at the end of 2020 to $10,353 million in 2021, and further declined to $9,503 million by the end of 2022. This indicates a consistent reduction in the company's leverage or obligations related to debt and leases.
- Equity attributable to common shareowners
- Equity attributable to common shareowners shows a steady increase each year. Starting at $6,252 million in 2020, it rose to $6,767 million in 2021 and further increased to $7,758 million in 2022. This growth suggests improvements in the company's net worth and possibly retained earnings or capital infusion over the period.
- Invested capital
- Invested capital remained relatively stable in 2020 and 2021, with a slight decrease from $19,032 million to $18,835 million. However, there was a notable increase to $19,880 million in 2022. This indicates a modest growth in the total capital deployed in the company’s operations by the end of the third year.
Cost of Capital
Carrier Global Corp., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt, including current portion3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2022-12-31).
1 US$ in millions
2 Equity. See details »
3 Long-term debt, including current portion. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt, including current portion3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2021-12-31).
1 US$ in millions
2 Equity. See details »
3 Long-term debt, including current portion. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Long-term debt, including current portion3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2020-12-31).
1 US$ in millions
2 Equity. See details »
3 Long-term debt, including current portion. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Carrier Global Corp., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||
| Economic profit1 | ||||
| Invested capital2 | ||||
| Performance Ratio | ||||
| Economic spread ratio3 | ||||
| Benchmarks | ||||
| Economic Spread Ratio, Competitors4 | ||||
| Boeing Co. | ||||
| Caterpillar Inc. | ||||
| Eaton Corp. plc | ||||
| GE Aerospace | ||||
| Honeywell International Inc. | ||||
| Lockheed Martin Corp. | ||||
| RTX Corp. | ||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2022 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × ÷ =
4 Click competitor name to see calculations.
The financial performance from 2020 through 2022 indicates a significant transition from value destruction to value creation. After two years of negative economic returns, a recovery was achieved in the final year of the period, marking a shift toward generating returns that exceed the cost of capital.
- Economic Profit
- A volatile trend is observed in economic profit, which began at -451 million US$ in 2020 and deteriorated further to -1,037 million US$ in 2021. However, a substantial reversal occurred by December 31, 2022, as the figure shifted to a positive 540 million US$, signifying that the entity successfully moved beyond its capital charge requirements.
- Invested Capital
- The capital base remained relatively stable throughout the analyzed period. Invested capital stood at 19,032 million US$ in 2020, experienced a marginal decrease to 18,835 million US$ in 2021, and subsequently rose to 19,880 million US$ by the end of 2022. This stability suggests that the changes in economic profit were driven by operational performance or cost of capital fluctuations rather than significant changes in the scale of investment.
- Economic Spread Ratio
- The economic spread ratio mirrors the trajectory of economic profit, reflecting the percentage by which returns exceeded or fell short of the cost of capital. The ratio declined from -2.37% in 2020 to a low of -5.50% in 2021, indicating an increase in value erosion. This trend was reversed in 2022, with the ratio reaching 2.72%, confirming that the return on invested capital surpassed the weighted average cost of capital for the first time in the observed timeframe.
Economic Profit Margin
Carrier Global Corp., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||
| Economic profit1 | ||||
| Net sales | ||||
| Performance Ratio | ||||
| Economic profit margin2 | ||||
| Benchmarks | ||||
| Economic Profit Margin, Competitors3 | ||||
| Boeing Co. | ||||
| Caterpillar Inc. | ||||
| Eaton Corp. plc | ||||
| GE Aerospace | ||||
| Honeywell International Inc. | ||||
| Lockheed Martin Corp. | ||||
| RTX Corp. | ||||
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 Economic profit. See details »
2 2022 Calculation
Economic profit margin = 100 × Economic profit ÷ Net sales
= 100 × ÷ =
3 Click competitor name to see calculations.
The financial performance between 2020 and 2022 reflects a significant turnaround in value creation, transitioning from a period of economic loss to a positive economic profit. While the company experienced a widening gap in value destruction in 2021, the 2022 results indicate a successful recovery, with the company generating returns that exceeded its cost of capital.
- Economic Profit
- A volatile trend is observed in economic profit, which began at negative 451 million USD in 2020 and deteriorated further to negative 1,037 million USD in 2021. This decline suggests a period where the company failed to generate sufficient operating profit to cover its cost of capital. However, a sharp reversal occurred in 2022, with economic profit shifting to a positive 540 million USD, marking a transition toward positive economic value added.
- Net Sales
- Net sales demonstrated growth from 17,456 million USD in 2020 to a peak of 20,613 million USD in 2021. A marginal decrease followed in 2022, with sales settling at 20,421 million USD. The increase in revenue during 2021 did not correlate with a corresponding increase in economic profit, indicating that growth in scale was initially decoupled from economic value creation.
- Economic Profit Margin
- The economic profit margin followed the trajectory of the absolute economic profit, declining from negative 2.58% in 2020 to negative 5.03% in 2021. This represents a deterioration in the efficiency of value generation relative to sales. By 2022, the margin improved significantly to 2.64%, confirming that the company achieved a positive return on its capital employed relative to its revenue stream.