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
Carrier Global Corp., economic profit 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 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
= 3,800 – 16.35% × 19,880 = 551
An analysis of the economic value added indicates a significant turnaround in financial performance over the three-year period ending December 31, 2022. The organization transitioned from a state of value destruction to value creation, characterized by a sharp recovery in operating profitability that ultimately overcame rising capital costs.
- Net Operating Profit After Taxes (NOPAT)
- A volatile trajectory is observed in NOPAT, which declined from US$ 2,367 million in 2020 to US$ 1,932 million in 2021. This downward trend was reversed in 2022 with a substantial increase to US$ 3,800 million, indicating a significant improvement in operational efficiency and earnings power.
- Cost of Capital and Invested Capital
- The cost of capital exhibits a consistent upward trend, rising from 14.76% in 2020 to 16.35% by 2022. Concurrently, invested capital remained relatively stable, with a slight contraction to US$ 18,835 million in 2021 followed by an expansion to US$ 19,880 million in 2022. The steady increase in the cost of capital intensified the threshold required for the company to generate a positive economic return.
- Economic Profit
- Economic profit remained negative for two consecutive years, reaching its lowest point in 2021 at negative US$ 1,027 million. This indicates that during 2020 and 2021, the operating returns were insufficient to cover the weighted average cost of the capital employed. However, 2022 marked a pivotal shift, with economic profit turning positive at US$ 551 million, signaling that the company began creating value above its cost of capital.
The overall financial trend suggests that while the cost of funding increased and capital investment grew slightly, the aggressive growth in NOPAT in 2022 was the primary driver in shifting the company from negative to positive economic profit.
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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
= 661 × 3.40% = 22
8 2022 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 324 × 21.00% = 68
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.
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Cash Operating Taxes
Carrier Global Corp., cash operating taxes 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).
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.
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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 $19,880 million in 2022. This indicates a modest growth in the total capital deployed in the company’s operations by the end of the third year.
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Cost of Capital
Carrier Global Corp., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 37,030) | 37,030) | ÷ | 45,076) | = | 0.82 | 0.82 | × | 19.39% | = | 15.93% | ||
| Long-term debt, including current portion3 | 7,385) | 7,385) | ÷ | 45,076) | = | 0.16 | 0.16 | × | 2.90% × (1 – 21.00%) | = | 0.38% | ||
| Operating lease liability4 | 661) | 661) | ÷ | 45,076) | = | 0.01 | 0.01 | × | 3.40% × (1 – 21.00%) | = | 0.04% | ||
| Total: | 45,076) | 1.00 | 16.35% | ||||||||||
Based on: 10-K (reporting date: 2022-12-31).
1 US$ 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 | 39,405) | 39,405) | ÷ | 50,171) | = | 0.79 | 0.79 | × | 19.39% | = | 15.23% | ||
| Long-term debt, including current portion3 | 10,109) | 10,109) | ÷ | 50,171) | = | 0.20 | 0.20 | × | 2.80% × (1 – 21.00%) | = | 0.45% | ||
| Operating lease liability4 | 657) | 657) | ÷ | 50,171) | = | 0.01 | 0.01 | × | 3.00% × (1 – 21.00%) | = | 0.03% | ||
| Total: | 50,171) | 1.00 | 15.71% | ||||||||||
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 | 32,378) | 32,378) | ÷ | 44,300) | = | 0.73 | 0.73 | × | 19.39% | = | 14.17% | ||
| Long-term debt, including current portion3 | 11,119) | 11,119) | ÷ | 44,300) | = | 0.25 | 0.25 | × | 2.70% × (1 – 21.00%) | = | 0.54% | ||
| Operating lease liability4 | 803) | 803) | ÷ | 44,300) | = | 0.02 | 0.02 | × | 3.40% × (1 – 21.00%) | = | 0.05% | ||
| Total: | 44,300) | 1.00 | 14.76% | ||||||||||
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 | 551) | (1,027) | (442) | |
| Invested capital2 | 19,880) | 18,835) | 19,032) | |
| Performance Ratio | ||||
| Economic spread ratio3 | 2.77% | -5.45% | -2.32% | |
| Benchmarks | ||||
| Economic Spread Ratio, Competitors4 | ||||
| Boeing Co. | -20.46% | -19.06% | — | |
| Caterpillar Inc. | -6.38% | -5.79% | — | |
| Eaton Corp. plc | -9.76% | -9.37% | — | |
| GE Aerospace | -13.79% | -18.70% | — | |
| Honeywell International Inc. | -3.09% | -2.00% | — | |
| Lockheed Martin Corp. | 14.31% | 15.29% | — | |
| RTX Corp. | -4.69% | -4.16% | — | |
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 × 551 ÷ 19,880 = 2.77%
4 Click competitor name to see calculations.
The analysis of value creation for the period ending December 31, 2022, reveals a marked recovery in economic performance. The transition from significant value destruction to positive economic profit indicates a successful alignment of returns above the cost of capital.
- Economic Profit Trend
- A volatile trajectory is observed in economic profit. The figure declined from negative 442 million US dollars in 2020 to a low of negative 1,027 million US dollars in 2021. However, a substantial reversal occurred by December 31, 2022, with economic profit reaching positive 551 million US dollars, signaling the commencement of actual economic value creation.
- Invested Capital Stability
- Invested capital remained relatively stable over the three-year window, fluctuating within a narrow range. A slight decrease from 19,032 million US dollars in 2020 to 18,835 million US dollars in 2021 was followed by an increase to 19,880 million US dollars in 2022. This suggests that the change in economic profit was primarily driven by operational performance rather than significant shifts in the capital base.
- Economic Spread Ratio Performance
- The economic spread ratio mirrors the movement of economic profit, reflecting the differential between the return on invested capital and the cost of capital. The ratio deteriorated from negative 2.32% in 2020 to negative 5.45% in 2021, before rebounding to a positive 2.77% in 2022. This turnaround confirms that by the end of 2022, the return on invested capital had finally exceeded the cost of capital.
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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 | 551) | (1,027) | (442) | |
| Net sales | 20,421) | 20,613) | 17,456) | |
| Performance Ratio | ||||
| Economic profit margin2 | 2.70% | -4.98% | -2.53% | |
| Benchmarks | ||||
| Economic Profit Margin, Competitors3 | ||||
| Boeing Co. | -15.62% | -15.14% | — | |
| Caterpillar Inc. | -6.18% | -6.67% | — | |
| Eaton Corp. plc | -14.47% | -14.06% | — | |
| GE Aerospace | -12.51% | -18.88% | — | |
| Honeywell International Inc. | -4.08% | -2.79% | — | |
| Lockheed Martin Corp. | 5.77% | 6.53% | — | |
| RTX Corp. | -7.69% | -7.22% | — | |
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 × 551 ÷ 20,421 = 2.70%
3 Click competitor name to see calculations.
The analysis of economic value creation over the three-year period reveals a significant transition from a state of value destruction to value generation. While the first two years were characterized by negative economic profit, the final year demonstrates a successful reversal of this trend.
- Net Sales Trends
- Revenue showed an upward trajectory between 2020 and 2021, increasing from 17,456 million USD to 20,613 million USD. This growth plateaued slightly in 2022, with net sales settling at 20,421 million USD, indicating a period of expansion followed by stabilization.
- Economic Profit Trajectory
- Economic profit experienced a notable decline in 2021, dropping to -1,027 million USD from -442 million USD in 2020. This indicates that despite the increase in sales during that period, the returns were insufficient to cover the cost of capital. A sharp recovery occurred in 2022, where economic profit shifted to a positive 551 million USD.
- Economic Profit Margin Analysis
- The economic profit margin mirrors the volatility of the absolute profit figures. The margin deteriorated from -2.53% in 2020 to -4.98% in 2021, suggesting a decrease in capital efficiency. The subsequent climb to a positive 2.70% in 2022 confirms that the company transitioned to generating returns that exceeded its cost of capital, reflecting improved operational efficiency and value creation.
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