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
Cummins Inc., economic profit calculation
US$ in millions
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2023 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 1,014 – 15.26% × 20,768 = -2,155
The financial trajectory from 2019 to 2023 indicates a significant decline in economic value creation, characterized by a shift from marginal value addition to substantial value destruction.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT demonstrated volatility throughout the period. Following a decline in 2020, a recovery was observed in 2021 and 2022. However, 2023 saw a sharp contraction, with NOPAT falling to US$ 1,014 million, representing a decrease of approximately 57% from the previous year.
- Invested Capital and Cost of Capital
- Invested capital followed a general upward trend for much of the period, rising from US$ 15,235 million in 2019 to a peak of US$ 22,657 million in 2022, before contracting slightly to US$ 20,768 million in 2023. During this same timeframe, the cost of capital remained relatively stable, oscillating between a high of 15.92% in 2019 and a low of 14.88% in 2022.
- Economic Profit Analysis
- Economic profit shifted from a positive US$ 183 million in 2019 to negative values for the remainder of the period. The deficit expanded progressively, moving from US$ -725 million in 2020 to US$ -2,155 million by 2023. This trend indicates that the returns generated by operations were consistently insufficient to cover the capital charge associated with the company's invested capital base.
- Overall Value Implications
- The divergence between increasing invested capital and declining NOPAT in the final year has accelerated the erosion of economic profit. The combination of a high cost of capital and a diminished operating profit base resulted in the most severe level of value destruction in 2023.
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Net Operating Profit after Taxes (NOPAT)
Cummins Inc., NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for doubtful account.
3 Addition of increase (decrease) in LIFO reserve. See details »
4 Addition of increase (decrease) in deferred revenue.
5 Addition of increase (decrease) in accrued product warranty.
6 Addition of increase (decrease) in equity equivalents to net income attributable to Cummins Inc..
7 2023 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 512 × 4.20% = 22
8 2023 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 397 × 21.00% = 83
9 Addition of after taxes interest expense to net income attributable to Cummins Inc..
The financial data reveals fluctuations in both net income and net operating profit after taxes (NOPAT) over the analyzed period.
- Net income attributable to Cummins Inc.
- Net income exhibited variability, beginning at 2,260 million USD in 2019 and decreasing sharply to 1,789 million USD in 2020. This was followed by a recovery in the subsequent years, rising to 2,131 million USD in 2021 and maintaining a similar level at 2,151 million USD in 2022. However, 2023 witnessed a significant decline, with net income dropping markedly to 735 million USD, which is substantially lower than any previous year in the period.
- Net operating profit after taxes (NOPAT)
- NOPAT displayed a somewhat parallel trend to net income. It started at 2,609 million USD in 2019, decreased to 2,018 million USD in 2020, then rebounded to 2,585 million USD in 2021. In 2022, there was a slight decrease to 2,348 million USD. Nevertheless, 2023 saw a pronounced decline, with NOPAT falling to 1,014 million USD. Although this drop is severe, it is less steep in percentage terms compared to net income.
Overall, the data suggests that while the company recovered from a downturn in 2020, its profitability experienced a substantial setback in 2023. The net income decline is especially pronounced relative to previous years, indicating potential issues affecting bottom-line results more acutely than operating profits. Further investigation into the causes behind the 2023 decline would be necessary to understand the underlying factors impacting financial performance.
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Cash Operating Taxes
Cummins Inc., cash operating taxes calculation
US$ in millions
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
The financial data reveals a consistent upward trend in both income tax expense and cash operating taxes over the five-year period from 2019 to 2023.
- Income Tax Expense
- This expense decreased slightly from 566 million USD in 2019 to 527 million USD in 2020. However, from 2020 onward, a steady increase is observable, with values rising to 587 million USD in 2021, 636 million USD in 2022, and reaching 786 million USD in 2023. This indicates a growth of approximately 49% over the five-year span from the minimum point in 2020 to 2023.
- Cash Operating Taxes
- Cash operating taxes exhibit a similar pattern. Starting at 596 million USD in 2019, there was a decline to 544 million USD in 2020. Following this, a significant rise is evident: 606 million USD in 2021, surging to 956 million USD in 2022, and further increasing to 1,326 million USD in 2023. This reflects a more pronounced growth trajectory, with cash operating taxes more than doubling from 2020 to 2023.
Overall, while both income tax expenses and cash operating taxes experienced slight declines in 2020—potentially due to economic effects impacting that year—the subsequent years show substantial increases. The growth in cash operating taxes is especially marked in the latter years, indicating either higher taxable operating income or changes in tax payment patterns. These upward trends suggest increasing tax-related outflows that may impact the company’s net earnings and cash flow positions.
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Invested Capital
Cummins Inc., invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
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 deferred revenue.
6 Addition of accrued product warranty.
7 Addition of equity equivalents to total Cummins Inc. shareholders’ equity.
8 Removal of accumulated other comprehensive income.
9 Subtraction of construction in process.
10 Subtraction of marketable securities.
- Total reported debt & leases
- The total reported debt and leases demonstrated a notable increase from 2019 through 2022, rising from $2,868 million to $8,355 million. This marks a nearly threefold increase over the four-year period. However, in 2023 there was a decrease to $7,208 million, suggesting a partial reduction in debt levels after the peak in 2022.
- Total Cummins Inc. shareholders’ equity
- Shareholders' equity showed consistent growth throughout the entire period. It started at $7,507 million in 2019 and increased annually to reach $8,975 million in 2022. The value slightly declined to $8,850 million in 2023, indicating a minor reduction but overall maintaining a stable upward trend over the five years.
- Invested capital
- Invested capital increased steadily from $15,235 million in 2019 to $17,518 million in 2021. A significant rise occurred in 2022, reaching $22,657 million. In 2023, invested capital decreased to $20,768 million, which, while lower than the previous year, remains notably above earlier levels. This pattern suggests an expansion phase followed by a moderate contraction.
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Cost of Capital
Cummins Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 36,436) | 36,436) | ÷ | 43,323) | = | 0.84 | 0.84 | × | 17.58% | = | 14.79% | ||
| Debt3 | 6,375) | 6,375) | ÷ | 43,323) | = | 0.15 | 0.15 | × | 3.74% × (1 – 21.00%) | = | 0.43% | ||
| Operating lease liability4 | 512) | 512) | ÷ | 43,323) | = | 0.01 | 0.01 | × | 4.20% × (1 – 21.00%) | = | 0.04% | ||
| Total: | 43,323) | 1.00 | 15.26% | ||||||||||
Based on: 10-K (reporting date: 2023-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 35,119) | 35,119) | ÷ | 43,019) | = | 0.82 | 0.82 | × | 17.58% | = | 14.35% | ||
| Debt3 | 7,400) | 7,400) | ÷ | 43,019) | = | 0.17 | 0.17 | × | 3.67% × (1 – 21.00%) | = | 0.50% | ||
| Operating lease liability4 | 500) | 500) | ÷ | 43,019) | = | 0.01 | 0.01 | × | 3.70% × (1 – 21.00%) | = | 0.03% | ||
| Total: | 43,019) | 1.00 | 14.88% | ||||||||||
Based on: 10-K (reporting date: 2022-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 31,834) | 31,834) | ÷ | 36,749) | = | 0.87 | 0.87 | × | 17.58% | = | 15.23% | ||
| Debt3 | 4,461) | 4,461) | ÷ | 36,749) | = | 0.12 | 0.12 | × | 2.92% × (1 – 21.00%) | = | 0.28% | ||
| Operating lease liability4 | 454) | 454) | ÷ | 36,749) | = | 0.01 | 0.01 | × | 2.80% × (1 – 21.00%) | = | 0.03% | ||
| Total: | 36,749) | 1.00 | 15.54% | ||||||||||
Based on: 10-K (reporting date: 2021-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 36,192) | 36,192) | ÷ | 41,310) | = | 0.88 | 0.88 | × | 17.58% | = | 15.40% | ||
| Debt3 | 4,665) | 4,665) | ÷ | 41,310) | = | 0.11 | 0.11 | × | 2.91% × (1 – 21.00%) | = | 0.26% | ||
| Operating lease liability4 | 453) | 453) | ÷ | 41,310) | = | 0.01 | 0.01 | × | 3.40% × (1 – 21.00%) | = | 0.03% | ||
| Total: | 41,310) | 1.00 | 15.69% | ||||||||||
Based on: 10-K (reporting date: 2020-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 24,689) | 24,689) | ÷ | 27,896) | = | 0.89 | 0.89 | × | 17.58% | = | 15.56% | ||
| Debt3 | 2,706) | 2,706) | ÷ | 27,896) | = | 0.10 | 0.10 | × | 4.13% × (1 – 21.00%) | = | 0.32% | ||
| Operating lease liability4 | 501) | 501) | ÷ | 27,896) | = | 0.02 | 0.02 | × | 3.30% × (1 – 21.00%) | = | 0.05% | ||
| Total: | 27,896) | 1.00 | 15.92% | ||||||||||
Based on: 10-K (reporting date: 2019-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Cummins Inc., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (2,155) | (1,025) | (137) | (725) | 183) | |
| Invested capital2 | 20,768) | 22,657) | 17,518) | 17,479) | 15,235) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | -10.38% | -4.52% | -0.78% | -4.15% | 1.20% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Boeing Co. | -15.07% | -20.46% | -19.06% | — | — | |
| Caterpillar Inc. | -2.46% | -6.38% | -5.79% | — | — | |
| Eaton Corp. plc | -7.86% | -9.76% | -9.37% | — | — | |
| GE Aerospace | 1.15% | -13.79% | -18.70% | — | — | |
| Honeywell International Inc. | -2.11% | -3.09% | -2.00% | — | — | |
| Lockheed Martin Corp. | 18.29% | 14.31% | 15.29% | — | — | |
| RTX Corp. | -4.65% | -4.69% | -4.16% | — | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2023 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -2,155 ÷ 20,768 = -10.38%
4 Click competitor name to see calculations.
The financial performance from 2019 to 2023 indicates a significant decline in economic value creation, transitioning from a positive economic profit to substantial value destruction.
- Economic Profit Trends
- A shift from a positive economic profit of 183 million USD in 2019 to a deficit of 2,155 million USD by 2023 is observed. Although a moderate recovery occurred in 2021, the subsequent years witnessed an accelerating downward trend, with the deficit increasing more than twofold between 2022 and 2023.
- Invested Capital Dynamics
- Invested capital grew from 15,235 million USD in 2019 to a peak of 22,657 million USD in 2022, before slightly contracting to 20,768 million USD in 2023. The expansion of the capital base coincided with a decline in economic profit, suggesting that the additional capital deployed did not generate returns sufficient to cover its cost.
- Economic Spread Ratio Performance
- The economic spread ratio exhibits a volatile and generally negative trajectory. After starting at 1.20% in 2019, the ratio fell into negative territory for four consecutive years, reaching a low of -10.38% in 2023. This trend underscores a widening gap between the return on invested capital and the cost of capital, reflecting a substantial erosion of economic efficiency over the five-year period.
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Economic Profit Margin
Cummins Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (2,155) | (1,025) | (137) | (725) | 183) | |
| Net sales | 34,065) | 28,074) | 24,021) | 19,811) | 23,571) | |
| Add: Increase (decrease) in deferred revenue | 338) | 143) | 174) | 177) | 198) | |
| Adjusted net sales | 34,403) | 28,217) | 24,195) | 19,988) | 23,769) | |
| Performance Ratio | ||||||
| Economic profit margin2 | -6.26% | -3.63% | -0.57% | -3.62% | 0.77% | |
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Boeing Co. | -8.70% | -15.62% | -15.14% | — | — | |
| Caterpillar Inc. | -2.14% | -6.18% | -6.67% | — | — | |
| Eaton Corp. plc | -10.64% | -14.47% | -14.06% | — | — | |
| GE Aerospace | 0.89% | -12.51% | -18.88% | — | — | |
| Honeywell International Inc. | -2.79% | -4.08% | -2.79% | — | — | |
| Lockheed Martin Corp. | 7.42% | 5.77% | 6.53% | — | — | |
| RTX Corp. | -7.31% | -7.69% | -7.22% | — | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 Economic profit. See details »
2 2023 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted net sales
= 100 × -2,155 ÷ 34,403 = -6.26%
3 Click competitor name to see calculations.
A significant divergence is observed between revenue growth and economic value creation over the five-year period from 2019 to 2023. While adjusted net sales have demonstrated a strong upward trajectory, economic profit has shifted from a positive position to substantial negative values, indicating a decline in the ability to generate returns exceeding the cost of capital.
- Economic Profit Performance
- Economic profit transitioned from a positive value of 183 million US dollars in 2019 to a significant deficit of 2.155 billion US dollars by 2023. Although a brief partial recovery occurred in 2021, where the deficit narrowed to 137 million US dollars, the subsequent two years saw a sharp acceleration in value destruction, with the loss expanding to 1.025 billion US dollars in 2022 and more than doubling in 2023.
- Adjusted Net Sales Growth
- Adjusted net sales exhibited a robust growth phase following a temporary decline in 2020. From a low of 19.988 billion US dollars in 2020, sales increased steadily to 34.403 billion US dollars by 2023. This represents a substantial expansion in top-line performance over the analyzed period.
- Economic Profit Margin Deterioration
- The economic profit margin reflects a widening gap between operating returns and the cost of capital. After starting at a positive 0.77% in 2019, the margin turned negative and reached its lowest point of -6.26% in 2023. The observation that the margin declined as sales grew suggests that the capital investments driving revenue growth have failed to produce commensurate economic returns, resulting in a systematic erosion of economic value.
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