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 performance from 2019 to 2023 indicates a significant erosion of economic value, transitioning from a state of value creation to substantial value destruction. While the company began the period with a positive economic profit, it experienced a sustained decline that culminated in a severe deficit by the end of 2023.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT exhibited significant volatility over the five-year period. After a decrease in 2020, there was a partial recovery in 2021 to 2,585 million USD. However, a sharp downward trend emerged subsequently, with 2023 recording a precipitous drop to 1,014 million USD, representing a decrease of approximately 56.8% compared to the previous year.
- Invested Capital and Cost of Capital
- Invested capital followed a general upward trajectory for most of the period, rising 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. Concurrently, the cost of capital remained relatively stable, fluctuating within a narrow range between 14.88% and 15.92%. The growth in the capital base without a corresponding increase in operating profits heightened the financial burden of the cost of capital.
- Economic Profit Analysis
- Economic profit shifted from a positive 183 million USD in 2019 to consistently negative figures from 2020 onward. Although there was a brief improvement in 2021, the trend reversed sharply in 2022 and 2023. The deficit expanded to 2,155 million USD by December 31, 2023, marking the lowest point in the analyzed period.
The divergence between increasing invested capital and declining NOPAT indicates that the returns generated from operations failed to meet the required minimum return dictated by the cost of capital. This imbalance led to a compounding loss of economic value, particularly evident in 2023 when the gap between operating profit and capital charges reached its maximum extent.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
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 performance between 2019 and 2023 is characterized by period-over-period volatility and a substantial contraction in profitability during the final fiscal year. A strong correlation exists between Net Operating Profit After Taxes (NOPAT) and net income, with both metrics experiencing a synchronized decline in 2020 and a severe downturn in 2023.
- Net Operating Profit After Taxes (NOPAT) Trend
- NOPAT exhibited a fluctuating trajectory, starting at 2,609 million US$ in 2019 and decreasing to 2,018 million US$ in 2020. A recovery occurred in 2021, reaching 2,585 million US$, before entering a downward trend that culminated in a significant drop to 1,014 million US$ in 2023. The decrease from 2022 to 2023 represents a reduction of approximately 56.8%.
- Net Income Attributable to Cummins Inc. Trend
- Net income followed a pattern closely aligned with NOPAT, declining from 2,260 million US$ in 2019 to 1,789 million US$ in 2020. While figures recovered and remained relatively stable through 2021 (2,131 million US$) and 2022 (2,151 million US$), a severe contraction was observed in 2023, where net income fell to 735 million US$. This constitutes a year-over-year decline of approximately 65.9%.
- Analysis of Operating vs. Net Profitability
- A consistent positive variance is observed between NOPAT and net income across the entire five-year observation period. NOPAT consistently exceeds net income, indicating that the core operating profitability of the entity is higher than the final earnings attributable to shareholders. This disparity suggests the influence of non-operating expenses, such as interest payments on debt or other non-core financial charges, which reduce the net income relative to the operating profit.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
Cash Operating Taxes
Cummins Inc., cash operating taxes calculation
US$ 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).
A comprehensive upward trajectory is observed in both income tax expense and cash operating taxes over the five-year period from 2019 to 2023. While both metrics exhibited a slight contraction in 2020, they entered a period of sustained growth starting in 2021, with cash operating taxes experiencing a significantly more aggressive acceleration in the final two years of the period.
- Income Tax Expense Trends
- The accounting tax expense remained relatively stable between 2019 and 2021, fluctuating between 527 million and 587 million US dollars. However, a marked increase occurred thereafter, rising to 636 million US dollars in 2022 and reaching a peak of 786 million US dollars by December 31, 2023. This represents a total increase of approximately 38.8% over the analyzed timeframe.
- Cash Operating Taxes Trajectory
- Cash tax outflows followed a similar initial pattern to accounting expenses but diverged sharply starting in 2022. After maintaining a range of 544 million to 606 million US dollars from 2019 to 2021, cash operating taxes surged to 956 million US dollars in 2022 and further escalated to 1,326 million US dollars in 2023. This reflects a substantial total increase of 122.5% from 2019 levels.
- Analysis of Tax Divergence
- A widening gap is evident between the accrual-based income tax expense and the actual cash taxes paid. From 2019 to 2021, the variance remained minimal, typically under 30 million US dollars. In contrast, the variance expanded to 320 million US dollars in 2022 and reached 540 million US dollars in 2023. This divergence indicates that cash tax payments have significantly outpaced the recognized tax expense, which may impact the calculation of economic value added by increasing the cash tax burden relative to reported accounting profits.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
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.
Invested capital exhibited a general growth trend between 2019 and 2022, peaking at US$ 22,657 million before experiencing a decrease to US$ 20,768 million by the end of 2023. The overall expansion of the capital base over the five-year period indicates an increase in the total resources deployed to generate economic value, although this growth was characterized by significant volatility in the underlying financing components.
- Debt and Lease Obligations
- A substantial increase in total reported debt and leases is observed, rising from US$ 2,868 million in 2019 to a peak of US$ 8,355 million in 2022. The most pronounced acceleration occurred between 2021 and 2022, where debt levels nearly doubled. This trend reversed slightly in 2023, with debt decreasing to US$ 7,208 million.
- Shareholders' Equity Trends
- Equity demonstrated a consistent and stable upward trajectory from 2019 through 2022, increasing from US$ 7,507 million to US$ 8,975 million. This gradual growth suggests a steady accumulation of capital. A marginal contraction was noted in 2023, with equity closing at US$ 8,850 million.
- Invested Capital Correlation
- The fluctuations in invested capital are more closely aligned with changes in debt and lease obligations than with movements in shareholders' equity. The sharp increase in invested capital observed in 2022 corresponds directly with the spike in reported debt. Similarly, the reduction in invested capital in 2023 is primarily driven by the decrease in total debt, highlighting that leverage has been the primary driver of capital base volatility during this period.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
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% | = | 14.78% | ||
| 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) | (1,024) | (137) | (724) | 183) | |
| Invested capital2 | 20,768) | 22,657) | 17,518) | 17,479) | 15,235) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | -10.38% | -4.52% | -0.78% | -4.14% | 1.20% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Boeing Co. | -15.06% | -20.44% | -19.05% | — | — | |
| Caterpillar Inc. | -2.42% | -6.34% | -5.74% | — | — | |
| Eaton Corp. plc | -7.84% | -9.74% | -9.35% | — | — | |
| GE Aerospace | 1.18% | -13.77% | -18.68% | — | — | |
| Honeywell International Inc. | -2.12% | -3.10% | -2.01% | — | — | |
| Lockheed Martin Corp. | 18.22% | 14.24% | 15.22% | — | — | |
| RTX Corp. | -4.69% | -4.74% | -4.20% | — | — | |
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 deterioration in the company's ability to generate economic value. There is a clear transition from positive value creation to substantial value destruction, as evidenced by the deepening negative trajectories of both economic profit and the economic spread ratio.
- Economic Profit Analysis
- Economic profit moved from a positive position of 183 million USD in 2019 to a significant deficit of 2,155 million USD by 2023. Although a marginal improvement was observed in 2021, where losses narrowed to 137 million USD, the subsequent two years experienced an accelerated decline, with the 2023 deficit representing the most severe erosion of economic value in the analyzed period.
- Invested Capital Trends
- The capital base expanded steadily from 15,235 million USD in 2019 to a peak of 22,657 million USD in 2022. A slight contraction occurred in 2023, with invested capital settling at 20,768 million USD. The increase in invested capital during the period did not correlate with improved economic profit, suggesting that capital deployments failed to generate returns exceeding the cost of capital.
- Economic Spread Ratio Interpretation
- The economic spread ratio exhibits a volatile but overall downward trend, falling from a positive 1.20% in 2019 to a negative 10.38% in 2023. The negative spread observed from 2020 onward indicates that the return on invested capital remained consistently below the weighted average cost of capital. The sharp drop to -10.38% in the final year signifies a widening inefficiency in capital utilization and a marked decrease in economic productivity.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
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) | (1,024) | (137) | (724) | 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. | -8.69% | -15.61% | -15.13% | — | — | |
| Caterpillar Inc. | -2.10% | -6.14% | -6.62% | — | — | |
| Eaton Corp. plc | -10.62% | -14.45% | -14.04% | — | — | |
| GE Aerospace | 0.92% | -12.48% | -18.85% | — | — | |
| Honeywell International Inc. | -2.80% | -4.09% | -2.80% | — | — | |
| Lockheed Martin Corp. | 7.40% | 5.74% | 6.50% | — | — | |
| RTX Corp. | -7.38% | -7.77% | -7.30% | — | — | |
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.
Between 2019 and 2023, a significant divergence emerged between revenue growth and the generation of economic value. While adjusted net sales exhibited a strong overall upward trajectory, economic profit transitioned from a positive position to an accelerating deficit, indicating that the company failed to generate returns exceeding its cost of capital despite increasing operational scale.
- Economic Profit Trends
- Economic profit shifted from a positive US$ 183 million in 2019 to negative territory starting in 2020. Although a partial recovery occurred in 2021 with a loss of US$ 137 million, the trend deteriorated sharply thereafter, reaching a deficit of US$ 2,155 million by December 31, 2023. This represents a substantial increase in value destruction over the five-year period.
- Adjusted Net Sales Performance
- A general growth pattern is observed in adjusted net sales, which rose from US$ 23,769 million in 2019 to US$ 34,403 million in 2023. Despite a temporary contraction to US$ 19,988 million in 2020, sales grew consistently from 2021 onward, demonstrating an expansion in market reach or pricing power that did not translate into economic profit.
- Economic Profit Margin Analysis
- The economic profit margin mirrored the decline in absolute economic profit, moving from a positive 0.77% in 2019 to a negative 6.26% in 2023. The margin experienced a notable volatility between 2020 and 2021, but the subsequent decline to -3.63% in 2022 and -6.26% in 2023 suggests an accelerating inability to convert sales growth into economic value added.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?