Economic Value Added (EVA)
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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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Cummins Inc. pages available for free this week:
- Statement of Comprehensive Income
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value to EBITDA (EV/EBITDA)
- Price to FCFE (P/FCFE)
- Operating Profit Margin since 2005
- Debt to Equity since 2005
- Price to Earnings (P/E) since 2005
- Analysis of Debt
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Economic Profit
Cummins Inc., economic profit calculation
US$ in millions
| 12 months ended: | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | |
|---|---|---|---|---|---|---|
| Net operating profit after taxes (NOPAT)1 | ||||||
| Cost of capital2 | ||||||
| Invested capital3 | ||||||
| Economic profit4 | ||||||
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
= – × =
- Net Operating Profit After Taxes (NOPAT)
- The net operating profit after taxes exhibits a fluctuating pattern over the five-year period. Beginning at $2,609 million in 2019, it experienced a decline to $2,018 million in 2020. This was followed by a recovery to $2,585 million in 2021, a slight decrease to $2,348 million in 2022, and a significant drop to $1,014 million in 2023. The overall trend indicates considerable volatility with a notable downturn in the most recent year.
- Cost of Capital
- The cost of capital demonstrated a gradual decline from 13.63% in 2019 to 12.77% in 2022, marking a modest reduction in the company's financing expenses. However, this trend reversed slightly in 2023, with the cost rising to 13.08%. The fluctuations are relatively small, indicating some stability in the company's capital costs over the period.
- Invested Capital
- Invested capital showed an overall increasing trend until 2022. Starting at $15,235 million in 2019, it rose steadily to $17,479 million in 2020 and $17,518 million in 2021, followed by a marked increase to $22,657 million in 2022. In 2023, invested capital declined to $20,768 million but remained significantly higher than the levels observed in the initial years. This suggests active investment and expansion up to 2022, with some retrenchment thereafter.
- Economic Profit
- Economic profit experienced considerable fluctuation over the five years. It was positive at $533 million in 2019 but turned negative to -$328 million in 2020. A recovery occurred in 2021 with a positive economic profit of $256 million, but 2022 and 2023 showed negative results of -$545 million and -$1,702 million, respectively. The progressively larger negative economic profit in the last two years indicates that the company failed to cover its cost of capital, reflecting diminishing value creation.
Net Operating Profit after Taxes (NOPAT)
Cummins Inc., NOPAT calculation
US$ 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
= × =
8 2023 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 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.
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.
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 $20,768 million, which, while lower than the previous year, remains notably above earlier levels. This pattern suggests an expansion phase followed by a moderate contraction.
Cost of Capital
Cummins Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2023-12-31).
1 US$ 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 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (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 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (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 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (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 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
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 | ||||||
| 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: 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 × ÷ =
4 Click competitor name to see calculations.
The data indicates significant volatility and a generally declining trend in the company's economic profit over the period analyzed. Beginning with a positive economic profit of US$533 million in 2019, which reflects a surplus of operating profit after accounting for the cost of capital, the company experienced a sharp decline in 2020 resulting in a negative economic profit of US$328 million. Although there was a partial recovery in 2021 with economic profit moving back to a positive US$256 million, this was followed by a substantial downturn in 2022 and 2023, reaching losses of US$545 million and US$1,702 million respectively.
Invested capital shows an overall upward trend from US$15,235 million at the end of 2019 to a peak of US$22,657 million in 2022 before decreasing to US$20,768 million in 2023. This increase in invested capital suggests expansions or significant reinvestment activities over the period, peaking in 2022.
The economic spread ratio, which reflects the percentage return on invested capital beyond its cost, mirrors the fluctuations observed in economic profit. From a positive 3.5% in 2019, it fell sharply to a negative -1.87% in 2020, slightly improved to 1.46% in 2021, before declining again substantially to -2.41% in 2022 and further deteriorating to -8.2% in 2023. This negative trend in the economic spread ratio indicates the company increasingly generated returns below its cost of capital, undermining value creation.
- Summary of Key Trends
- The company’s economic profit exhibited pronounced volatility, moving from positive in 2019 and 2021 to negative in subsequent years, with fiscal 2023 showing the most severe loss. Such volatility could point to operational challenges or market conditions adversely affecting profitability.
- Invested capital steadily increased from 2019 through 2022, implying ongoing investments, but then declined in 2023, potentially reflecting divestitures or write-downs.
- The economic spread ratio follows the economic profit pattern, with a decline into negative territory after 2019 and further deterioration in 2023, suggesting diminishing returns relative to the cost of invested capital.
Overall, the data portrays a company facing significant profitability challenges, with investments not yielding commensurate returns in recent years. This trend underscores a critical need to address underlying operational or strategic issues to restore positive economic value generation.
Economic Profit Margin
Cummins Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | ||||||
| Net sales | ||||||
| Add: Increase (decrease) in deferred revenue | ||||||
| Adjusted 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: 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 × ÷ =
3 Click competitor name to see calculations.
- Adjusted Net Sales
- The adjusted net sales exhibit a fluctuating but overall increasing trend from 2019 to 2023. Starting at 23,769 million US dollars in 2019, there is a decline in 2020 to 19,988 million, followed by a recovery and growth to 24,195 million in 2021. This upward momentum continues more strongly into 2022 (28,217 million) and 2023 (34,403 million), indicating a consistent expansion in sales volumes or pricing power over the recent years after the initial drop.
- Economic Profit
- The economic profit demonstrates significant volatility and a negative trend over the period. It starts positively at 533 million US dollars in 2019, sharply declines into negative territory at -328 million in 2020, rises back to a positive 256 million in 2021, then falls drastically to -545 million in 2022 and further deteriorates to -1,702 million in 2023. This pattern suggests increasing challenges in generating value beyond the cost of capital despite rising sales, with particularly adverse performance in the last two years.
- Economic Profit Margin
- The economic profit margin mirrors the fluctuations seen in economic profit. It begins at a positive 2.24% in 2019, dropping to a negative -1.64% in 2020. There is a recovery to a positive 1.06% in 2021, followed by a steep decline to -1.93% in 2022 and further down to -4.95% in 2023. The margin trend highlights deteriorating profitability relative to sales, indicating increasing costs or inefficiencies impacting the company's ability to convert revenue growth into economic gains.
- Overall Analysis
- Despite a strong recovery and consistent increase in sales after 2020, profitability as measured by economic profit and its margin has declined sharply, especially in the latter two years. This divergence suggests that while the company is growing its revenue base, it is facing rising costs, margin pressure, or capital efficiency issues, negatively impacting its economic profitability. The persistent negative economic profit and margin in recent periods warrant a closer examination of operational and financial strategies to enhance value creation going forward.