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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Cummins Inc. pages available for free this week:
- Statement of Comprehensive Income
- Analysis of Profitability Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Enterprise Value (EV)
- Enterprise Value to EBITDA (EV/EBITDA)
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Return on Equity (ROE) since 2005
- Total Asset Turnover since 2005
- Price to Operating Profit (P/OP) since 2005
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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)
- NOPAT demonstrates a fluctuating trend over the observed years. Starting at 2,609 million USD in 2019, it decreased to 2,018 million USD in 2020, possibly reflecting adverse conditions or reduced operational efficiency. Subsequently, NOPAT increased to 2,585 million USD in 2021, indicating recovery or improved profitability. However, in 2022, it slightly fell again to 2,348 million USD and experienced a more pronounced decline to 1,014 million USD in 2023, marking the lowest point in the period and suggesting challenges impacting net operating income.
- Cost of Capital
- The cost of capital shows a gradual downward trend from 13.64% in 2019 to 12.78% in 2022, reflecting potentially lower risk perceptions or more favorable financing conditions. However, in 2023, this trend reverses slightly, rising to 13.09%, which may indicate an increase in perceived risk or higher capital costs.
- Invested Capital
- Invested capital increased steadily from 15,235 million USD in 2019 to 17,518 million USD in 2021, followed by a more substantial rise to 22,657 million USD in 2022, indicating significant investment or expansion during that period. In 2023, invested capital decreased to 20,768 million USD, suggesting a possible divestment or reduction in asset base.
- Economic Profit
- Economic profit exhibits a volatile pattern with a positive value of 531 million USD in 2019, turning negative at -330 million USD in 2020, which is indicative of value destruction during that year. It rebounded to a positive 254 million USD in 2021, signaling value creation. However, a sharp decline occurred in 2022, dropping to -548 million USD, and deteriorated further in 2023 to -1,705 million USD, highlighting significant value erosion in recent years likely due to insufficient returns relative to the invested capital and cost of capital.
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.
- Economic Profit
- The economic profit demonstrated significant volatility over the analyzed period. It started positively at 531 million USD in 2019, then declined sharply to a negative 330 million USD in 2020. In 2021, it recovered somewhat to 254 million USD, but the profitability again deteriorated substantially in 2022 and 2023, reaching negative values of 548 million USD and 1,705 million USD, respectively. This pattern indicates instability in the company's ability to generate value beyond its cost of capital, with a concerning downward trend in the most recent years.
- Invested Capital
- The invested capital showed a consistent upward trajectory until 2022, increasing from 15,235 million USD in 2019 to a peak of 22,657 million USD in 2022. However, this was followed by a decline to 20,768 million USD in 2023. This trend suggests ongoing investments and growth in the asset base or capital employed up to 2022, with a potential strategic contraction or asset reallocation occurring in the most recent year.
- Economic Spread Ratio
- The economic spread ratio, which measures the difference between return on invested capital and cost of capital, mirrored the fluctuations seen in economic profit. It started at a positive 3.48% in 2019, fell to negative 1.89% in 2020, then rebounded to 1.45% in 2021 before declining sharply to negative 2.42% in 2022 and further to -8.21% in 2023. The increasingly negative spread in the last two years highlights deteriorating efficiency in generating returns above the cost of capital, reflecting challenges in maintaining profitability.
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.
The financial data reveals notable fluctuations in key performance indicators over the five-year period ending December 31, 2023. Adjusted net sales exhibited a generally upward trajectory, increasing from approximately $23.8 billion in 2019 to $34.4 billion in 2023. This represents a significant growth in revenue generation capacity, particularly evident from 2021 onwards when sales steadily expanded year-over-year.
Contrasting this positive sales trend, economic profit displayed a highly volatile pattern with a marked decline overall. The company recorded positive economic profit of $531 million in 2019, but this figure deteriorated sharply in subsequent years, turning negative at -$330 million in 2020. Although 2021 saw a partial recovery back to a positive economic profit of $254 million, the profitability measure again declined substantially in 2022 and 2023, reaching deeply negative levels of -$548 million and -$1.705 billion respectively. This suggests challenges in translating sales growth into economic profitability.
Supporting this observation, the economic profit margin, which measures economic profit as a percentage of adjusted net sales, mirrored the erratic trend of economic profit. The margin started at a positive 2.23% in 2019 but turned negative to -1.65% in 2020, slightly rebounded to 1.05% in 2021, and then declined again to -1.94% in 2022 and further to -4.96% in 2023. The deeply negative margins in the final years underscore deteriorating operational efficiency or increased economic costs that cannot be offset by revenue growth.
In summary, despite consistent growth in adjusted net sales, economic profit and its associated margin reveal substantial profitability challenges. The data suggests that while the company is expanding its sales base, it has faced increasing difficulty in sustaining economic profit, potentially due to rising costs, investment demands, or other financial pressures leading to a negative return on capital employed in recent years.