Cummins Inc. (NYSE:CMI)

The period under review demonstrates a declining trend in economic profit. While positive in 2019, economic profit transitioned to negative values and continued to decrease through 2023. This decline is attributable to a combination of fluctuations in net operating profit after taxes, changes in the cost of capital, and increases in invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced a decrease from US$2,609 million in 2019 to US$2,018 million in 2020, followed by a recovery to US$2,585 million in 2021. A further decline to US$2,348 million occurred in 2022, with a substantial reduction to US$1,014 million in 2023. This represents the most significant volatility among the reported items and contributes heavily to the overall trend in economic profit.

Cost of Capital

The cost of capital exhibited a slight decrease from 15.85% in 2019 to 15.47% in 2021. It then increased to 14.82% in 2022 before rising again to 15.19% in 2023. While relatively stable, these fluctuations influence the calculation of economic profit, particularly when combined with changes in NOPAT and invested capital.

Invested Capital

Invested capital increased consistently from US$15,235 million in 2019 to US$22,657 million in 2022. A slight decrease to US$20,768 million was observed in 2023. The growth in invested capital, coupled with declining NOPAT, exacerbated the negative trend in economic profit.

Economic Profit

Economic profit began at US$194 million in 2019, indicating value creation. However, it became negative in 2020 at -US$712 million and continued to deteriorate, reaching -US$2,141 million in 2023. The magnitude of the negative economic profit increased substantially over the period, suggesting a growing shortfall between returns generated and the cost of capital employed. The largest decrease occurred between 2022 and 2023.

The observed trend suggests a weakening ability to generate returns exceeding the cost of capital. The significant decline in NOPAT in 2023, combined with a relatively high level of invested capital, appears to be the primary driver of the increasingly negative economic profit.

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.

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.

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.

The economic spread ratio exhibited a markedly declining trend between 2019 and 2023. Initially positive, the ratio transitioned to negative values and demonstrated increasing negativity over the period. This shift correlates with a pattern of decreasing economic profit alongside fluctuating invested capital.

Economic Spread Ratio

In 2019, the economic spread ratio stood at 1.27%. This indicates that the company generated a return on invested capital exceeding its cost of capital. However, the ratio decreased substantially to -4.08% in 2020, signifying that the return on invested capital fell below the cost of capital. A slight improvement was observed in 2021, with the ratio reaching -0.71%, but this was followed by further declines to -4.46% in 2022 and a significant drop to -10.31% in 2023. The increasing negative values suggest a widening gap between the cost of capital and the returns generated from invested capital.

Economic profit followed a contrasting trend. While positive at US$194 million in 2019, it became negative in 2020, reaching -US$712 million. Subsequent years continued to show negative economic profit, with values of -US$125 million, -US$1,010 million, and -US$2,141 million in 2021, 2022, and 2023 respectively. This indicates a consistent failure to generate returns exceeding the cost of capital.

Invested Capital

Invested capital increased from US$15,235 million in 2019 to US$17,479 million in 2020 and US$17,518 million in 2021. A more substantial increase was observed in 2022, reaching US$22,657 million. However, invested capital decreased to US$20,768 million in 2023. The fluctuations in invested capital do not appear to fully explain the declining economic spread ratio, as the most significant decline in the ratio occurred despite a relatively high level of invested capital in 2022.

The combined trends suggest that the company’s ability to generate returns on its invested capital has deteriorated over the analyzed period. While invested capital has generally increased, the economic spread ratio and economic profit have consistently declined, indicating a growing inefficiency in capital allocation or a decrease in operational profitability relative to the cost of capital.

The economic profit margin exhibited a clear downward trend over the five-year period. Initially positive, it transitioned to negative values and progressively declined in magnitude. This shift indicates a weakening in the company’s ability to generate returns exceeding its cost of capital.

Economic Profit Margin

In 2019, the economic profit margin stood at 0.82%. This positive margin suggests that the company was generating economic profit at that time. However, the following year, in 2020, the margin became negative, registering at -3.56%. This represents a substantial decline and indicates the company’s returns were no longer covering its cost of capital.

The economic profit margin remained negative in 2021 (-0.52%) and 2022 (-3.58%), fluctuating but remaining below zero. The margin experienced a further deterioration in 2023, reaching -6.22%, the lowest value observed during the analyzed period. This signifies an increasing gap between the company’s returns and its cost of capital.

The trend in economic profit mirrors the economic profit margin. While a profit of US$194 million was recorded in 2019, subsequent years saw significant losses. The economic profit decreased to -US$712 million in 2020, -US$125 million in 2021, -US$1,010 million in 2022, and further to -US$2,141 million in 2023. This consistent decline in economic profit directly contributes to the worsening economic profit margin.

Adjusted net sales demonstrate an overall increasing trend, rising from US$23,769 million in 2019 to US$34,403 million in 2023. However, this increase in sales revenue has not translated into improved economic profitability. The widening negative economic profit margin, despite growing sales, suggests that the company’s cost of capital is increasing at a faster rate than its ability to generate returns from sales, or that operational inefficiencies are eroding profitability.