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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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
= – × =
An analysis of the financial performance between 2019 and 2023 reveals a significant deterioration in economic value creation. The company transitioned from generating a positive economic profit in 2019 to experiencing deepening value destruction over the subsequent four years, culminating in a substantial deficit by the end of 2023.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT exhibited significant volatility throughout the period. After a decline from US$ 2,609 million in 2019 to US$ 2,018 million in 2020, a recovery occurred in 2021, reaching US$ 2,585 million. However, a downward trajectory followed, with a precipitous drop to US$ 1,014 million in 2023, representing a reduction of approximately 56.8% compared to the previous year.
- Invested Capital and Cost of Capital
- Invested capital showed a general upward trend, increasing from US$ 15,235 million in 2019 to a peak of US$ 22,657 million in 2022, before settling at US$ 20,768 million in 2023. Concurrently, the cost of capital remained relatively stable, fluctuating within a narrow range between 14.94% and 15.98%. The expansion of the invested capital base increased the absolute capital charge required to achieve a positive economic profit.
- Economic Profit Trends
- Economic profit shifted from a positive US$ 175 million in 2019 to negative territory for the remainder of the period. While a slight recovery toward the break-even point was noted in 2021 (US$ -146 million), the trend reversed sharply thereafter. The economic profit declined to US$ -1,036 million in 2022 and reached a low of US$ -2,166 million in 2023.
The widening gap between NOPAT and the cost of invested capital indicates an increasing inability to generate returns that exceed the company's cost of capital. The severe decline in economic profit in 2023 is primarily driven by the simultaneous occurrence of a sharp contraction in operating profits and a capital base that remains significantly higher than 2019 levels.
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 financial performance concerning economic value added reflects a significant downward trajectory between 2019 and 2023. The transition from positive economic profit to substantial negative values indicates a persistent failure to generate returns exceeding the company's cost of capital over the analyzed period.
- Economic Profit
- Economic profit transitioned from a surplus of US$ 175 million in 2019 to a substantial deficit of US$ 2,166 million by 2023. Although a partial recovery was observed in 2021, where losses narrowed to US$ 146 million, the subsequent two years experienced an accelerating decline, with the 2023 deficit representing a more than twofold increase compared to 2022.
- Invested Capital
- The capital base expanded from US$ 15,235 million in 2019 to a peak of US$ 22,657 million in 2022, before declining to US$ 20,768 million in 2023. The expansion of invested capital occurred concurrently with deteriorating economic profit, suggesting that the additional capital deployed did not produce sufficient returns to cover its associated costs.
- Economic Spread Ratio
- The economic spread ratio exhibits a severe contraction, moving from a positive 1.15% in 2019 to -10.43% in 2023. This trend highlights a widening gap between the return on invested capital and the cost of capital. The most significant deterioration occurred between 2022 and 2023, where the ratio dropped by 5.86 percentage points, signaling a marked decline in value creation efficiency.
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 performance from 2019 to 2023 is characterized by a significant divergence between revenue growth and economic value creation. While adjusted net sales have expanded considerably over the period, economic profit has transitioned from a positive state to an accelerating negative trajectory, indicating that the returns on capital have fallen below the required cost of capital.
- Economic Profit Trend
- A consistent downward trend is observed in economic profit, which declined from a positive US$ 175 million in 2019 to a deficit of US$ 2,166 million by December 31, 2023. Although a marginal recovery was noted in 2021, the losses intensified sharply in 2022 and 2023, signaling a substantial erosion of economic value.
- Adjusted Net Sales Performance
- Revenue demonstrates a strong growth pattern following a temporary contraction in 2020. Adjusted net sales rose from US$ 19,988 million in 2020 to US$ 34,403 million in 2023. This indicates an expansion in market reach and top-line scale during the analyzed period.
- Economic Profit Margin Analysis
- The economic profit margin mirrors the decline in absolute economic profit, moving from a positive 0.74% in 2019 to a low of -6.30% in 2023. The fact that the margin deteriorated while net sales increased suggests that the growth in revenue was achieved at the expense of economic efficiency, as the cost of capital surpassed the operating returns generated by the increased sales volume.