Return on Capital (ROC)
Return on capital (ROC) is after tax rate of return on net business assets. ROIC is unaffected by changes in interest rates or company debt and equity structure. It measures business productivity performance.
Return on Invested Capital (ROIC)
Cummins Inc., ROIC 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) | ||||||
| Net operating profit after taxes (NOPAT)1 | 1,014) | 2,348) | 2,585) | 2,018) | 2,609) | |
| Invested capital2 | 20,768) | 22,657) | 17,518) | 17,479) | 15,235) | |
| Performance Ratio | ||||||
| ROIC3 | 4.88% | 10.36% | 14.75% | 11.55% | 17.13% | |
| Benchmarks | ||||||
| ROIC, Competitors4 | ||||||
| Boeing Co. | -0.17% | -5.72% | -5.35% | — | — | |
| Caterpillar Inc. | 18.02% | 13.41% | 12.58% | — | — | |
| Eaton Corp. plc | 10.48% | 8.00% | 7.84% | — | — | |
| GE Aerospace | 20.95% | 2.73% | -2.53% | — | — | |
| Honeywell International Inc. | 12.37% | 11.54% | 12.33% | — | — | |
| Lockheed Martin Corp. | 25.46% | 21.60% | 22.51% | — | — | |
| RTX Corp. | 3.80% | 4.24% | 4.52% | — | — | |
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 Invested capital. See details »
3 2023 Calculation
ROIC = 100 × NOPAT ÷ Invested capital
= 100 × 1,014 ÷ 20,768 = 4.88%
4 Click competitor name to see calculations.
The return on invested capital exhibits a significant overall downward trajectory over the five-year period from 2019 to 2023, decreasing from 17.13% to 4.88%. This decline indicates a substantial erosion in the efficiency with which capital is deployed to generate operating profits.
- Net Operating Profit After Taxes (NOPAT)
- Operating profitability has been characterized by volatility and a severe terminal decline. After an initial dip in 2020, NOPAT recovered strongly in 2021 to 2,585 million US$. However, a sharp contraction occurred in 2023, with NOPAT falling to 1,014 million US$, a decrease of approximately 56.8% from the 2022 value of 2,348 million US$.
- Invested Capital
- The capital base grew consistently from 2019 through 2022, rising from 15,235 million US$ to a peak of 22,657 million US$. Although there was a moderate reduction in 2023 to 20,768 million US$, the total invested capital remains significantly higher than the 2019 baseline, increasing the threshold of profit required to maintain stable ROIC levels.
- Return on Invested Capital (ROIC) Trends
- The ROIC performance shows a pattern of unstable recovery followed by a collapse. The ratio dropped from 17.13% in 2019 to 11.55% in 2020, partially recovered to 14.75% in 2021, and then entered a steep decline. The fall to 4.88% in 2023 is the result of the simultaneous effect of a diminished NOPAT and a capital base that remains expanded relative to the start of the period, signaling a marked decrease in capital productivity.
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Decomposition of ROIC
Cummins Inc., decomposition of ROIC
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 Operating profit margin (OPM). See calculations »
2 Turnover of capital (TO). See calculations »
3 Effective cash tax rate (CTR). See calculations »
The Return on Invested Capital (ROIC) exhibited a significant downward trajectory over the five-year period, declining from 17.13% in 2019 to 4.88% in 2023. This erosion in capital returns is primarily driven by a compression in operating margins and an increase in the effective cash tax burden, which outweighed improvements in capital turnover.
- Operating Profit Margin (OPM)
- A consistent downward trend is observed in operating profitability. The margin decreased from 13.49% in 2019 to 11.71% in 2022, followed by a sharp contraction to 6.80% in 2023. This steady decline suggests increasing operational costs or pricing pressures that have significantly reduced the profit generated per unit of revenue.
- Turnover of Capital (TO)
- Capital efficiency demonstrated volatility but remained the most resilient component of the ROIC decomposition. After a dip to 1.14 in 2020, the ratio recovered to 1.38 in 2021 and reached a period peak of 1.66 in 2023. While the increase in turnover indicates a more efficient use of invested capital to generate sales in the final year, this gain was insufficient to offset the decline in margins.
- Effective Cash Tax Rate Impact
- The tax component, represented as 1 minus the effective cash tax rate, shows a severe decline from 81.40% in 2019 to 43.33% in 2023. This trend indicates a substantial increase in the cash taxes paid relative to operating profit, which acted as a primary catalyst for the overall reduction in ROIC, particularly in the 2022-2023 period.
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Operating Profit Margin (OPM)
Cummins Inc., OPM 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) | ||||||
| Net operating profit after taxes (NOPAT)1 | 1,014) | 2,348) | 2,585) | 2,018) | 2,609) | |
| Add: Cash operating taxes2 | 1,326) | 956) | 606) | 544) | 596) | |
| Net operating profit before taxes (NOPBT) | 2,341) | 3,304) | 3,191) | 2,562) | 3,206) | |
| 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) | |
| Profitability Ratio | ||||||
| OPM3 | 6.80% | 11.71% | 13.19% | 12.82% | 13.49% | |
| Benchmarks | ||||||
| OPM, Competitors4 | ||||||
| Boeing Co. | 0.85% | -3.49% | -3.17% | — | — | |
| Caterpillar Inc. | 20.95% | 17.42% | 19.09% | — | — | |
| Eaton Corp. plc | 17.76% | 14.81% | 15.90% | — | — | |
| GE Aerospace | 17.53% | 4.46% | -2.35% | — | — | |
| Honeywell International Inc. | 20.28% | 19.83% | 21.58% | — | — | |
| Lockheed Martin Corp. | 13.04% | 11.60% | 11.85% | — | — | |
| RTX Corp. | 7.71% | 10.88% | 9.65% | — | — | |
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 Cash operating taxes. See details »
3 2023 Calculation
OPM = 100 × NOPBT ÷ Adjusted net sales
= 100 × 2,341 ÷ 34,403 = 6.80%
4 Click competitor name to see calculations.
The financial performance from 2019 to 2023 reveals a significant divergence between top-line growth and operating efficiency. Although adjusted net sales experienced an overall upward trajectory, culminating in a five-year peak in 2023, this growth was not accompanied by a corresponding increase in operating profitability.
- Operating Profit Margin (OPM) Erosion
- A consistent downward trend in the operating profit margin is evident beginning in 2021. The margin shifted from 13.19% in 2021 to 11.71% in 2022, followed by a sharp contraction to 6.80% in 2023. This represents a substantial decline in the percentage of revenue retained as operating profit, indicating a significant reduction in operational efficiency.
- Revenue and Profit Divergence
- A stark disconnect between revenue and profit is observed between 2022 and 2023. During this period, adjusted net sales increased from 28,217 million to 34,403 million. However, net operating profit before taxes (NOPBT) decreased from 3,304 million to 2,341 million. This inverse correlation suggests that the costs associated with generating increased sales volume grew at a rate that outpaced revenue gains.
- Net Operating Profit Before Taxes (NOPBT) Volatility
- NOPBT exhibited fluctuations throughout the period, with an initial decline in 2020 to 2,562 million and a subsequent recovery to a peak of 3,304 million by 2022. The decline to 2,341 million in 2023 is particularly notable as it constitutes the lowest operating profit recorded in the five-year span, occurring simultaneously with the period's highest sales figures.
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Turnover of Capital (TO)
Cummins Inc., TO 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) | ||||||
| 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) | |
| Invested capital1 | 20,768) | 22,657) | 17,518) | 17,479) | 15,235) | |
| Efficiency Ratio | ||||||
| TO2 | 1.66 | 1.25 | 1.38 | 1.14 | 1.56 | |
| Benchmarks | ||||||
| TO, Competitors3 | ||||||
| Boeing Co. | 1.73 | 1.31 | 1.26 | — | — | |
| Caterpillar Inc. | 1.15 | 1.03 | 0.87 | — | — | |
| Eaton Corp. plc | 0.74 | 0.67 | 0.67 | — | — | |
| GE Aerospace | 1.29 | 1.10 | 0.99 | — | — | |
| Honeywell International Inc. | 0.76 | 0.76 | 0.72 | — | — | |
| Lockheed Martin Corp. | 2.46 | 2.48 | 2.34 | — | — | |
| RTX Corp. | 0.64 | 0.61 | 0.58 | — | — | |
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 Invested capital. See details »
2 2023 Calculation
TO = Adjusted net sales ÷ Invested capital
= 34,403 ÷ 20,768 = 1.66
3 Click competitor name to see calculations.
The analysis of capital efficiency from 2019 to 2023 reveals a period of volatility followed by a significant strengthening of asset productivity. The turnover of capital experienced a notable contraction in 2020 before entering a recovery phase, ultimately reaching its highest level in the five-year period by the end of 2023.
- Adjusted Net Sales Performance
- A significant contraction in revenue occurred in 2020, with adjusted net sales falling to 19,988 million US$. However, this was followed by a consistent and accelerating growth trajectory. Sales increased to 24,195 million US$ in 2021, 28,217 million US$ in 2022, and peaked at 34,403 million US$ in 2023, representing a substantial recovery and expansion of the top line.
- Invested Capital Dynamics
- Invested capital showed a general upward trend between 2019 and 2022, rising from 15,235 million US$ to a peak of 22,657 million US$. This indicates an expansion of the capital base during this period. In 2023, a reversal occurred as invested capital decreased to 20,768 million US$, suggesting either a strategic optimization of the balance sheet or a reduction in capital expenditures.
- Turnover of Capital (TO) Efficiency
- The turnover ratio reflects the company's ability to generate sales from its invested capital. The ratio declined from 1.56 in 2019 to a low of 1.14 in 2020, correlating with the decline in net sales. While the ratio recovered to 1.38 in 2021, it dipped slightly to 1.25 in 2022 as the growth in invested capital outpaced revenue growth. A sharp improvement is observed in 2023, where the ratio reached 1.66, driven by the simultaneous increase in net sales and the reduction in invested capital.
The convergence of increasing revenue and a reduced capital base in 2023 resulted in a peak efficiency level for capital turnover. This suggests an improved ability to generate higher volumes of business with a more streamlined capital investment.
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Effective Cash Tax Rate (CTR)
Cummins Inc., CTR 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) | ||||||
| Net operating profit after taxes (NOPAT)1 | 1,014) | 2,348) | 2,585) | 2,018) | 2,609) | |
| Add: Cash operating taxes2 | 1,326) | 956) | 606) | 544) | 596) | |
| Net operating profit before taxes (NOPBT) | 2,341) | 3,304) | 3,191) | 2,562) | 3,206) | |
| Tax Rate | ||||||
| CTR3 | 56.67% | 28.93% | 18.99% | 21.24% | 18.60% | |
| Benchmarks | ||||||
| CTR, Competitors4 | ||||||
| Boeing Co. | 111.76% | — | — | — | — | |
| Caterpillar Inc. | 25.26% | 25.42% | 24.06% | — | — | |
| Eaton Corp. plc | 20.06% | 19.89% | 26.02% | — | — | |
| GE Aerospace | 7.01% | 44.47% | — | — | — | |
| Honeywell International Inc. | 19.41% | 23.25% | 20.13% | — | — | |
| Lockheed Martin Corp. | 20.72% | 24.95% | 18.89% | — | — | |
| RTX Corp. | 22.52% | 36.10% | 18.64% | — | — | |
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 Cash operating taxes. See details »
3 2023 Calculation
CTR = 100 × Cash operating taxes ÷ NOPBT
= 100 × 1,326 ÷ 2,341 = 56.67%
4 Click competitor name to see calculations.
An analysis of the cash tax burden reveals a significant and accelerating increase in the effective cash tax rate (CTR) from 2019 through 2023. While the company maintained a relatively stable tax profile in the early part of the period, a sharp divergence between profitability and cash tax payments occurred in the final two years.
- Cash Operating Taxes
- Cash tax outflows exhibited a consistent upward trajectory after 2020. Payments rose from US$ 596 million in 2019 to US$ 1,326 million in 2023, representing a total increase of 122%. The most aggressive growth occurred between 2021 and 2023, where annual tax payments more than doubled.
- Net Operating Profit Before Taxes (NOPBT)
- Profitability demonstrated volatility over the five-year period. After a decline in 2020, NOPBT recovered to peak at US$ 3,304 million in 2022. However, 2023 saw a substantial contraction in profitability, with NOPBT falling to US$ 2,341 million, a decrease of approximately 29% from the previous year.
- Effective Cash Tax Rate (CTR)
- The CTR remained stable between 18.60% and 21.24% from 2019 to 2021. A notable upward shift began in 2022, reaching 28.93%. In 2023, the CTR experienced an exponential increase to 56.67%. This surge is the result of a simultaneous increase in cash tax payments and a decrease in NOPBT, indicating that cash tax obligations have decoupled from current operating profitability.
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