Eaton Corp. plc (NYSE:ETN)

The period under review demonstrates a consistent pattern of negative economic profit, although the magnitude of the loss has decreased over time. Net operating profit after taxes (NOPAT) has exhibited a clear upward trend, while the cost of capital and invested capital have increased at a slower pace. This dynamic contributes to the observed economic profit performance.

NOPAT Trend

Net operating profit after taxes increased steadily from US$1,541 million in 2020 to US$3,854 million in 2024. This represents a substantial improvement in operational profitability over the five-year period. The largest single-year increase occurred between 2022 and 2023, with an increase of US$837 million.

Cost of Capital Trend

The cost of capital experienced a gradual increase, moving from 15.57% in 2020 to 16.78% in 2024. While the increase is consistent, it is relatively modest, suggesting that the company’s financing costs have remained stable despite broader economic conditions. The increase from 2023 to 2024 was minimal, at 0.01%.

Invested Capital Trend

Invested capital also showed an increasing trend, rising from US$27,450 million in 2020 to US$31,924 million in 2024. The rate of increase slowed over time, with smaller increments observed in the later years of the period. This suggests a potential stabilization in capital expenditure or asset growth.

Economic Profit Trend

Economic profit remained negative throughout the period, starting at a loss of US$2,734 million in 2020. However, the losses have diminished year-over-year, reaching US$1,503 million in 2024. This improvement is attributable to the faster growth of NOPAT relative to the increases in both cost of capital and invested capital. The largest reduction in the economic loss occurred between 2022 and 2023, coinciding with the largest NOPAT increase.

In summary, while the company continues to generate a negative economic profit, the trend indicates improving financial performance. The increasing NOPAT is partially offset by the rising cost of capital and invested capital, but the overall effect is a reduction in the magnitude of the economic loss. Continued monitoring of these trends will be crucial to assess whether the company can achieve positive economic profit in the future.

Net Income Attributable to Eaton Ordinary Shareholders

The net income shows a consistent upward trend over the five-year period. Starting at $1,410 million in 2020, it increased to $2,144 million in 2021, representing a significant growth of approximately 52%. This positive momentum continued with a more moderate increase to $2,462 million in 2022. Subsequently, the growth accelerated again, reaching $3,218 million in 2023 and further increasing to $3,794 million by the end of 2024. Overall, the net income more than doubled during the period, reflecting strong profitability improvements.

Net Operating Profit After Taxes (NOPAT)

NOPAT also exhibits a steady rise through the reporting years. Beginning at $1,541 million in 2020, it increased substantially to $2,328 million in 2021, an increase of around 51%. The upward trajectory continued at a slower pace in 2022 with $2,473 million. Growth accelerated significantly thereafter, reaching $3,310 million in 2023 and $3,854 million in 2024. The pattern closely mirrors that of net income, indicating improved operating efficiency and successful management of expenses and taxes.

General Observations

Both net income and NOPAT exhibit strong and consistent growth over the five years, highlighting an overall enhancement in the company's profitability and operational performance. The most substantial percentage increases occur between 2020 and 2021, followed by steady gains each subsequent year. The continuous upward trend suggests successful execution of business strategies leading to improved financial results.

Income Tax Expense

The income tax expense showed significant fluctuations over the five-year period. Starting at $331 million in 2020, it more than doubled in 2021, reaching $750 million. This was followed by a decrease to $445 million in 2022. However, the tax expense increased again in the subsequent years, rising to $604 million in 2023 and further to $768 million in 2024. Overall, despite variability, the trend indicates a general increase over the period, with a notable peak in 2021.

Cash Operating Taxes

Cash operating taxes exhibited a consistent upward trend from 2020 to 2024. Starting at $497 million in 2020, the figure rose substantially to $819 million in 2021. Though there was a slight decline in 2022 to $614 million, the amount increased again to $830 million in 2023 and further to $964 million in 2024. The pattern suggests ongoing growth in cash operating tax payments over the timeframe, with a temporary dip observed in 2022.

Comparative Insights

When comparing income tax expense and cash operating taxes, both show generally increasing trends through the years, despite some fluctuations. The income tax expense appears more volatile, with sharper increases and decreases, while cash operating taxes demonstrate a steadier increase. The largest deviations for both metrics occur in 2021, indicating possible changes in tax policies, financial performance, or accounting treatments during that year. By the end of the period, cash operating taxes surpass income tax expense, potentially reflecting differences in timing, recognition, or tax planning strategies.

Total reported debt & leases

The total reported debt and lease obligations have shown a consistent upward trend over the five-year period. Starting at $8,500 million in 2020, the figure increased to $9,984 million by the end of 2024. The most notable annual increment occurred between 2022 and 2023, where debt increased by approximately $696 million. This trend suggests a gradual rise in the company’s financial leverage over time.

Total Eaton shareholders’ equity

Shareholders’ equity demonstrated growth from $14,930 million in 2020 to a peak of $19,036 million in 2023, before slightly declining to $18,488 million in 2024. The steady increase from 2020 through 2023 indicates an accumulation of residual interest in the company assets, reflecting potentially retained earnings or capital inflows. The slight decrease in the final year may imply dividend payouts, share repurchases, or other equity adjustments.

Invested capital

Invested capital, which represents the total capital provided by shareholders and debt holders, showed a steady increase from $27,450 million in 2020 to $31,924 million in 2024. The incremental rises each year suggest ongoing investments in the company’s operational assets or capital expenditures. The rate of growth in invested capital is moderate and appears to align with the increases observed in both reported debt and equity, indicating balanced financing activities.

The period under review demonstrates a consistent pattern of negative economic profit, alongside increasing invested capital. This has resulted in a negative economic spread ratio throughout the observed timeframe, though with a notable trend toward improvement.

Economic Profit

Economic profit exhibits negative values across all years, starting at -2,734 US$ millions in 2020. While fluctuations are present, a general decreasing trend in the magnitude of the loss is observed, moving from -2,734 in 2020 to -1,503 US$ millions in 2024. This suggests a gradual improvement in profitability relative to the capital employed, despite remaining unprofitable on an economic basis.

Invested Capital

Invested capital shows a consistent upward trend, increasing from 27,450 US$ millions in 2020 to 31,924 US$ millions in 2024. This indicates a continued investment in the business, potentially driven by growth initiatives or strategic acquisitions. The increase in invested capital, coupled with negative economic profit, contributes to the sustained negative economic spread ratio.

Economic Spread Ratio

The economic spread ratio is negative for each year presented, ranging from -9.96% in 2020 to -4.71% in 2024. A clear upward trend is evident, signifying a diminishing gap between the return on invested capital and the cost of capital. The improvement from -9.96% to -4.71% suggests increasing efficiency in capital allocation or improved operational performance, though the ratio remains negative, indicating the company is not yet generating returns exceeding its cost of capital.

In summary, while the company continues to experience negative economic profit, the trend suggests a positive trajectory in its ability to generate returns relative to its invested capital. The increasing invested capital base necessitates continued focus on improving profitability to achieve a positive economic spread ratio.

The economic profit margin exhibited a consistent, albeit gradual, improvement over the five-year period. While negative throughout, the magnitude of the loss decreased year over year. This improvement occurred alongside increasing adjusted net sales.

Economic Profit Margin

The economic profit margin began at -15.29% in 2020 and progressively improved to -6.04% in 2024. The largest single-year improvement occurred between 2022 and 2023, with a shift of 3.72 percentage points. The improvement from 2023 to 2024 was smaller, at 2.47 percentage points. This suggests a potential slowing in the rate of improvement, though the trend remains positive.

The decline in the negative economic profit margin correlates with growth in adjusted net sales. Adjusted net sales increased from US$17,881 million in 2020 to US$24,870 million in 2024, representing a cumulative increase of approximately 39.1%. The consistent growth in sales, coupled with the diminishing negative economic profit margin, indicates a potential increase in the efficiency of capital deployment or an improvement in operational profitability relative to the cost of capital.

Economic Profit

Economic profit itself also showed improvement, moving from a loss of US$2,734 million in 2020 to a loss of US$1,503 million in 2024. This reduction in the absolute value of the loss mirrors the improvement observed in the economic profit margin. The largest reduction in economic profit occurred between 2022 and 2023, decreasing by US$564 million.

In summary, the period demonstrates a positive trend in economic profit margin and economic profit, despite continued negative values. The increasing adjusted net sales appear to be a contributing factor to this improvement, suggesting a strengthening financial performance relative to the cost of capital.