Economic Value Added (EVA)
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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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Ecolab Inc. pages available for free this week:
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Reportable Segments
- Enterprise Value to EBITDA (EV/EBITDA)
- Price to FCFE (P/FCFE)
- Capital Asset Pricing Model (CAPM)
- Return on Equity (ROE) since 2005
- Return on Assets (ROA) since 2005
- Current Ratio since 2005
- Price to Operating Profit (P/OP) since 2005
- Analysis of Revenues
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Economic Profit
Ecolab Inc., economic profit calculation
US$ in thousands
| 12 months ended: | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | |
|---|---|---|---|---|---|---|
| Net operating profit after taxes (NOPAT)1 | ||||||
| Cost of capital2 | ||||||
| Invested capital3 | ||||||
| Economic profit4 | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2021 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= – × =
The period between 2017 and 2021 demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) fluctuated, it did not generate sufficient returns to cover the cost of invested capital. The cost of capital remained relatively stable, with a slight increase between 2017 and 2020, followed by a decrease in 2021. Invested capital also exhibited variability, impacting the overall economic profit calculation.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT increased from US$1,369,555 thousand in 2017 to US$1,771,309 thousand in 2018, representing a substantial gain. However, it then decreased to US$1,736,725 thousand in 2019 before experiencing a more significant decline to US$1,206,880 thousand in 2020. A partial recovery was observed in 2021, with NOPAT reaching US$1,348,902 thousand. Despite the recovery, NOPAT remained below the 2018 peak.
- Cost of Capital
- The cost of capital increased steadily from 14.69% in 2017 to 15.64% in 2020. This increase suggests a rising cost of funding for the business. In 2021, the cost of capital decreased to 14.98%, potentially due to changes in market conditions or the company’s financial structure.
- Invested Capital
- Invested capital generally increased from US$17,388,578 thousand in 2017 to US$18,090,500 thousand in 2019. A notable decrease occurred in 2020, with invested capital falling to US$15,595,900 thousand. The level of invested capital then rose again in 2021 to US$18,430,300 thousand, exceeding the 2019 value.
- Economic Profit
- Economic profit remained negative throughout the analyzed period. The magnitude of the negative economic profit increased consistently from -US$1,184,829 thousand in 2017 to -US$1,411,239 thousand in 2021. This indicates a widening gap between the return generated by the invested capital and the cost of that capital. The largest negative economic profit occurred in 2021, despite the partial recovery in NOPAT.
The consistent negative economic profit suggests that the company’s investments are not generating returns sufficient to cover its cost of capital. The fluctuations in NOPAT and invested capital contribute to the variability in the magnitude of the economic loss, but the underlying trend remains consistently unfavorable.
Net Operating Profit after Taxes (NOPAT)
Ecolab Inc., NOPAT calculation
US$ in thousands
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for expected credit losses.
3 Addition of increase (decrease) in LIFO reserve. See details »
4 Addition of increase (decrease) in restructuring liability.
5 Addition of increase (decrease) in equity equivalents to net income (loss) attributable to Ecolab.
6 2021 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= × =
7 2021 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= × 21.00% =
8 Addition of after taxes interest expense to net income (loss) attributable to Ecolab.
9 2021 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= × 21.00% =
10 Elimination of after taxes investment income.
11 Elimination of discontinued operations.
- Net Income (Loss) Attributable to Ecolab
- The net income attributable to Ecolab exhibited positive values from 2017 through 2019, with a slight decrease in 2018 followed by a recovery in 2019. However, in 2020, there was a significant decline, reflected by a net loss of approximately 1.2 billion US dollars. This downturn was reversed in 2021, where net income returned to a positive figure, measuring around 1.13 billion US dollars, although still below the 2019 peak.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT showed an overall increasing trend from 2017 to 2019, starting at about 1.37 billion US dollars and peaking at roughly 1.74 billion US dollars in 2019. In 2020, similar to net income, NOPAT experienced a decline but remained positive at about 1.21 billion US dollars. In 2021, there was a moderate recovery, with NOPAT increasing to approximately 1.35 billion US dollars; however, this figure did not reach the 2019 peak level.
- Summary of Trends and Insights
- The data indicates that the company experienced a strong performance in the initial years up to 2019, with increasing profitability as evidenced by both net income and NOPAT. The year 2020 represents a notable inflection point with a severe reduction in profitability, culminating in a net loss. This suggests that external or internal factors during 2020 heavily impacted earnings. Both metrics improved in 2021, reflecting a recovery phase, but the full return to the profitability levels of 2019 has not yet been realized by the end of that year. The persistence of positive NOPAT through the downturn indicates ongoing operational profitability despite overall net losses in 2020.
Cash Operating Taxes
Ecolab Inc., cash operating taxes calculation
US$ in thousands
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
The financial data reveals notable fluctuations in the provision for income taxes and cash operating taxes over the five-year period.
- Provision for income taxes
- This item experienced an overall increase from 242,400 thousand US dollars in 2017 to a peak of 364,300 thousand US dollars in 2018. Subsequently, it decreased to 322,700 thousand US dollars in 2019 and sharply declined further to 176,600 thousand US dollars in 2020. However, it rebounded to 270,200 thousand US dollars in 2021. This pattern indicates volatility with a significant dip in 2020, possibly linked to changes in taxable income or tax regulations, followed by a partial recovery in the final year.
- Cash operating taxes
- Cash operating taxes presented a different trend characterized by a marked decrease from 692,614 thousand US dollars in 2017 to 329,842 thousand US dollars in 2018. After this drop, values rose to 405,411 thousand US dollars in 2019, followed by another decline to 280,171 thousand US dollars in 2020. There was a moderate increase to 319,507 thousand US dollars in 2021. Overall, the data exhibits considerable volatility with no sustained growth or decline, indicating fluctuating cash tax outflows over the years.
In summary, both provision for income taxes and cash operating taxes show significant variability throughout the period, with notable decreases in 2020 likely tied to the extraordinary circumstances of that year. The partial rebounds in 2021 suggest a normalization trend, although both metrics remain below their initial high points observed in earlier years.
Invested Capital
Ecolab Inc., invested capital calculation (financing approach)
US$ in thousands
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
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 restructuring liability.
6 Addition of equity equivalents to total Ecolab shareholders’ equity.
7 Removal of accumulated other comprehensive income.
8 Subtraction of construction in progress.
- Total Reported Debt & Leases
- The total reported debt and leases exhibit a fluctuating pattern over the observed periods. Starting at approximately $7.88 billion in 2017, there is a gradual decline until 2019, reaching about $6.93 billion. This is followed by a slight increase in 2020 to approximately $7.11 billion, and a notable rise in 2021 to roughly $9.16 billion. The large increase in 2021 indicates a significant change in the company's leverage or financing activities.
- Total Shareholders' Equity
- Shareholders’ equity shows a general upward trend from 2017 to 2019, rising from around $7.62 billion to approximately $8.69 billion. However, in 2020, there is a sharp decrease to about $6.17 billion, followed by a partial recovery in 2021 to approximately $7.22 billion. The drop in 2020 could reflect significant losses, dividend payments, share repurchases, or other equity-reducing activities during that year.
- Invested Capital
- Invested capital demonstrates an increase from 2017 to 2019, moving from around $17.39 billion to $18.09 billion. In 2020, there is a decline to approximately $15.60 billion, consistent with the reduction in shareholders' equity and the minor increase in debt. By 2021, invested capital rises again to about $18.43 billion, reaching its highest level in the observed timeframe. This trend suggests active adjustments in the capital structure and investment base through the period.
Cost of Capital
Ecolab Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2021-12-31).
1 US$ in thousands
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 thousands
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 thousands
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: 2018-12-31).
1 US$ in thousands
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 – 35.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 35.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2017-12-31).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Ecolab Inc., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | ||||||
| Economic profit1 | ||||||
| Invested capital2 | ||||||
| Performance Ratio | ||||||
| Economic spread ratio3 | ||||||
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2021 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × ÷ =
4 Click competitor name to see calculations.
The economic spread ratio exhibited a generally declining trend over the five-year period from 2017 to 2021. While fluctuating, the ratio consistently remained negative, indicating that the company’s return on invested capital was less than its cost of capital throughout the analyzed timeframe.
- Economic Spread Ratio
- In 2017, the economic spread ratio was -6.81%. This figure improved slightly to -5.47% in 2018, suggesting a modest narrowing of the gap between return and cost of capital. However, the ratio deteriorated again in 2019 to -5.97%, followed by a more substantial decline to -7.90% in 2020. The downward trend continued into 2021, with the ratio reaching -7.66%.
The negative economic spread ratio across all years suggests persistent underperformance in generating returns exceeding the cost of capital. The increasing negativity from 2017 to 2020 indicates a widening gap, while the slight improvement in 2021 offers a limited indication of potential stabilization, though returns still fall short of capital costs.
- Relationship to Economic Profit
- The consistently negative economic profit values align with the negative economic spread ratios. As economic profit is calculated using the economic spread, the negative values reinforce the observation that the company is destroying, rather than creating, economic value. The increasing magnitude of negative economic profit from 2017 to 2021 corresponds with the increasingly negative economic spread ratio.
The invested capital figures show some fluctuation, decreasing notably in 2020 before increasing again in 2021. However, this change in invested capital does not appear to significantly alter the overall trend of the economic spread ratio, suggesting that the primary driver of the negative spread is a consistent inability to generate returns that cover the cost of capital, rather than changes in the capital base itself.
Economic Profit Margin
Ecolab Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | ||||||
| Economic profit1 | ||||||
| Net sales | ||||||
| Performance Ratio | ||||||
| Economic profit margin2 | ||||||
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 Economic profit. See details »
2 2021 Calculation
Economic profit margin = 100 × Economic profit ÷ Net sales
= 100 × ÷ =
3 Click competitor name to see calculations.
The economic profit margin exhibited a consistent decline over the five-year period from 2017 to 2021. While economic profit remained negative throughout the observed timeframe, its absolute value increased, contributing to the worsening margin. Net sales demonstrated initial growth before experiencing a significant contraction in 2020, followed by partial recovery.
- Economic Profit Margin
- The economic profit margin decreased steadily from -8.56% in 2017 to -11.08% in 2021. This indicates a growing disparity between the company’s cost of capital and the returns generated from its net sales. The margin’s negative value consistently signifies that the company’s economic profit was negative, meaning it did not generate returns exceeding its cost of capital.
- Net Sales Trend
- Net sales increased from US$13,838,300 thousand in 2017 to US$14,906,300 thousand in 2019, representing a period of revenue growth. However, a substantial decrease was observed in 2020, with net sales falling to US$11,790,200 thousand. A partial recovery occurred in 2021, with net sales reaching US$12,733,100 thousand, but remained below the 2019 peak.
- Relationship between Economic Profit and Net Sales
- Despite the initial increase in net sales from 2017 to 2019, the economic profit margin did not improve correspondingly. This suggests that increases in costs or capital charges outpaced revenue growth during that period. The significant decline in net sales in 2020 coincided with a more pronounced deterioration in the economic profit margin, indicating that the revenue decrease exacerbated the existing profitability challenges. The partial sales recovery in 2021 did not translate into an improved economic profit margin, further reinforcing the concern regarding underlying profitability issues.
The consistent negative economic profit and the declining economic profit margin suggest a need for a thorough review of cost structure, capital allocation, and pricing strategies. The impact of the 2020 net sales decline on economic profit warrants further investigation.