General Dynamics Corp. (NYSE:GD)

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General Dynamics Corp., effective income tax rate (EITR) reconciliation

	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
Statutory federal income tax rate	21.00%	21.00%	35.00%	35.00%	35.00%
State tax on commercial operations, net of federal benefits	0.70%	1.10%	0.60%	0.60%	0.60%
Impact of international operations	0.20%	0.60%	-4.50%	-3.80%	-1.40%
Domestic production deduction	0.00%	0.00%	-1.50%	-1.30%	-1.60%
Foreign derived intangible income	-1.40%	-1.20%	0.00%	0.00%	0.00%
Equity-based compensation	-1.10%	-1.10%	-2.60%	-2.00%	0.00%
Domestic tax credits	-2.00%	-1.10%	-0.80%	-0.80%	-1.10%
Contract close-outs	0.00%	-0.50%	0.00%	0.00%	-2.90%
Other, net	-0.30%	-1.00%	-0.50%	-0.10%	-0.90%
Effective income tax rate, before adoption impact of enacted change in U.S. tax law	17.10%	17.80%	25.70%	27.60%	27.70%
Adoption impact of enacted change in U.S. tax law	0.00%	0.00%	2.90%	0.00%	0.00%
Effective income tax rate	17.10%	17.80%	28.60%	27.60%	27.70%

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

A significant reduction in the effective income tax rate (EITR) is observed over the five-year period, transitioning from 27.70% in 2015 to 17.10% by 2019. This downward trajectory is primarily attributed to the reduction in the statutory federal income tax rate, which decreased from 35.00% to 21.00% beginning in 2018.

Statutory Rate and Adoption Impacts: The federal statutory rate remained constant at 35.00% from 2015 through 2017 before dropping to 21.00% in 2018 and 2019. A temporary increase in the EITR occurred in 2017, rising to 28.60% due to a 2.90% adoption impact resulting from enacted changes in U.S. tax law.
International and Domestic Tax Lever Shifts: The impact of international operations shifted from a tax benefit, peaking at -4.50% in 2017, to a tax cost of 0.60% in 2018 and 0.20% in 2019. Concurrently, the domestic production deduction, which provided a benefit between -1.30% and -1.60% from 2015 to 2017, was replaced by the foreign derived intangible income (FDII) deduction, which reduced the EITR by 1.20% in 2018 and 1.40% in 2019.
Consistent Tax Reducers: Equity-based compensation provided a consistent downward adjustment to the tax rate from 2016 through 2019, with the most significant impact of -2.60% occurring in 2017. Domestic tax credits also acted as a persistent reducer, with the benefit increasing to -2.00% in 2019, compared to -1.10% in 2015.
Variable Adjustments: Contract close-outs provided a notable tax benefit of -2.90% in 2015, though this effect diminished significantly in subsequent years, appearing only as a marginal -0.50% adjustment in 2018. Other net adjustments remained relatively minor, fluctuating between -0.10% and -1.00% throughout the period.

The overall convergence of the EITR toward the lower statutory rate in 2018 and 2019 indicates a structural shift in the tax burden, where the benefit of the lower federal rate outweighed the loss of previous international tax advantages and domestic production deductions.

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General Dynamics Corp., components of deferred tax assets and liabilities

US$ in millions

	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
Retirement benefits	1,097)	1,055)	935)	1,461)	1,347)
Lease assets	418)	—)	—)	—)	—)
Tax loss and credit carryforwards	323)	393)	437)	480)	522)
Salaries and wages	167)	160)	137)	257)	275)
Workers’ compensation	148)	138)	139)	235)	248)
Other	367)	351)	335)	396)	406)
Deferred assets	2,520)	2,097)	1,983)	2,829)	2,798)
Valuation allowances	(291)	(336)	(402)	(406)	(425)
Net deferred assets	2,229)	1,761)	1,581)	2,423)	2,373)
Intangible assets	(1,070)	(1,061)	(688)	(1,049)	(1,013)
Lease liabilities	(418)	—)	—)	—)	—)
Contract accounting methods	(375)	(530)	(500)	(532)	(261)
Property, plant and equipment	(291)	(265)	(182)	(320)	(285)
Capital Construction Fund qualified ships	(164)	(160)	(159)	(240)	(240)
Other	(359)	(284)	(221)	(245)	(203)
Deferred liabilities	(2,677)	(2,300)	(1,750)	(2,386)	(2,002)
Net deferred tax asset (liability)	(448)	(539)	(169)	37)	371)

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

The financial data indicates a transition in the net deferred tax position from a net asset to a net liability over the five-year period ending December 31, 2019. A net deferred tax asset of 371 million USD in 2015 declined to a net deferred tax liability of 448 million USD by 2019, reflecting significant shifts in both the components of deferred assets and liabilities.

Deferred Asset Trends: Gross deferred assets exhibited volatility, peaking at 2,829 million USD in 2016 before dropping to 1,983 million USD in 2017 and recovering to 2,520 million USD by 2019. The primary driver of these assets is retirement benefits, which remained the largest component throughout the period despite a notable dip in 2017. Tax loss and credit carryforwards showed a consistent downward trend, decreasing from 522 million USD in 2015 to 323 million USD in 2019. Additionally, the introduction of lease assets totaling 418 million USD in 2019 contributed to the year-end asset recovery.
Valuation Allowance Analysis: Valuation allowances against deferred assets decreased steadily from 425 million USD in 2015 to 291 million USD in 2019. This reduction suggests an increasing likelihood that the company will realize the tax benefits associated with its deferred assets over time.
Deferred Liability Drivers: Deferred liabilities grew from 2,002 million USD in 2015 to 2,677 million USD in 2019. Intangible assets consistently represent the most significant liability component, generally hovering around 1 billion USD, despite a temporary reduction in 2017. Contract accounting methods also contributed significantly, peaking at 530 million USD in 2018. In 2019, the recognition of 418 million USD in lease liabilities offset the corresponding lease assets, maintaining a neutral impact on the net position for that specific item.
Net Position Evolution: The shift to a net deferred tax liability occurred between 2016 and 2017, when the position moved from a positive 37 million USD to a negative 169 million USD. The liability peaked in 2018 at 539 million USD before slightly moderating to 448 million USD in 2019. This progression reflects a structural increase in deferred tax liabilities that outpaced the growth and realizability of deferred tax assets.

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General Dynamics Corp., deferred tax assets and liabilities, classification

US$ in millions

	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
Current deferred tax asset (included in Other current assets)	—)	—)	—)	5)	3)
Current deferred tax liability	—)	—)	—)	1,258)	829)
Noncurrent deferred tax asset (included in Other assets)	33)	38)	75)	1,362)	1,272)
Noncurrent deferred tax liability	481)	577)	244)	72)	75)

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

The company's deferred tax profile underwent a significant structural shift between 2016 and 2017, transitioning from a predominant net deferred tax asset position to a net deferred tax liability position.

Noncurrent Deferred Tax Assets: A substantial contraction in noncurrent deferred tax assets is observed between December 31, 2016, and December 31, 2017, with balances falling from 1,362 million USD to 75 million USD. This downward trend continued more gradually over the subsequent two years, ending at 33 million USD by December 31, 2019.
Noncurrent Deferred Tax Liabilities: Noncurrent deferred tax liabilities exhibited an inverse trend to the assets. After remaining relatively stable at approximately 72 to 75 million USD through 2016, liabilities increased sharply to 244 million USD in 2017 and peaked at 577 million USD in 2018. A slight reduction followed, with the balance closing at 481 million USD in 2019.
Current Deferred Tax Position: During the 2015-2016 period, current deferred tax liabilities showed a notable increase, rising from 829 million USD to 1,258 million USD. In contrast, current deferred tax assets remained negligible, moving from 3 million USD to 5 million USD. No data is available for current deferred tax items for the fiscal years 2017 through 2019.

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General Dynamics Corp., Financial Data: Reported vs. Adjusted

General Dynamics Corp., adjustments to financial statements

US$ in millions

	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
Adjustment to Current Assets
Current assets (as reported)	19,780)	18,189)	18,328)	15,447)	14,571)
Less: Current deferred tax assets, net	—)	—)	—)	5)	3)
Current assets (adjusted)	19,780)	18,189)	18,328)	15,442)	14,568)
Adjustment to Total Assets
Total assets (as reported)	48,841)	45,408)	35,046)	32,872)	31,997)
Less: Current deferred tax assets, net	—)	—)	—)	5)	3)
Less: Noncurrent deferred tax assets, net	33)	38)	75)	1,362)	1,272)
Total assets (adjusted)	48,808)	45,370)	34,971)	31,505)	30,722)
Adjustment to Current Liabilities
Current liabilities (as reported)	16,801)	14,739)	13,099)	12,846)	12,445)
Less: Current deferred tax liabilities, net	—)	—)	—)	1,258)	829)
Current liabilities (adjusted)	16,801)	14,739)	13,099)	11,588)	11,616)
Adjustment to Total Liabilities
Total liabilities (as reported)	35,264)	33,676)	23,611)	21,896)	21,259)
Less: Current deferred tax liabilities, net	—)	—)	—)	1,258)	829)
Less: Noncurrent deferred tax liabilities, net	481)	577)	244)	72)	75)
Total liabilities (adjusted)	34,783)	33,099)	23,367)	20,566)	20,355)
Adjustment to Shareholders’ Equity
Shareholders’ equity (as reported)	13,577)	11,732)	11,435)	10,976)	10,738)
Less: Net deferred tax assets (liabilities)	(448)	(539)	(169)	37)	371)
Shareholders’ equity (adjusted)	14,025)	12,271)	11,604)	10,939)	10,367)
Adjustment to Net Earnings
Net earnings (as reported)	3,484)	3,345)	2,912)	2,955)	2,965)
Add: Deferred income tax expense (benefit)	92)	(3)	401)	376)	167)
Net earnings (adjusted)	3,576)	3,342)	3,313)	3,331)	3,132)

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

An analysis of the financial position from 2015 to 2019 reveals a consistent trend of growth in the balance sheet, alongside a distinct divergence between reported and adjusted figures resulting from the removal of deferred taxes. Total assets expanded from 31,997 million USD in 2015 to 48,841 million USD in 2019, while total liabilities increased from 21,259 million USD to 35,264 million USD over the same period.

Asset Adjustment Patterns: The impact of deferred tax removal on current assets was negligible, with adjusted current assets remaining nearly identical to reported figures, particularly from 2017 onward. However, a significant difference is observed in total assets. Adjusted total assets were consistently lower than reported total assets, though this variance narrowed over time. In 2015, the difference was approximately 1,275 million USD, whereas by 2019, the gap decreased to 33 million USD.
Liability Adjustment Patterns: Adjusted total liabilities remained consistently lower than reported total liabilities throughout the five-year period. A notable shift occurred in current liabilities; significant adjustments were made in 2015 and 2016, where adjusted current liabilities were substantially lower than reported values. Starting in 2017, reported and adjusted current liabilities converged and remained identical through 2019.
Impact on Shareholders' Equity: The removal of deferred taxes shifted the valuation of shareholders' equity over time. In 2015, adjusted equity was lower than reported equity by 371 million USD. This trend reversed by 2018 and 2019, where adjusted shareholders' equity exceeded reported equity, reaching a peak difference of 448 million USD in 2019. This indicates that the net effect of removing deferred tax assets and liabilities became positive for the equity position in the latter part of the period.
Earnings Performance Analysis: Adjusted net earnings were consistently higher than reported net earnings for every year in the analyzed period. The most substantial positive variance occurred in 2016, where adjusted earnings exceeded reported earnings by 376 million USD. While reported net earnings grew from 2,965 million USD in 2015 to 3,484 million USD in 2019, the adjusted figures reflect a higher baseline of profitability throughout the duration.

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General Dynamics Corp., Financial Ratios: Reported vs. Adjusted

General Dynamics Corp., adjusted financial ratios

	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
Current Ratio
Reported current ratio	1.18	1.23	1.40	1.20	1.17
Adjusted current ratio	1.18	1.23	1.40	1.33	1.25
Net Profit Margin
Reported net profit margin	8.85%	9.24%	9.40%	9.42%	9.42%
Adjusted net profit margin	9.09%	9.23%	10.70%	10.62%	9.95%
Total Asset Turnover
Reported total asset turnover	0.81	0.80	0.88	0.95	0.98
Adjusted total asset turnover	0.81	0.80	0.89	1.00	1.02
Financial Leverage
Reported financial leverage	3.60	3.87	3.06	2.99	2.98
Adjusted financial leverage	3.48	3.70	3.01	2.88	2.96
Return on Equity (ROE)
Reported ROE	25.66%	28.51%	25.47%	26.92%	27.61%
Adjusted ROE	25.50%	27.23%	28.55%	30.45%	30.21%
Return on Assets (ROA)
Reported ROA	7.13%	7.37%	8.31%	8.99%	9.27%
Adjusted ROA	7.33%	7.37%	9.47%	10.57%	10.19%

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

An analysis of the financial ratios from 2015 to 2019 reveals a distinct trend where the removal of deferred taxes initially created a significant divergence between reported and adjusted metrics, which subsequently converged toward the end of the period. This suggests that the impact of deferred tax accounting on the financial position was most pronounced between 2015 and 2017.

Liquidity and Asset Efficiency: The adjusted current ratio was higher than the reported ratio in 2015 and 2016, indicating that deferred tax liabilities likely inflated current liabilities. By 2018 and 2019, these figures converged completely, suggesting a stabilization or elimination of the deferred tax impact on short-term liquidity. Total asset turnover followed a similar pattern; adjusted turnover was higher in the early years but converged with reported figures by 2018. Both metrics exhibited a consistent downward trend over the five-year period, declining from approximately 1.0 in 2015 to 0.81 in 2019.
Profitability and Returns: Net profit margins showed a marked improvement when adjusted for deferred taxes from 2015 to 2017, with the adjusted margin peaking at 10.70% in 2017 compared to the reported 9.40%. However, by 2019, the gap narrowed significantly. Return on Assets (ROA) mirrored this trend, with adjusted values remaining higher until 2018, when they aligned with reported figures. Conversely, Return on Equity (ROE) transitioned from being higher on an adjusted basis (2015-2017) to being lower than reported figures in 2018 and 2019, indicating a shift in the relationship between net income and equity after the removal of deferred taxes.
Solvency and Leverage: Financial leverage experienced an overall increase over the observed period, rising from approximately 3.0 in 2015 to 3.60 (reported) and 3.48 (adjusted) by 2019, with a notable peak in 2018. Throughout the entire duration, the adjusted financial leverage remained lower than the reported leverage, suggesting that the removal of deferred tax entries consistently reduced the calculated leverage ratio, though the gap remained relatively narrow compared to profitability metrics.

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	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Current assets	19,780)	18,189)	18,328)	15,447)	14,571)
Current liabilities	16,801)	14,739)	13,099)	12,846)	12,445)
Liquidity Ratio
Current ratio¹	1.18	1.23	1.40	1.20	1.17
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted current assets	19,780)	18,189)	18,328)	15,442)	14,568)
Adjusted current liabilities	16,801)	14,739)	13,099)	11,588)	11,616)
Liquidity Ratio
Adjusted current ratio²	1.18	1.23	1.40	1.33	1.25

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

2019 Calculations

¹ Current ratio = Current assets ÷ Current liabilities
= 19,780 ÷ 16,801 = 1.18

² Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= 19,780 ÷ 16,801 = 1.18

An evaluation of the liquidity position from 2015 to 2019 indicates a general increase in both current assets and current liabilities, with a peak in liquidity efficiency observed in 2017.

Current Asset Trends: Both reported and adjusted current assets exhibited a consistent upward trajectory, increasing from approximately 14.6 billion US$ in 2015 to 19.78 billion US$ by 2019. The variance between reported and adjusted asset values was negligible during the initial years and became nonexistent from 2017 onwards.
Current Liability Trends: Adjusted current liabilities showed an overall increase from 11.62 billion US$ in 2015 to 16.80 billion US$ in 2019. A notable discrepancy existed between reported and adjusted current liabilities in 2015 and 2016, with adjusted liabilities being lower than reported figures. This gap closed entirely in 2017, after which reported and adjusted liabilities remained identical through 2019.
Adjusted Current Ratio Analysis: The adjusted current ratio demonstrated an initial improvement, rising from 1.25 in 2015 to a peak of 1.40 in 2017. Following this peak, a downward trend is observed, with the ratio declining to 1.23 in 2018 and reaching 1.18 by the end of 2019. During the 2015 and 2016 periods, the adjusted current ratio presented a more favorable liquidity profile than the reported current ratio, although the two metrics converged completely starting in 2017.

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	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Net earnings	3,484)	3,345)	2,912)	2,955)	2,965)
Revenue	39,350)	36,193)	30,973)	31,353)	31,469)
Profitability Ratio
Net profit margin¹	8.85%	9.24%	9.40%	9.42%	9.42%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net earnings	3,576)	3,342)	3,313)	3,331)	3,132)
Revenue	39,350)	36,193)	30,973)	31,353)	31,469)
Profitability Ratio
Adjusted net profit margin²	9.09%	9.23%	10.70%	10.62%	9.95%

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

2019 Calculations

¹ Net profit margin = 100 × Net earnings ÷ Revenue
= 100 × 3,484 ÷ 39,350 = 8.85%

² Adjusted net profit margin = 100 × Adjusted net earnings ÷ Revenue
= 100 × 3,576 ÷ 39,350 = 9.09%

Financial performance between 2015 and 2019 is characterized by a divergence between absolute net earnings growth and net profit margin stability. While net earnings reached their highest levels at the end of the period, both reported and adjusted profit margins showed a general decline in the final two years.

Adjusted Net Profit Margin Trends: The adjusted net profit margin experienced a period of expansion from 2015 to 2017, increasing from 9.95% to a peak of 10.70%. This trend reversed sharply in 2018, with the margin dropping to 9.23%, and continuing a slight descent to 9.09% in 2019.
Net Earnings Progression: Adjusted net earnings demonstrated consistent growth, rising from US$ 3,132 million in 2015 to US$ 3,576 million in 2019. Reported net earnings mirrored this upward trajectory in the latter half of the period, increasing from US$ 2,912 million in 2017 to US$ 3,484 million in 2019.
Analysis of Margin Compression: A trend of margin compression is evident as reported net profit margins declined steadily from 9.42% in 2015 to 8.85% in 2019. The observation that net earnings increased while margins decreased indicates that revenue growth exceeded the growth rate of net income, or that operational costs increased more rapidly than earnings.
Convergence of Reported and Adjusted Metrics: A notable convergence between reported and adjusted figures is observed toward the end of the period. The disparity between reported and adjusted net profit margins was most significant in 2016 and 2017, but by 2018 and 2019, the values became nearly identical, suggesting a decrease in the influence of one-time adjustments on the bottom line.

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	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Revenue	39,350)	36,193)	30,973)	31,353)	31,469)
Total assets	48,841)	45,408)	35,046)	32,872)	31,997)
Activity Ratio
Total asset turnover¹	0.81	0.80	0.88	0.95	0.98
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Revenue	39,350)	36,193)	30,973)	31,353)	31,469)
Adjusted total assets	48,808)	45,370)	34,971)	31,505)	30,722)
Activity Ratio
Adjusted total asset turnover²	0.81	0.80	0.89	1.00	1.02

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

2019 Calculations

¹ Total asset turnover = Revenue ÷ Total assets
= 39,350 ÷ 48,841 = 0.81

² Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= 39,350 ÷ 48,808 = 0.81

A comprehensive evaluation of the asset utilization metrics from 2015 to 2019 reveals a period of substantial balance sheet expansion coupled with a decline in operational efficiency regarding asset turnover.

Total Asset Growth: Reported total assets grew consistently over the five-year period, increasing from US$ 31,997 million in 2015 to US$ 48,841 million in 2019. The most pronounced increase occurred between 2017 and 2018, where assets rose by approximately 29.6% in a single year, indicating significant capital investment or acquisition activity during that interval.
Asset Turnover Trends: Both reported and adjusted total asset turnover ratios experienced a steady decline from 2015 through 2018. The adjusted total asset turnover began at 1.02 in 2015 and decreased to 0.80 by 2018, before stabilizing at 0.81 in 2019. This downward trajectory suggests that revenue growth did not keep pace with the rapid expansion of the asset base, leading to diminished asset productivity.
Comparative Analysis of Reported and Adjusted Metrics: In the initial years of the period, adjusted total asset turnover was higher than reported turnover, specifically at 1.02 versus 0.98 in 2015 and 1.00 versus 0.95 in 2016. This indicates that the adjustments made to the asset base initially provided a more favorable view of efficiency. However, by 2018 and 2019, the reported and adjusted ratios converged to 0.80 and 0.81 respectively, suggesting that the impact of the adjustments became negligible as the total asset base grew.

The overall financial pattern indicates that while the company successfully scaled its asset base, this expansion resulted in a lower turnover ratio, reflecting a decrease in the efficiency with which assets are utilized to generate revenue.

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	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Total assets	48,841)	45,408)	35,046)	32,872)	31,997)
Shareholders’ equity	13,577)	11,732)	11,435)	10,976)	10,738)
Solvency Ratio
Financial leverage¹	3.60	3.87	3.06	2.99	2.98
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted total assets	48,808)	45,370)	34,971)	31,505)	30,722)
Adjusted shareholders’ equity	14,025)	12,271)	11,604)	10,939)	10,367)
Solvency Ratio
Adjusted financial leverage²	3.48	3.70	3.01	2.88	2.96

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

2019 Calculations

¹ Financial leverage = Total assets ÷ Shareholders’ equity
= 48,841 ÷ 13,577 = 3.60

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted shareholders’ equity
= 48,808 ÷ 14,025 = 3.48

A consistent expansion in both reported and adjusted total assets is observed from 2015 through 2019. Total reported assets increased from 31,997 million USD to 48,841 million USD, with a particularly significant surge occurring between 2017 and 2018, where assets grew by approximately 29.8%. Shareholders' equity followed a similar upward trajectory, though at a more moderate pace, increasing from 10,738 million USD to 13,577 million USD over the five-year period.

Financial Leverage Trends: Reported financial leverage remained relatively stable between 2015 and 2017, fluctuating between 2.98 and 3.06. However, a sharp increase occurred in 2018, reaching a peak of 3.87 before moderating to 3.60 in 2019. The adjusted financial leverage followed a nearly identical pattern, peaking at 3.70 in 2018 and declining to 3.48 in 2019.
Comparative Analysis of Reported vs. Adjusted Metrics: Adjusted financial leverage remained consistently lower than reported financial leverage throughout the analyzed period. This divergence is attributed to the adjustments made to both total assets and shareholders' equity. While adjusted assets were typically lower than reported assets, the adjusted shareholders' equity exceeded reported equity from 2018 onwards, contributing to the lower adjusted leverage ratio.
Leverage Volatility and Asset Growth: The correlation between the spike in total assets in 2018 and the peak in financial leverage suggests a period of increased debt-funded expansion or a significant change in the capital structure during that fiscal year. The subsequent decline in leverage in 2019, despite continued asset growth, indicates an improvement in the equity-to-asset ratio or a reduction in total liabilities.

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	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Net earnings	3,484)	3,345)	2,912)	2,955)	2,965)
Shareholders’ equity	13,577)	11,732)	11,435)	10,976)	10,738)
Profitability Ratio
ROE¹	25.66%	28.51%	25.47%	26.92%	27.61%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net earnings	3,576)	3,342)	3,313)	3,331)	3,132)
Adjusted shareholders’ equity	14,025)	12,271)	11,604)	10,939)	10,367)
Profitability Ratio
Adjusted ROE²	25.50%	27.23%	28.55%	30.45%	30.21%

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

2019 Calculations

¹ ROE = 100 × Net earnings ÷ Shareholders’ equity
= 100 × 3,484 ÷ 13,577 = 25.66%

² Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted shareholders’ equity
= 100 × 3,576 ÷ 14,025 = 25.50%

The financial performance from 2015 to 2019 demonstrates a general increase in both earnings and equity, although the efficiency of capital utilization as measured by return on equity shows a declining trend in adjusted terms.

Earnings Performance: Reported net earnings remained relatively stable between 2015 and 2017 before increasing to 3,484 million by 2019. Adjusted net earnings consistently exceeded reported figures throughout the five-year period, peaking at 3,576 million in 2019. This consistent variance indicates that non-recurring items or tax-related adjustments typically reduced the reported net income relative to the adjusted performance.
Equity Growth: A steady upward trajectory is observed in shareholders' equity. Reported equity grew from 10,738 million in 2015 to 13,577 million in 2019, while adjusted equity followed a similar growth pattern, reaching 14,025 million by the end of the period. The consistent expansion of the equity base suggests a strengthening of the overall capital position.
Return on Equity (ROE) Trends: A divergence is observed between reported and adjusted ROE trajectories. Reported ROE fluctuated over the period, reaching a peak of 28.51% in 2018 before declining to 25.66% in 2019. Conversely, adjusted ROE experienced a persistent decline from a high of 30.45% in 2016 to 25.50% in 2019. The convergence of these two metrics by 2019 suggests that the impact of adjustments on the return calculation diminished over time as the equity base grew.

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	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
As Reported
Selected Financial Data (US$ in millions)
Net earnings	3,484)	3,345)	2,912)	2,955)	2,965)
Total assets	48,841)	45,408)	35,046)	32,872)	31,997)
Profitability Ratio
ROA¹	7.13%	7.37%	8.31%	8.99%	9.27%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net earnings	3,576)	3,342)	3,313)	3,331)	3,132)
Adjusted total assets	48,808)	45,370)	34,971)	31,505)	30,722)
Profitability Ratio
Adjusted ROA²	7.33%	7.37%	9.47%	10.57%	10.19%

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

2019 Calculations

¹ ROA = 100 × Net earnings ÷ Total assets
= 100 × 3,484 ÷ 48,841 = 7.13%

² Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × 3,576 ÷ 48,808 = 7.33%

Between 2015 and 2019, a divergence is observed between earnings growth and asset expansion, resulting in a gradual compression of the Return on Assets (ROA).

Earnings Performance: Reported net earnings increased from 2,965 million USD in 2015 to 3,484 million USD in 2019. Adjusted net earnings followed a similar upward trajectory, rising from 3,132 million USD to 3,576 million USD over the same period. The adjusted figures remained consistently higher than the reported figures, suggesting that non-recurring items or tax-related adjustments negatively impacted the reported net earnings.
Asset Base Expansion: Total assets grew substantially from 31,997 million USD in 2015 to 48,841 million USD in 2019. A significant acceleration in asset growth occurred between 2017 and 2018, during which reported assets increased from 35,046 million USD to 45,408 million USD. Adjusted total assets mirrored this growth pattern closely, reflecting a large-scale increase in the organization's resource base.
ROA Trajectory and Efficiency: Reported ROA experienced a steady decline from 9.27% in 2015 to 7.13% in 2019. Adjusted ROA peaked at 10.57% in 2016 before declining to 7.33% by 2019. This downward trend indicates that the rate of asset accumulation significantly outpaced the rate of earnings growth, leading to diminished efficiency in asset utilization over the five-year duration.
Convergence of Adjusted and Reported Metrics: A notable convergence between reported and adjusted ROA occurred in the latter part of the period. From 2015 to 2017, the adjusted ROA provided a meaningful uplift over the reported figure. However, by 2018 and 2019, the gap narrowed significantly, with both metrics converging toward the 7.1% to 7.4% range.

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