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.
Economic Profit
General Dynamics Corp., economic profit calculation
US$ in millions
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).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2019 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 4,114 – 15.69% × 31,608 = -844
The period under review demonstrates a fluctuating relationship between net operating profit after taxes, cost of capital, and invested capital, ultimately impacting economic profit. Initial years show positive economic profit, followed by a shift to substantial economic losses.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT generally increased from 2015 to 2019, with a slight dip in 2017. Growth was most pronounced between 2018 and 2019, increasing from US$3,683 million to US$4,114 million. This suggests improving operational efficiency or increased revenue generation over the latter part of the period.
- Cost of Capital
- The cost of capital remained relatively stable between 2015 and 2017, hovering around 17.5%. A significant decrease is observed in 2018 (15.48%) and 2019 (15.69%), potentially due to changes in market interest rates, the company’s credit rating, or its capital structure. This decrease in cost of capital, however, did not translate into improved economic profit in subsequent years.
- Invested Capital
- Invested capital exhibited a consistent upward trend throughout the period. The most substantial increase occurred between 2017 and 2018, rising from US$19,772 million to US$29,939 million. This suggests significant investment in assets or acquisitions. The increase continued, albeit at a slower pace, reaching US$31,608 million in 2019.
- Economic Profit
- Economic profit initially showed positive values in 2015 and 2016, at US$68 million and US$110 million respectively. However, it turned negative in 2017, reaching a loss of US$120 million. The losses escalated significantly in 2018 and 2019, reaching US$950 million and US$844 million respectively. This deterioration in economic profit is primarily attributable to the substantial increase in invested capital outpacing the growth in NOPAT, despite the declining cost of capital in the later years. The increasing capital base required a higher absolute NOPAT to cover the cost of that capital, a threshold not met during the latter portion of the period.
In summary, while NOPAT demonstrated growth and the cost of capital decreased, the substantial increases in invested capital resulted in a marked decline in economic profit, transitioning from positive values to significant losses. This suggests that investments made did not generate sufficient returns to cover the cost of capital.
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Net Operating Profit after Taxes (NOPAT)
General Dynamics Corp., NOPAT calculation
US$ in millions
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).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in product warranty liabilities.
3 Addition of increase (decrease) in equity equivalents to net earnings.
4 2019 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 1,503 × 3.00% = 45
5 2019 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 517 × 21.00% = 109
6 Addition of after taxes interest expense to net earnings.
7 2019 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 12 × 21.00% = 3
8 Elimination of after taxes investment income.
9 Elimination of discontinued operations.
- Net Earnings
- Net earnings remained relatively stable from 2015 to 2017, showing a slight decrease from 2,965 million USD in 2015 to 2,912 million USD in 2017. However, from 2017 onwards, a notable upward trend is observed with earnings increasing to 3,345 million USD in 2018 and further to 3,484 million USD in 2019. This indicates a period of renewed profitability growth in the last two years under review.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT experienced consistent growth over the entire period. Starting at 3,237 million USD in 2015, it increased to 3,563 million USD in 2016. Despite a slight decrease in 2017 to 3,393 million USD, the overall trend resumed upward momentum, reaching 3,683 million USD in 2018 and then significantly climbing to 4,114 million USD in 2019. This illustrates improving operational efficiency and profitability after taxes over the five-year span.
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Cash Operating Taxes
General Dynamics Corp., cash operating taxes calculation
US$ in millions
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 provision for income taxes, net, exhibited a generally stable trend between 2015 and 2017, with values of approximately 1137 million, 1169 million, and 1165 million US dollars, respectively. However, there was a notable decline starting in 2018, with the figure dropping significantly to 727 million and further slightly decreasing to 718 million US dollars in 2019. This downward shift after 2017 suggests a reduction in the overall tax burden or possible changes in tax strategies or profitability.
Cash operating taxes showed a downward trajectory over the five-year period. Starting from 1007 million US dollars in 2015, cash operating taxes decreased to 833 million in 2016, and then continued to decline slightly to 811 million in 2017. In 2018, the amount remained relatively stable at 814 million US dollars but then decreased again to 732 million in 2019. This gradual reduction aligns with the trend observed in the provision for income taxes, although the decline in cash taxes began earlier and was more gradual compared to the sharper decrease seen in the provision figures after 2017.
Overall, both tax-related metrics demonstrate a significant reduction in the company’s income tax liabilities from 2017 onwards, with cash taxes showing a steady decline throughout the entire period. This pattern may reflect changes in taxable income, effective tax rates, tax planning measures, or adjustments in accounting for tax provisions.
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Invested Capital
General Dynamics Corp., invested capital calculation (financing approach)
US$ in millions
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).
1 Addition of capitalized operating leases.
2 Elimination of deferred taxes from assets and liabilities. See details »
3 Addition of product warranty liabilities.
4 Addition of equity equivalents to shareholders’ equity.
5 Removal of accumulated other comprehensive income.
6 Subtraction of construction in process.
The analysis of the financial data over the five-year period reveals several noteworthy trends in the company's debt levels, equity base, and invested capital.
- Total Reported Debt & Leases
- The total reported debt and leases exhibited a generally increasing trend from 2015 to 2017, rising from $4,345 million to $5,188 million. A significant jump occurred between 2017 and 2018, with debt surging dramatically to $13,882 million, followed by a slight decrease in 2019 to $13,433 million. This suggests a substantial increase in leverage starting in 2018, which may reflect a strategic decision to finance growth, acquisitions, or other investments during this time.
- Shareholders’ Equity
- Shareholders’ equity steadily increased over the analyzed periods, moving from $10,738 million in 2015 to $13,577 million in 2019. The growth was relatively consistent, indicating ongoing accumulation of retained earnings and/or capital contributions. The equity growth rate appears moderate and stable compared to the more volatile changes observed in total debt.
- Invested Capital
- Invested capital increased from $18,175 million in 2015 to $19,772 million by 2017, which is a moderate growth. However, a sharp rise occurred between 2017 and 2018, coinciding with the surge in reported debt and leases, with invested capital reaching $29,939 million in 2018 and further increasing to $31,608 million in 2019. This suggests significant investment or expansion activities starting in 2018, funded in part by increased debt levels.
Overall, the data indicate a period of relative stability from 2015 through 2017, followed by a substantial increase in leverage and total invested capital beginning in 2018. The company’s equity base grew steadily throughout, providing a solid foundation despite the sharp increase in debt. This pattern may reflect a strategic shift toward accelerated growth or capital-intensive initiatives in the latter years of the period analyzed.
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Cost of Capital
General Dynamics Corp., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 53,943) | 53,943) | ÷ | 67,785) | = | 0.80 | 0.80 | × | 19.11% | = | 15.21% | ||
| Short- and long-term debt principal3 | 12,339) | 12,339) | ÷ | 67,785) | = | 0.18 | 0.18 | × | 2.97% × (1 – 21.00%) | = | 0.43% | ||
| Operating lease liability4 | 1,503) | 1,503) | ÷ | 67,785) | = | 0.02 | 0.02 | × | 3.00% × (1 – 21.00%) | = | 0.05% | ||
| Total: | 67,785) | 1.00 | 15.69% | ||||||||||
Based on: 10-K (reporting date: 2019-12-31).
1 US$ in millions
2 Equity. See details »
3 Short- and long-term debt principal. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 50,003) | 50,003) | ÷ | 63,814) | = | 0.78 | 0.78 | × | 19.11% | = | 14.97% | ||
| Short- and long-term debt principal3 | 12,346) | 12,346) | ÷ | 63,814) | = | 0.19 | 0.19 | × | 2.94% × (1 – 21.00%) | = | 0.45% | ||
| Operating lease liability4 | 1,465) | 1,465) | ÷ | 63,814) | = | 0.02 | 0.02 | × | 2.94% × (1 – 21.00%) | = | 0.05% | ||
| Total: | 63,814) | 1.00 | 15.48% | ||||||||||
Based on: 10-K (reporting date: 2018-12-31).
1 US$ in millions
2 Equity. See details »
3 Short- and long-term debt principal. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 62,217) | 62,217) | ÷ | 67,397) | = | 0.92 | 0.92 | × | 19.11% | = | 17.64% | ||
| Short- and long-term debt principal3 | 3,974) | 3,974) | ÷ | 67,397) | = | 0.06 | 0.06 | × | 2.62% × (1 – 35.00%) | = | 0.10% | ||
| Operating lease liability4 | 1,206) | 1,206) | ÷ | 67,397) | = | 0.02 | 0.02 | × | 2.62% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 67,397) | 1.00 | 17.77% | ||||||||||
Based on: 10-K (reporting date: 2017-12-31).
1 US$ in millions
2 Equity. See details »
3 Short- and long-term debt principal. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 55,414) | 55,414) | ÷ | 60,333) | = | 0.92 | 0.92 | × | 19.11% | = | 17.55% | ||
| Short- and long-term debt principal3 | 3,849) | 3,849) | ÷ | 60,333) | = | 0.06 | 0.06 | × | 2.28% × (1 – 35.00%) | = | 0.09% | ||
| Operating lease liability4 | 1,070) | 1,070) | ÷ | 60,333) | = | 0.02 | 0.02 | × | 2.28% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 60,333) | 1.00 | 17.67% | ||||||||||
Based on: 10-K (reporting date: 2016-12-31).
1 US$ in millions
2 Equity. See details »
3 Short- and long-term debt principal. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 41,154) | 41,154) | ÷ | 45,481) | = | 0.90 | 0.90 | × | 19.11% | = | 17.29% | ||
| Short- and long-term debt principal3 | 3,381) | 3,381) | ÷ | 45,481) | = | 0.07 | 0.07 | × | 2.36% × (1 – 35.00%) | = | 0.11% | ||
| Operating lease liability4 | 946) | 946) | ÷ | 45,481) | = | 0.02 | 0.02 | × | 2.36% × (1 – 35.00%) | = | 0.03% | ||
| Total: | 45,481) | 1.00 | 17.44% | ||||||||||
Based on: 10-K (reporting date: 2015-12-31).
1 US$ in millions
2 Equity. See details »
3 Short- and long-term debt principal. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
General Dynamics Corp., economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (844) | (950) | (120) | 110) | 68) | |
| Invested capital2 | 31,608) | 29,939) | 19,772) | 19,539) | 18,175) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | -2.67% | -3.17% | -0.61% | 0.56% | 0.37% | |
| 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: 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).
1 Economic profit. See details »
2 Invested capital. See details »
3 2019 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -844 ÷ 31,608 = -2.67%
4 Click competitor name to see calculations.
The economic spread ratio exhibited a declining trend between 2015 and 2019. Initially positive, the ratio transitioned to negative values, indicating a diminishing ability to generate returns exceeding the cost of capital. This shift coincides with a substantial decrease in economic profit and a concurrent increase in invested capital over the period.
- Economic Spread Ratio
- In 2015, the economic spread ratio stood at 0.37%, suggesting that the company generated returns exceeding its cost of capital. This ratio increased to 0.56% in 2016, demonstrating improved profitability relative to invested capital. However, a significant reversal began in 2017, with the ratio falling to -0.61%. This negative trend accelerated in subsequent years, reaching -3.17% in 2018 and -2.67% in 2019. The consistently negative values from 2017 onward indicate that returns generated were insufficient to cover the cost of capital.
- Economic Profit
- Economic profit began at US$68 million in 2015 and rose to US$110 million in 2016. A substantial decline commenced in 2017, with economic profit falling to a loss of US$120 million. This loss expanded significantly in 2018 to US$950 million and remained substantial in 2019 at US$844 million. The consistent negative economic profit from 2017 onward directly contributed to the declining economic spread ratio.
- Invested Capital
- Invested capital demonstrated a consistent upward trend throughout the period. Starting at US$18,175 million in 2015, it increased to US$19,539 million in 2016 and US$19,772 million in 2017. The most significant increase occurred between 2017 and 2018, rising to US$29,939 million, and continued to US$31,608 million in 2019. The increasing invested capital, coupled with declining economic profit, exacerbated the negative trend in the economic spread ratio.
The combination of decreasing economic profit and increasing invested capital resulted in a marked deterioration of the economic spread ratio. The shift from positive to negative values suggests a weakening of the company’s ability to create value for its investors.
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Economic Profit Margin
General Dynamics Corp., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (844) | (950) | (120) | 110) | 68) | |
| Revenue | 39,350) | 36,193) | 30,973) | 31,353) | 31,469) | |
| Performance Ratio | ||||||
| Economic profit margin2 | -2.15% | -2.63% | -0.39% | 0.35% | 0.22% | |
| 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: 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).
1 Economic profit. See details »
2 2019 Calculation
Economic profit margin = 100 × Economic profit ÷ Revenue
= 100 × -844 ÷ 39,350 = -2.15%
3 Click competitor name to see calculations.
The economic profit margin exhibited a volatile pattern over the five-year period. Initially positive, it transitioned to negative values and increased in magnitude before stabilizing in the most recent year.
- Economic Profit Margin
- In 2015, the economic profit margin stood at 0.22%. This increased to 0.35% in 2016, indicating improved profitability relative to the capital employed. However, a significant shift occurred in 2017, with the margin declining to -0.39%. This negative trend accelerated in 2018, reaching -2.63%, and remained negative in 2019 at -2.15%.
The economic profit margin’s movement closely mirrors the trend in economic profit. Positive economic profit in 2015 and 2016 corresponded with positive margins. The substantial declines in economic profit in 2017, 2018, and 2019 directly resulted in increasingly negative economic profit margins.
- Revenue
- Revenue demonstrated an overall upward trend, increasing from US$31,469 million in 2015 to US$39,350 million in 2019. However, revenue experienced a slight decrease between 2015 and 2016, and again between 2016 and 2017. The largest revenue increase occurred between 2018 and 2019.
Despite the growth in revenue, the economic profit margin’s deterioration suggests that revenue increases were insufficient to offset rising costs or a decline in operational efficiency relative to the capital invested. The widening gap between revenue growth and declining economic profit margins warrants further investigation into the underlying factors affecting profitability.
- Overall Trend
- The period began with positive economic profit and margin, but concluded with substantial negative economic profit and a consistently negative margin. This indicates a weakening ability to generate returns exceeding the cost of capital. The negative trend in economic profit margin, despite revenue growth, suggests potential issues with cost management, capital allocation, or competitive pressures.
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