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 – 15.68% × 31,608 = -843
The financial performance from 2015 to 2019 is characterized by a significant divergence between operating profit growth and the expansion of the capital base, resulting in a transition from positive economic profit to substantial value destruction.
- Net Operating Profit After Taxes (NOPAT)
- A general upward trajectory is observed in NOPAT, which grew from 3,237 million US$ in 2015 to 4,114 million US$ in 2019. Despite a slight contraction in 2017, the overall trend indicates a consistent increase in the company's ability to generate operating earnings after taxes.
- Invested Capital
- Invested capital exhibited moderate growth between 2015 and 2017, remaining below 20,000 million US$. However, a sharp escalation occurred in 2018, where invested capital rose to 29,939 million US$, followed by a further increase to 31,608 million US$ in 2019. This rapid expansion of the asset base represents the most significant shift in the financial structure during the period analyzed.
- Cost of Capital
- The cost of capital remained relatively stable and peaked at 17.77% in 2017. A notable reduction occurred in 2018, dropping to 15.47%, and remained near this level in 2019 at 15.68%. While the cost of capital decreased in the latter two years, the reduction was insufficient to offset the impact of the increased capital base.
- Economic Profit Trends
- Economic profit shifted from positive values of 69 million US$ in 2015 and 111 million US$ in 2016 to negative values starting in 2017. The decline accelerated sharply in 2018, reaching a deficit of 949 million US$, and remained deeply negative at 843 million US$ in 2019. This trend indicates that the return on invested capital fell below the cost of capital, meaning the growth in NOPAT did not keep pace with the surge in invested capital, leading to a loss in economic value.
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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.
Financial performance from 2015 to 2019 reveals a general upward trajectory in both operational profitability and bottom-line earnings, characterized by a period of relative stagnation followed by accelerated growth in the latter two years.
- Net Operating Profit After Taxes (NOPAT) Trend
- NOPAT exhibited a volatile but positive growth pattern over the five-year period. After an initial increase in 2016 to 3,563 million USD, a temporary contraction occurred in 2017, with values decreasing to 3,393 million USD. This was followed by a sustained recovery, culminating in a peak of 4,114 million USD by 2019, representing a total increase of approximately 27% from the 2015 baseline.
- Net Earnings Performance
- Net earnings remained relatively flat between 2015 and 2017, experiencing marginal declines from 2,965 million USD to 2,912 million USD. A significant upward pivot occurred in 2018, where net earnings increased to 3,345 million USD, with further growth continuing into 2019 to reach 3,484 million USD.
- Operational vs. Net Profitability Variance
- A consistent positive variance is observed between NOPAT and net earnings throughout the entire period. NOPAT consistently exceeded net earnings, indicating that the core operating activities generated higher value than the final net income reported. This gap expanded notably by 2019, suggesting that while operating efficiency improved significantly, non-operating factors such as interest expenses or tax structures continued to impact the final net profit.
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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).
Analysis of tax expenditures from 2015 to 2019 reveals a general decline in both statutory provisions and actual cash outflows for operating taxes. A significant transition is noted between 2017 and 2018, during which the tax burden shifted markedly.
- Provision for Income Taxes, Net
- The provision remained relatively stable between 2015 and 2017, peaking at 1,169 million US$ in 2016. However, a substantial reduction occurred in 2018, where the figure dropped to 727 million US$, representing a decrease of approximately 37.5% from the 2017 level. This downward trajectory continued into 2019, ending at 718 million US$.
- Cash Operating Taxes
- Cash taxes exhibited a more consistent downward trend over the five-year period. From a peak of 1,007 million US$ in 2015, payments decreased to 811 million US$ by 2017. Following a period of relative stability in 2018, cash taxes further declined to 732 million US$ in 2019, reflecting a cumulative reduction of approximately 27% since 2015.
- Convergence and Divergence of Tax Metrics
- A notable shift in the relationship between tax provisions and cash payments occurred in 2018. From 2015 through 2017, the net provision for income taxes consistently exceeded cash operating taxes, indicating that accrued tax liabilities grew faster than cash disbursements. Conversely, in 2018 and 2019, cash operating taxes exceeded the net provision, suggesting a period where actual cash outflows for taxes were higher than the reported accounting expense for the period.
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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.
Invested capital exhibited a consistent upward trajectory from 2015 to 2019, characterized by a period of gradual growth followed by a significant acceleration between 2017 and 2018. Total invested capital increased from 18,175 million US dollars in 2015 to 31,608 million US dollars by the end of 2019.
- Debt and Lease Obligations
- A substantial shift in the leverage profile occurred during the analyzed period. Total reported debt and leases grew modestly from 4,345 million US dollars in 2015 to 5,188 million US dollars in 2017. A sharp increase was observed in 2018, with debt and leases rising to 13,882 million US dollars, representing a significant expansion of liabilities. This figure remained relatively stable into 2019, closing at 13,433 million US dollars.
- Shareholders’ Equity
- Equity demonstrated a steady and linear growth pattern throughout the five-year window. Starting at 10,738 million US dollars in 2015, equity increased incrementally each year, reaching 13,577 million US dollars by December 31, 2019. The growth in equity was consistent and lacked the volatility seen in the debt component.
- Capital Composition and Trends
- The expansion of the total invested capital base was primarily driven by the surge in debt and leases starting in 2018. While equity provided a stable foundation of growth, the jump in invested capital from 19,772 million US dollars in 2017 to 29,939 million US dollars in 2018 is directly attributable to the increased borrowing and lease obligations. Consequently, the proportion of debt within the invested capital increased significantly in the latter two years of the period.
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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 | × | 19.10% | = | 15.20% | ||
| 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 | 15.68% | ||||||||||
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 | × | 19.10% | = | 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 | 15.47% | ||||||||||
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 | × | 19.10% | = | 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 | × | 19.10% | = | 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 | × | 19.10% | = | 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 | 17.43% | ||||||||||
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 | (843) | (949) | (119) | 111) | 69) | |
| Invested capital2 | 31,608) | 29,939) | 19,772) | 19,539) | 18,175) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | -2.67% | -3.17% | -0.60% | 0.57% | 0.38% | |
| 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 × -843 ÷ 31,608 = -2.67%
4 Click competitor name to see calculations.
Between 2015 and 2019, a transition from economic value creation to significant value destruction is observed. While the period began with modest positive economic profits, a trend of widening deficits emerged starting in 2017, coinciding with a substantial expansion in the company's invested capital base.
- Economic Profit Analysis
- Economic profit increased slightly from $69 million in 2015 to $111 million in 2016. However, a sharp reversal occurred in 2017, with profit falling to negative $119 million. This deterioration accelerated in 2018, reaching a peak deficit of negative $949 million, before experiencing a marginal recovery to negative $843 million in 2019.
- Invested Capital Growth
- Invested capital grew steadily from $18,175 million in 2015 to $19,772 million in 2017. A significant capital infusion occurred in 2018, with invested capital jumping to $29,939 million, a growth of approximately 51% in a single year. This expansion continued into 2019, reaching $31,608 million.
- Economic Spread Ratio Trends
- The economic spread ratio remained positive through 2016, peaking at 0.57%. A transition to negative territory occurred in 2017 (-0.60%), indicating that the return on invested capital no longer exceeded the cost of capital. The ratio declined sharply to -3.17% in 2018, reflecting the combined impact of surging invested capital and plummeting economic profit. By 2019, the ratio slightly improved to -2.67%, although it remained deeply negative.
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Economic Profit Margin
General Dynamics Corp., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | (843) | (949) | (119) | 111) | 69) | |
| Revenue | 39,350) | 36,193) | 30,973) | 31,353) | 31,469) | |
| Performance Ratio | ||||||
| Economic profit margin2 | -2.14% | -2.62% | -0.38% | 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 × -843 ÷ 39,350 = -2.14%
3 Click competitor name to see calculations.
The financial performance from 2015 to 2019 is characterized by a marked deterioration in economic value creation despite a strengthening revenue trajectory. The transition from generating positive economic profit to incurring significant economic losses indicates that the returns on capital failed to keep pace with the cost of capital employed during the latter part of the period.
- Economic Profit Trajectory
- Economic profit experienced an initial increase from 69 million USD in 2015 to 111 million USD in 2016. However, a sharp reversal occurred in 2017, where the figure turned negative at -119 million USD. This downward trend accelerated significantly in 2018, reaching a low of -949 million USD, before showing a marginal recovery to -843 million USD in 2019.
- Revenue Performance
- Revenue remained relatively stagnant between 2015 and 2017, fluctuating around 31 billion USD. A period of robust growth followed, with revenue increasing to 36.19 billion USD in 2018 and further expanding to 39.35 billion USD by 2019. The data reveals a divergence where substantial increases in scale did not translate into positive economic value.
- Economic Profit Margin Analysis
- The economic profit margin mirrors the volatility of the absolute economic profit. The margin peaked at 0.35% in 2016 before collapsing to -0.38% in 2017. The most severe erosion occurred in 2018, with the margin dropping to -2.62%. Although the margin improved slightly to -2.14% in 2019, the persistent negative values confirm a sustained period of economic value destruction relative to the revenue base.
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