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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Illinois Tool Works Inc. pages available for free this week:
- Statement of Comprehensive Income
- Cash Flow Statement
- Common-Size Income Statement
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Reportable Segments
- Enterprise Value to EBITDA (EV/EBITDA)
- Return on Equity (ROE) since 2005
- Total Asset Turnover since 2005
- Price to Sales (P/S) since 2005
- Aggregate Accruals
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Economic Profit
Illinois Tool Works Inc., economic profit calculation
US$ in millions
| 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 under review demonstrates significant fluctuations in economic profit. Initial observations reveal a substantial improvement followed by a decline, and then a recovery, in the company’s financial performance as measured by economic value added principles.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT increased notably from 2017 to 2018, rising from US$1,924 million to US$2,774 million. This growth was followed by a decrease in 2019 to US$2,672 million, and a further decline in 2020 to US$2,268 million. A recovery is evident in 2021, with NOPAT reaching US$2,907 million, surpassing the 2018 peak.
- Cost of Capital
- The cost of capital exhibited a slight upward trend throughout the period, increasing from 16.29% in 2017 to 16.76% in 2021. While the increases were incremental, they contribute to the overall economic profit calculation.
- Invested Capital
- Invested capital decreased from US$14,406 million in 2017 to US$12,895 million in 2018. It then experienced a modest increase over the subsequent years, reaching US$13,555 million in 2021. The fluctuations in invested capital, combined with changes in NOPAT, influence the economic profit generated.
- Economic Profit
- Economic profit was negative in 2017, at -US$422 million. A significant turnaround occurred in 2018, with economic profit reaching US$665 million. This positive trend continued in 2019, with a value of US$519 million, but then sharply declined to US$55 million in 2020. A substantial recovery is observed in 2021, with economic profit increasing to US$636 million, representing the second-highest value in the observed period.
The correlation between NOPAT and economic profit is strong. The decline in NOPAT in 2020 directly corresponds to the lowest economic profit during the period. The recovery in NOPAT in 2021 is similarly reflected in the improved economic profit. The increasing cost of capital appears to have a moderating effect on economic profit, requiring higher NOPAT levels to achieve similar profit results.
Net Operating Profit after Taxes (NOPAT)
Illinois Tool Works Inc., NOPAT calculation
US$ in millions
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 doubtful accounts.
3 Addition of increase (decrease) in LIFO reserve. See details »
4 Addition of increase (decrease) in deferred revenue and customer deposits.
5 Addition of increase (decrease) in accrued product warranties.
6 Addition of increase (decrease) in equity equivalents to net income.
7 2021 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= × =
8 2021 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= × 21.00% =
9 Addition of after taxes interest expense to net income.
10 2021 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= × 21.00% =
11 Elimination of after taxes investment income.
- Net Income
- The net income exhibited an overall upward trend from 2017 to 2021, starting at 1,687 million US dollars in 2017 and rising to 2,694 million US dollars by 2021. There was a significant increase between 2017 and 2018, followed by a slight decline in 2019. A more noticeable decrease occurred in 2020, likely reflecting challenging conditions during that year. Nevertheless, the net income rebounded strongly in 2021, reaching its highest value in the period analyzed.
- Net Operating Profit After Taxes (NOPAT)
- Similar to net income, the NOPAT also demonstrated positive growth over the five-year span. It increased from 1,924 million US dollars in 2017 to 2,907 million US dollars in 2021. The data shows a peak in 2018, followed by a gradual decline in 2019 and 2020, before recovering substantially in 2021. The pattern aligns closely with the net income trend, indicating consistent operational performance and profitability improvements toward the end of the period.
- Summary of Trends
- Both net income and NOPAT reveal a pattern of growth with intermittent setbacks. The declines observed in 2019 and 2020 suggest external or internal challenges impacting profitability during those years. The recovery in 2021 indicates resilience and potential operational improvements or favorable market conditions. Overall, the financial results over the period reflect strong profitability with transient fluctuations rather than a continuous trend of increase or decrease.
Cash Operating Taxes
Illinois Tool Works Inc., cash operating taxes calculation
US$ in millions
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 trends in the provision for income taxes and cash operating taxes over a five-year period ending in 2021.
- Provision for Income Taxes
- The provision for income taxes shows a clear downward trend from 2017 through 2020, starting at $1,583 million in 2017 and declining significantly to $595 million in 2020. This represents a decrease of approximately 62.4% over three years. In 2021, the provision for income taxes experienced a slight increase to $632 million, indicating a minor reversal of the prior years’ declining trend but still remaining well below the initial 2017 level.
- Cash Operating Taxes
- Cash operating taxes followed a similar pattern to the provision for income taxes but with less pronounced variability. Beginning at $1,597 million in 2017, cash operating taxes decreased to $666 million in 2020. This decline of roughly 58.3% over four years suggests effective cash tax management or changes in taxable income. Unlike the provision for income taxes, cash operating taxes increased notably in 2021 to $821 million, representing a larger rebound compared to the provision figure but still below 2017 values.
Overall, both tax-related expenses exhibit a significant downward trend during the initial four years, which may reflect changes in earnings, tax planning strategies, or tax rate adjustments. The partial recovery in both measures in 2021 suggests a stabilization or potential increase in taxable earnings or adjustments in tax liabilities. The gap between provision and cash operating taxes is relatively narrow throughout the period, indicating consistency between accrued and actual cash tax payments.
Invested Capital
Illinois Tool Works Inc., invested capital calculation (financing approach)
US$ in millions
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 deferred revenue and customer deposits.
6 Addition of accrued product warranties.
7 Addition of equity equivalents to stockholders’ equity attributable to ITW.
8 Removal of accumulated other comprehensive income.
9 Subtraction of construction in progress.
- Total reported debt & leases
- The total reported debt and leases exhibit some variability over the analyzed period. Starting at $8,612 million in 2017, the figure declines to a low of $7,583 million in 2018, before experiencing a gradual increase, reaching $8,310 million in 2020, and then decreasing again to $7,881 million in 2021. Overall, the debt level fluctuates within a relatively narrow range, indicating some active management of debt levels without significant long-term increases or decreases.
- Stockholders’ equity attributable to ITW
- Stockholders' equity shows a declining trend from 2017 through 2019, dropping from $4,585 million to $3,026 million. In 2020, there is a slight recovery to $3,181 million, followed by a more substantial increase to $3,625 million in 2021. This pattern suggests that the company faced equity reductions initially, with a partial rebound in the later years of the period under review.
- Invested capital
- Invested capital declines from $14,406 million in 2017 to $12,895 million in 2018, then experiences a steady increase each year to $13,033 million in 2019, $13,434 million in 2020, and $13,555 million in 2021. This trend indicates growing investment in the company's operations or assets after an initial drop, reflecting possibly increased capital expenditures or acquisition activity post-2018.
Cost of Capital
Illinois Tool Works Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 21.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2021-12-31).
1 US$ in millions
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 millions
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 millions
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 millions
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 millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Illinois Tool Works 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 millions) | ||||||
| Economic profit1 | ||||||
| Invested capital2 | ||||||
| Performance Ratio | ||||||
| Economic spread ratio3 | ||||||
| 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: 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 period under review demonstrates significant fluctuations in economic performance. Initially, the company experienced a negative economic profit, which subsequently transitioned to positive values, albeit with considerable variability. This is reflected in the economic spread ratio, which exhibits a similar pattern of improvement followed by a decline and then a resurgence.
- Economic Profit
- Economic profit began at a loss of US$422 million in 2017. A substantial improvement was noted in 2018, with economic profit reaching US$665 million. This positive trend continued into 2019, though at a reduced rate, resulting in a profit of US$519 million. A significant decrease occurred in 2020, with economic profit falling to US$55 million. The final year of the period, 2021, saw a strong recovery, with economic profit increasing to US$636 million.
- Invested Capital
- Invested capital decreased from US$14,406 million in 2017 to US$12,895 million in 2018. It then experienced a modest increase over the subsequent three years, reaching US$13,555 million in 2021. The changes in invested capital appear relatively stable compared to the volatility observed in economic profit.
- Economic Spread Ratio
- The economic spread ratio mirrored the trend in economic profit. It started at -2.93% in 2017, indicating a return on invested capital below the cost of capital. The ratio improved substantially to 5.16% in 2018 and remained positive at 3.98% in 2019. A sharp decline to 0.41% occurred in 2020, suggesting a near-breakeven situation. The ratio rebounded strongly in 2021, reaching 4.69%, indicating a solid margin above the cost of capital.
The correlation between economic profit and the economic spread ratio is evident. The fluctuations in economic profit directly influence the economic spread ratio, highlighting the company’s ability to generate returns exceeding its cost of capital. The substantial improvement in 2018 and 2021, followed by the decline in 2020, warrants further investigation to understand the underlying drivers of these changes.
Economic Profit Margin
Illinois Tool Works Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | ||||||
| Operating revenue | ||||||
| Add: Increase (decrease) in deferred revenue and customer deposits | ||||||
| Adjusted operating revenue | ||||||
| Performance Ratio | ||||||
| Economic profit margin2 | ||||||
| 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: 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 ÷ Adjusted operating revenue
= 100 × ÷ =
3 Click competitor name to see calculations.
The economic profit margin exhibited considerable fluctuation between 2017 and 2021. Initial observations reveal a substantial improvement in profitability followed by a significant decline, and then a recovery towards the end of the period.
- Economic Profit Margin Trend
- In 2017, the economic profit margin stood at -2.95%, indicating the company did not generate returns exceeding its cost of capital. A marked positive shift occurred in 2018, with the margin increasing to 4.50%. This positive trend continued into 2019, albeit at a slower pace, reaching 3.69%.
- However, 2020 witnessed a dramatic decrease in the economic profit margin, falling to 0.44%. This represents a substantial contraction in the company’s ability to generate economic profit. The final period analyzed, 2021, showed a strong recovery, with the margin rebounding to 4.35%, nearly matching the level achieved in 2018.
The economic profit margin’s movement appears correlated with the adjusted operating revenue. While revenue generally increased from 2017 to 2019, the margin also improved. The decline in revenue in 2020 coincided with the sharp drop in the economic profit margin. The subsequent revenue increase in 2021 was accompanied by a restoration of the margin to a level comparable to earlier positive periods.
- Economic Profit and Margin Relationship
- The economic profit itself mirrored the margin’s trajectory. A negative economic profit of US$422 million was recorded in 2017, followed by positive economic profits of US$665 million, US$519 million, US$55 million, and US$636 million in subsequent years. The magnitude of the economic profit in 2018 and 2021 aligns with the higher economic profit margin values observed in those years.
The volatility in the economic profit margin suggests sensitivity to changes in operating revenue and/or underlying cost of capital. Further investigation into the factors driving these fluctuations would be necessary to understand the sustainability of the recent improvement observed in 2021.