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.
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Illinois Tool Works Inc. pages available for free this week:
- Cash Flow Statement
- Common-Size Balance Sheet: Assets
- Enterprise Value (EV)
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Return on Assets (ROA) since 2005
- Current Ratio since 2005
- Price to Earnings (P/E) since 2005
- Price to Operating Profit (P/OP) since 2005
- Price to Book Value (P/BV) since 2005
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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 between 2017 and 2021 demonstrates a significant fluctuation in economic profit. Initial observations reveal a substantial improvement in financial performance followed by a downturn, and then a recovery towards the end of the analyzed timeframe.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT increased notably from $1,924 million in 2017 to $2,774 million in 2018, indicating improved operational efficiency and profitability. A slight decrease was observed in 2019 to $2,672 million, followed by a more pronounced decline to $2,268 million in 2020. However, NOPAT rebounded strongly in 2021, reaching $2,907 million, surpassing the 2018 peak.
- Cost of Capital
- The cost of capital exhibited a modest upward trend throughout the period, increasing from 16.30% in 2017 to 16.76% in 2021. This suggests a gradual increase in the required rate of return for investors, potentially influenced by changing market conditions or perceived risk.
- Invested Capital
- Invested capital decreased from $14,406 million in 2017 to $12,895 million in 2018. It then experienced a period of relative stability, fluctuating between $13,033 million and $13,555 million from 2019 to 2021. This suggests a period of capital reallocation or optimization following the initial decrease.
- Economic Profit
- Economic profit was negative in 2017, at -$423 million, indicating that the company’s NOPAT did not cover its cost of capital. A dramatic shift occurred in 2018, with economic profit rising to $664 million. This positive trend continued in 2019, reaching $518 million, before declining significantly to $55 million in 2020. Economic profit then experienced a substantial recovery in 2021, reaching $635 million, demonstrating a return to strong value creation.
The correlation between NOPAT and economic profit is evident. The decline in NOPAT in 2020 directly contributed to the substantial reduction in economic profit during that year. Conversely, the strong NOPAT performance in 2021 drove the significant improvement in economic profit. While the cost of capital increased modestly, its impact on economic profit was less pronounced than the fluctuations in NOPAT.
Net Operating Profit after Taxes (NOPAT)
Illinois Tool Works Inc., NOPAT calculation
US$ 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. Initial observations reveal a substantial shift from negative economic profit to positive values, followed by periods of volatility and eventual improvement. The economic spread ratio mirrors these trends, indicating varying degrees of value creation over the five-year span.
- Economic Profit
- Economic profit began at a negative US$423 million in 2017, indicating the company’s returns were insufficient to cover its cost of capital. A marked improvement occurred in 2018, with economic profit rising to US$664 million. This positive trend continued into 2019, albeit at a reduced rate, reaching US$518 million. A significant decline was then observed in 2020, with economic profit falling to US$55 million. However, 2021 witnessed a strong recovery, with economic profit increasing substantially to US$635 million, surpassing the 2018 and 2019 levels.
- Invested Capital
- Invested capital experienced a decrease from US$14,406 million in 2017 to US$12,895 million in 2018. It then stabilized and showed a gradual increase over the subsequent years, reaching US$13,033 million in 2019, US$13,434 million in 2020, and finally US$13,555 million in 2021. The changes in invested capital appear relatively moderate compared to the volatility observed in economic profit.
- Economic Spread Ratio
- The economic spread ratio, which reflects the efficiency of capital allocation, exhibited a corresponding pattern to economic profit. It started at -2.94% in 2017, reflecting the negative economic profit. A substantial increase was seen in 2018, reaching 5.15%. The ratio decreased to 3.98% in 2019, then plummeted to 0.41% in 2020, coinciding with the lowest economic profit of the period. A strong rebound occurred in 2021, with the economic spread ratio rising to 4.68%, indicating improved value creation relative to invested capital.
The correlation between economic profit and the economic spread ratio is evident. The significant fluctuations in economic profit directly influence the economic spread ratio, highlighting the company’s ability to generate returns exceeding its cost of capital. The recovery in 2021 suggests improved operational efficiency and/or favorable market conditions.
Economic Profit Margin
Illinois Tool Works Inc., economic profit margin calculation, comparison to benchmarks
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ 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 swing from a negative value in 2017 to positive values in subsequent years, followed by a dip in 2020 and a recovery in 2021.
- Economic Profit Margin Trend
- In 2017, the economic profit margin stood at -2.95%. This indicates that the company’s economic profit was negative, meaning its return on capital employed was less than the cost of capital. A significant improvement occurred in 2018, with the margin rising to 4.49%, demonstrating a positive economic profit. The margin remained positive in 2019 at 3.68%, although slightly lower than the previous year.
- A marked decline was observed in 2020, with the economic profit margin decreasing to 0.43%. This suggests a substantial reduction in economic profit, potentially due to decreased revenues or increased capital costs. The margin rebounded strongly in 2021, reaching 4.34%, nearly matching the level achieved in 2018 and indicating a return to stronger economic profitability.
The economic profit margin’s movement appears correlated with the adjusted operating revenue. While revenue decreased in 2019 and 2020, the economic profit margin also decreased. Conversely, revenue increased in 2018 and 2021, coinciding with increases in the economic profit margin. However, the magnitude of the changes in revenue does not perfectly align with the changes in the margin, suggesting that factors beyond revenue, such as cost of capital or operational efficiency, also play a significant role.
- Economic Profit
- The absolute economic profit values mirror the trend in the margin. A loss of US$423 million was recorded in 2017, followed by profits of US$664 million, US$518 million, US$55 million, and US$635 million in 2018, 2019, 2020, and 2021 respectively. The low economic profit in 2020 is consistent with the low margin observed in that year.
Overall, the period demonstrates a volatile but ultimately improving trend in economic profitability. The company experienced a turnaround from negative economic profit in 2017 to substantial positive economic profit in 2018 and 2021, with a temporary setback in 2020. Further investigation into the underlying drivers of these fluctuations would be beneficial.