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:
- Balance Sheet: Assets
- Common-Size Balance Sheet: Assets
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value to FCFF (EV/FCFF)
- Price to FCFE (P/FCFE)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Return on Equity (ROE) since 2005
- Current Ratio since 2005
- Price to Operating Profit (P/OP) 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 analysis of economic profit from 2017 to 2021 reveals a transition from value destruction to consistent value creation, characterized by a recovery in operating profitability and a strategic realignment of invested capital.
- Net Operating Profit After Taxes (NOPAT)
- A general upward trajectory is observed in NOPAT, which grew from 1,924 million US$ in 2017 to a peak of 2,907 million US$ in 2021. While a contraction occurred between 2018 and 2020, reaching a period low of 2,268 million US$ in 2020, the subsequent recovery in 2021 indicates a strong rebound in operational efficiency and earnings power.
- Invested Capital and Cost of Capital
- Invested capital experienced a notable reduction between 2017 and 2018, falling from 14,406 million US$ to 12,895 million US$, followed by a period of modest, steady growth through 2021. Concurrently, the cost of capital remained relatively stable, exhibiting a slight incremental increase from 16.29% in 2017 to 16.75% in 2021. The stabilization of the capital base alongside a rising cost of capital suggests an increasing requirement for higher operational returns to maintain value creation.
- Economic Profit Trends
- Economic profit shifted from a deficit of -422 million US$ in 2017 to a positive position of 636 million US$ by 2021. The move into positive territory in 2018 was driven by the simultaneous increase in NOPAT and the reduction in invested capital. Although economic profit declined sharply to 56 million US$ in 2020, mirroring the dip in NOPAT, the 2021 results demonstrate a return to robust value generation, nearly matching the levels seen in 2018.
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 financial performance between 2017 and 2021 is characterized by significant volatility in value creation, transitioning from a period of economic loss to consistent value generation, despite a notable contraction in 2020.
- Economic Spread Ratio
- The economic spread ratio exhibited substantial fluctuations over the five-year period. A negative spread of -2.93% in 2017 indicates that the return on invested capital was below the cost of capital. A sharp recovery occurred in 2018, with the ratio peaking at 5.16%. This positive trend moderated to 3.99% in 2019 and plummeted to a near-breakeven level of 0.42% in 2020, suggesting a near-total erosion of economic spread. By 2021, the ratio rebounded to 4.69%, signaling a return to efficient capital utilization and value creation.
- Economic Profit
- Economic profit followed a trajectory similar to the spread ratio, moving from a deficit of -422 million USD in 2017 to a surplus of 665 million USD in 2018. While profit remained positive in 2019 at 520 million USD, it experienced a severe decline in 2020, falling to 56 million USD. This represents a significant reduction in the absolute value created above the required return. A strong recovery is observed in 2021, with economic profit rising back to 636 million USD.
- Invested Capital
- Invested capital showed a general trend of stabilization following an initial reduction. A decrease from 14,406 million USD in 2017 to 12,895 million USD in 2018 suggests a strategic optimization of the capital base or a divestiture. From 2018 through 2021, the invested capital grew modestly and steadily, ending the period at 13,555 million USD. This indicates that the fluctuations in economic profit and spread were driven by operational returns rather than massive shifts in the capital base.
Overall, the analysis reveals a resilient capacity to recover from periods of value destruction. The correlation between the economic spread ratio and economic profit confirms that the organization successfully restored its ability to generate returns in excess of its cost of capital by the end of the analyzed period.
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 analysis of economic value added from 2017 to 2021 reveals a period of significant volatility in value creation, characterized by a sharp initial recovery, a subsequent contraction, and a strong rebound in the final year of the period.
- Economic Profit Trends
- Economic profit experienced a substantial reversal between 2017 and 2018, moving from a deficit of US$ 422 million to a surplus of US$ 665 million. This positive trajectory was maintained through 2019 at US$ 520 million before a sharp decline occurred in 2020, where economic profit fell to US$ 56 million. A robust recovery followed in 2021, with the figure rising back to US$ 636 million, nearly returning to the 2018 peak.
- Adjusted Operating Revenue Performance
- Operating revenue remained relatively stable between 2017 and 2019, peaking in 2018 at US$ 14,778 million. A notable contraction occurred in 2020, with revenue decreasing to US$ 12,608 million, representing the lowest point in the five-year period. By 2021, revenue recovered to US$ 14,627 million, aligning closely with pre-2020 levels.
- Economic Profit Margin Analysis
- The economic profit margin mirrors the volatility seen in absolute profit figures. The margin transitioned from a negative 2.94% in 2017 to 4.50% in 2018, indicating that the entity began generating returns in excess of its cost of capital. A period of margin compression followed, with the ratio declining to 3.69% in 2019 and reaching a near-zero low of 0.44% in 2020. The trend reversed sharply in 2021, as the margin climbed back to 4.35%, suggesting a restoration of operational efficiency and value creation capabilities.
The correlation between the decline in adjusted operating revenue and the compression of the economic profit margin in 2020 suggests that the reduction in value creation was closely linked to a decrease in top-line performance. The subsequent recovery in 2021 demonstrates a high degree of resilience, as both revenue and margins returned to levels consistent with the 2018-2019 period.