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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.

Economic Profit
Net Operating Profit after Taxes (NOPAT)
Cash Operating Taxes
Invested Capital
Cost of Capital
Economic Spread Ratio
Economic Profit Margin

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	2,907)	2,268)	2,672)	2,774)	1,924)
Cost of capital²	13.04%	12.82%	12.87%	12.76%	12.69%
Invested capital³	13,555)	13,434)	13,033)	12,895)	14,406)

Economic profit⁴	1,140)	545)	996)	1,128)	96)

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
= 2,907 – 13.04% × 13,555 = 1,140

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Item	Description	The company
Economic profit	Economic profit is a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital.	Illinois Tool Works Inc. economic profit decreased from 2019 to 2020 but then increased from 2020 to 2021 exceeding 2019 level.

Illinois Tool Works Inc., NOPAT calculation

US$ in millions

12 months ended:	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
Net income	2,694)	2,109)	2,521)	2,563)	1,687)
Deferred income tax expense (benefit)¹	(148)	(30)	32)	34)	64)
Increase (decrease) in allowance for doubtful accounts²	(1)	9)	(1)	(22)	—)
Increase (decrease) in LIFO reserve³	36)	(7)	(8)	8)	3)
Increase (decrease) in deferred revenue and customer deposits⁴	172)	34)	(27)	10)	25)
Increase (decrease) in accrued product warranties⁵	1)	—)	—)	—)	—)
Increase (decrease) in equity equivalents⁶	60)	6)	(4)	30)	92)
Interest expense	202)	206)	221)	257)	260)
Interest expense, operating lease liability⁷	4)	4)	5)	7)	9)
Adjusted interest expense	206)	210)	226)	264)	269)
Tax benefit of interest expense⁸	(43)	(44)	(47)	(55)	(94)
Adjusted interest expense, after taxes⁹	163)	166)	178)	208)	175)
Interest income	(12)	(17)	(29)	(35)	(45)
Investment income, before taxes	(12)	(17)	(29)	(35)	(45)
Tax expense (benefit) of investment income¹⁰	3)	4)	6)	7)	16)
Investment income, after taxes¹¹	(9)	(13)	(23)	(28)	(29)
Net operating profit after taxes (NOPAT)	2,907)	2,268)	2,672)	2,774)	1,924)

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
= 194 × 1.98% = 4

⁸ 2021 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 206 × 21.00% = 43

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
= 12 × 21.00% = 3

¹¹ Elimination of after taxes investment income.

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Item	Description	The company
NOPAT	Net operating profit after taxes is income from operations, but after removement of taxes calculated on cash basis that are relevant to operating income.	Illinois Tool Works Inc. NOPAT decreased from 2019 to 2020 but then increased from 2020 to 2021 exceeding 2019 level.

Illinois Tool Works Inc., cash operating taxes calculation

US$ in millions

12 months ended:	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
Provision for income taxes	632)	595)	767)	831)	1,583)
Less: Deferred income tax expense (benefit)	(148)	(30)	32)	34)	64)
Add: Tax savings from interest expense	43)	44)	47)	55)	94)
Less: Tax imposed on investment income	3)	4)	6)	7)	16)
Cash operating taxes	821)	666)	776)	845)	1,597)

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).

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Item	Description	The company
Cash operating taxes	Cash operating taxes are estimated by adjusting income tax expense for changes in deferred taxes and tax benefit from the interest deduction.	Illinois Tool Works Inc. cash operating taxes decreased from 2019 to 2020 but then increased from 2020 to 2021 exceeding 2019 level.

Illinois Tool Works Inc., invested capital calculation (financing approach)

US$ in millions

	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
Short-term debt	778)	350)	4)	1,351)	850)
Long-term debt	6,909)	7,772)	7,754)	6,029)	7,478)
Operating lease liability¹	194)	188)	179)	203)	284)
Total reported debt & leases	7,881)	8,310)	7,937)	7,583)	8,612)
Stockholders’ equity attributable to ITW	3,625)	3,181)	3,026)	3,254)	4,585)
Net deferred tax (assets) liabilities²	102)	55)	152)	153)	(341)
Allowance for doubtful accounts³	28)	29)	20)	21)	43)
LIFO reserve⁴	118)	82)	89)	97)	89)
Deferred revenue and customer deposits⁵	394)	222)	188)	215)	205)
Accrued product warranties⁶	46)	45)	45)	45)	45)
Equity equivalents⁷	688)	433)	494)	531)	41)
Accumulated other comprehensive (income) loss, net of tax⁸	1,502)	1,642)	1,705)	1,677)	1,287)
Noncontrolling interest	1)	1)	4)	4)	4)
Adjusted stockholders’ equity attributable to ITW	5,816)	5,257)	5,229)	5,466)	5,917)
Construction in progress⁹	(142)	(133)	(133)	(154)	(123)
Invested capital	13,555)	13,434)	13,033)	12,895)	14,406)

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.

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Item	Description	The company
Invested capital	Capital is an approximation of the economic book value of all cash invested in going-concern business activities.	Illinois Tool Works Inc. invested capital increased from 2019 to 2020 and from 2020 to 2021.

Illinois Tool Works Inc., cost of capital calculations

Dec 31, 2021

	Capital (fair value)¹	Weights					Cost of capital
Equity²	68,130)	68,130)	÷	76,830)	=	0.89	0.89	×	14.45%	=	12.81%
Debt³	8,506)	8,506)	÷	76,830)	=	0.11	0.11	×	2.54% × (1 – 21.00%)	=	0.22%
Operating lease liability⁴	194)	194)	÷	76,830)	=	0.00	0.00	×	1.98% × (1 – 21.00%)	=	0.00%
Total:	76,830)					1.00					13.04%

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 »

Dec 31, 2020

	Capital (fair value)¹	Weights					Cost of capital
Equity²	63,643)	63,643)	÷	73,243)	=	0.87	0.87	×	14.45%	=	12.56%
Debt³	9,412)	9,412)	÷	73,243)	=	0.13	0.13	×	2.61% × (1 – 21.00%)	=	0.26%
Operating lease liability⁴	188)	188)	÷	73,243)	=	0.00	0.00	×	2.34% × (1 – 21.00%)	=	0.00%
Total:	73,243)					1.00					12.82%

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 »

Dec 31, 2019

	Capital (fair value)¹	Weights					Cost of capital
Equity²	59,902)	59,902)	÷	68,695)	=	0.87	0.87	×	14.45%	=	12.60%
Debt³	8,614)	8,614)	÷	68,695)	=	0.13	0.13	×	2.63% × (1 – 21.00%)	=	0.26%
Operating lease liability⁴	179)	179)	÷	68,695)	=	0.00	0.00	×	2.59% × (1 – 21.00%)	=	0.01%
Total:	68,695)					1.00					12.87%

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 »

Dec 31, 2018

	Capital (fair value)¹	Weights					Cost of capital
Equity²	47,317)	47,317)	÷	55,185)	=	0.86	0.86	×	14.45%	=	12.39%
Debt³	7,666)	7,666)	÷	55,185)	=	0.14	0.14	×	3.29% × (1 – 21.00%)	=	0.36%
Operating lease liability⁴	203)	203)	÷	55,185)	=	0.00	0.00	×	3.29% × (1 – 21.00%)	=	0.01%
Total:	55,185)					1.00					12.76%

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 »

Dec 31, 2017

	Capital (fair value)¹	Weights					Cost of capital
Equity²	55,795)	55,795)	÷	64,980)	=	0.86	0.86	×	14.45%	=	12.41%
Debt³	8,901)	8,901)	÷	64,980)	=	0.14	0.14	×	3.09% × (1 – 35.00%)	=	0.28%
Operating lease liability⁴	284)	284)	÷	64,980)	=	0.00	0.00	×	3.09% × (1 – 35.00%)	=	0.01%
Total:	64,980)					1.00					12.69%

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 »

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	1,140)	545)	996)	1,128)	96)
Invested capital²	13,555)	13,434)	13,033)	12,895)	14,406)
Performance Ratio
Economic spread ratio³	8.41%	4.06%	7.64%	8.75%	0.67%
Benchmarks
Economic Spread Ratio, Competitors⁴
Boeing Co.	-18.46%	-30.02%	-19.89%	—	—
Caterpillar Inc.	0.97%	-5.15%	1.17%	—	—
Cummins Inc.	2.63%	-0.70%	4.69%	—	—
Eaton Corp. plc	-4.37%	-6.48%	-3.80%	—	—
General Electric Co.	-13.82%	-3.96%	-6.51%	—	—
Honeywell International Inc.	0.21%	-1.22%	3.05%	—	—
Lockheed Martin Corp.	14.23%	17.53%	18.15%	—	—
RTX Corp.	-2.71%	-8.23%	0.27%	—	—

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 × 1,140 ÷ 13,555 = 8.41%

⁴ Click competitor name to see calculations.

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Performance ratio	Description	The company
Economic spread ratio	The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital.	Illinois Tool Works Inc. economic spread ratio deteriorated from 2019 to 2020 but then improved from 2020 to 2021 exceeding 2019 level.

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	1,140)	545)	996)	1,128)	96)

Operating revenue	14,455)	12,574)	14,109)	14,768)	14,314)
Add: Increase (decrease) in deferred revenue and customer deposits	172)	34)	(27)	10)	25)
Adjusted operating revenue	14,627)	12,608)	14,082)	14,778)	14,339)
Performance Ratio
Economic profit margin²	7.79%	4.32%	7.07%	7.64%	0.67%
Benchmarks
Economic Profit Margin, Competitors³
Boeing Co.	-14.64%	-24.59%	-9.23%	—	—
Caterpillar Inc.	1.12%	-7.15%	1.27%	—	—
Cummins Inc.	1.90%	-0.61%	3.00%	—	—
Eaton Corp. plc	-6.56%	-9.95%	-5.24%	—	—
General Electric Co.	-13.95%	-6.33%	-9.68%	—	—
Honeywell International Inc.	0.30%	-1.81%	3.55%	—	—
Lockheed Martin Corp.	6.07%	7.52%	7.79%	—	—
RTX Corp.	-4.82%	-16.81%	0.36%	—	—

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 × 1,140 ÷ 14,627 = 7.79%

³ Click competitor name to see calculations.

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Performance ratio	Description	The company
Economic profit margin	The ratio of economic profit to sales. It is the company profit margin covering income efficiency and asset management. Economic profit margin is not biased in favor of capital-intensive business models, because any added capital is a cost to the economic profit margin.	Illinois Tool Works Inc. economic profit margin deteriorated from 2019 to 2020 but then improved from 2020 to 2021 exceeding 2019 level.

Illinois Tool Works Inc. (NYSE:ITW)

Economic Value Added (EVA)

Economic Profit

Net Operating Profit after Taxes (NOPAT)

Cash Operating Taxes

Invested Capital

Cost of Capital

Economic Spread Ratio

Economic Profit Margin