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
Illinois Tool Works Inc., economic profit 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 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 – 16.81% × 13,555 = 629
The analysis of economic value added over the five-year period reveals a transition from value destruction to a consistent state of value creation, despite a significant volatility event in 2020. The shift from a negative economic profit in 2017 to positive figures in subsequent years indicates an improvement in the ability to generate returns exceeding the cost of capital.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT demonstrated a sharp increase between 2017 and 2018, rising from 1,924 million to 2,774 million. After a period of moderate decline and a further drop to 2,268 million in 2020, NOPAT reached its highest point in the series at 2,907 million by December 31, 2021, reflecting a strong recovery in operational profitability.
- Cost of Capital
- The cost of capital remained relatively stable with a slight upward trajectory. The rate moved from 16.34% in 2017 to 16.81% in 2021. This marginal increase indicates a slightly higher hurdle rate required to achieve economic profit over the analyzed period.
- Invested Capital
- A reduction in invested capital was observed between 2017 and 2018, falling from 14,406 million to 12,895 million. From 2019 onward, a steady increase is evident, with the capital base expanding to 13,555 million by the end of 2021, suggesting a gradual increase in the resources deployed to generate profit.
- Economic Profit
- Economic profit shifted from a negative 429 million in 2017 to a positive 659 million in 2018, marking a pivot toward value creation. This positive trend continued through 2019 but experienced a severe contraction in 2020, falling to 49 million. A significant rebound occurred in 2021, with economic profit returning to 629 million, confirming the restoration of value generation capacity.
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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
= 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.
The operational profitability and net earnings of the entity exhibited a volatile but generally upward trajectory between 2017 and 2021. A pronounced expansion in earnings occurred in 2018, followed by a period of moderation and a significant contraction in 2020, before returning to peak levels in 2021.
- Net Operating Profit After Taxes (NOPAT) Trends
- NOPAT increased substantially from 1,924 million USD in 2017 to 2,774 million USD in 2018. A marginal decline was observed in 2019, falling to 2,672 million USD, which transitioned into a more significant decrease in 2020 to 2,268 million USD. By 2021, NOPAT reached its highest point in the analyzed period at 2,907 million USD, representing a comprehensive recovery from the 2020 trough.
- Net Income Correlation
- Net income movements closely mirrored the NOPAT trend. The most significant growth occurred between 2017 and 2018, where net income rose from 1,687 million USD to 2,563 million USD. Similar to the operational profit, net income experienced a downturn in 2020, dropping to 2,109 million USD, before rebounding to 2,694 million USD in 2021.
- Comparison of Operational Performance and Bottom-Line Results
- NOPAT remained consistently higher than net income throughout the five-year period. This indicates that core operational performance, when adjusted to exclude the effects of capital structure and financing costs, was stronger than the final net profit. The variance between NOPAT and net income remained relatively stable, ranging from a high of 237 million USD in 2017 to a low of 151 million USD in 2019.
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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).
An analysis of tax expenditures from 2017 to 2021 reveals a significant reduction in both the provision for income taxes and cash operating taxes following the 2017 fiscal year. Both metrics experienced a sharp decline between 2017 and 2018, with subsequent stabilization and a gradual divergence in the latter years of the period.
- Tax Expenditure Trends
- The provision for income taxes decreased from 1,583 million USD in 2017 to 632 million USD in 2021. A similar downward trajectory was observed in cash operating taxes, which fell from 1,597 million USD in 2017 to a period low of 666 million USD in 2020, before increasing to 821 million USD in 2021.
- Cash versus Accrual Divergence
- From 2017 through 2019, cash operating taxes remained closely aligned with the provision for income taxes, with variance remaining minimal. However, a widening gap emerged in 2020 and 2021. By the end of 2021, cash operating taxes exceeded the provision for income taxes by 189 million USD, indicating that actual cash outflows for tax obligations significantly outpaced the recognized accounting expense.
- Operating Impact
- The observed increase in cash operating taxes in 2021, despite a relatively stable provision for income taxes, suggests a shift in the timing of tax payments or the realization of deferred tax liabilities, which directly impacts the calculation of cash-based performance metrics such as Economic Value Added.
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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.
The analysis of the capital structure from 2017 to 2021 reveals a period of initial contraction followed by a steady recovery in the total capital base utilized for operations.
- Invested Capital Trend
- A notable decrease in invested capital occurred between 2017 and 2018, falling from 14,406 million US$ to 12,895 million US$. Following this decline, a consistent upward trajectory was established, with the figure rising incrementally each year to reach 13,555 million US$ by December 31, 2021. This indicates a stabilization and gradual expansion of the resource base after the initial contraction.
- Debt and Lease Obligations
- Total reported debt and leases exhibited volatility throughout the observed period. After a reduction in 2018 to 7,583 million US$, debt levels increased for two consecutive years, peaking at 8,310 million US$ in 2020, before declining to 7,881 million US$ in 2021. Debt consistently represents the larger portion of the total invested capital compared to equity.
- Stockholders' Equity Dynamics
- Stockholders' equity attributable to the company underwent a significant reduction between 2017 and 2019, dropping from 4,585 million US$ to 3,026 million US$. A recovery phase followed, with equity increasing to 3,181 million US$ in 2020 and further rising to 3,625 million US$ by the end of 2021. This movement suggests a significant reallocation of equity in the early part of the period followed by a steady rebuild.
- Synthesis of Capital Composition
- The overall movement in invested capital was driven by the combined fluctuations of debt and equity. The contraction observed in 2018 was the result of simultaneous decreases in both debt and stockholders' equity. Conversely, the growth in invested capital from 2019 to 2021 was supported by the recovery of equity levels and fluctuating debt obligations, suggesting a diversified approach to funding the capital base in recent years.
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Cost of Capital
Illinois Tool Works Inc., cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 68,130) | 68,130) | ÷ | 76,830) | = | 0.89 | 0.89 | × | 18.70% | = | 16.58% | ||
| 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 | 16.81% | ||||||||||
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 | 63,643) | 63,643) | ÷ | 73,243) | = | 0.87 | 0.87 | × | 18.70% | = | 16.25% | ||
| 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 | 16.52% | ||||||||||
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 | 59,902) | 59,902) | ÷ | 68,695) | = | 0.87 | 0.87 | × | 18.70% | = | 16.30% | ||
| 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 | 16.57% | ||||||||||
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 | 47,317) | 47,317) | ÷ | 55,185) | = | 0.86 | 0.86 | × | 18.70% | = | 16.03% | ||
| 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 | 16.40% | ||||||||||
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 | 55,795) | 55,795) | ÷ | 64,980) | = | 0.86 | 0.86 | × | 18.70% | = | 16.05% | ||
| 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 | 16.34% | ||||||||||
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 | 629) | 49) | 513) | 659) | (429) | |
| Invested capital2 | 13,555) | 13,434) | 13,033) | 12,895) | 14,406) | |
| Performance Ratio | ||||||
| Economic spread ratio3 | 4.64% | 0.37% | 3.94% | 5.11% | -2.98% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Boeing Co. | -19.05% | — | — | — | — | |
| Caterpillar Inc. | -5.74% | — | — | — | — | |
| Eaton Corp. plc | -9.35% | — | — | — | — | |
| GE Aerospace | -18.68% | — | — | — | — | |
| Honeywell International Inc. | -2.01% | — | — | — | — | |
| Lockheed Martin Corp. | 15.22% | — | — | — | — | |
| RTX Corp. | -4.20% | — | — | — | — | |
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 × 629 ÷ 13,555 = 4.64%
4 Click competitor name to see calculations.
The analysis of economic value creation from 2017 to 2021 reveals a period of notable volatility in profitability relative to the cost of capital. While the capital base remained relatively consistent, the economic spread ratio experienced significant fluctuations, indicating varying levels of value addition for shareholders over the five-year period.
- Economic Spread Ratio Trends
- The economic spread ratio shifted from a negative 2.98% in 2017 to a peak of 5.11% in 2018, marking a rapid transition toward positive value creation. A subsequent downward trend occurred through 2020, where the ratio declined to a low of 0.37%, before rebounding sharply to 4.64% in 2021. This trajectory indicates a high sensitivity of the spread to economic fluctuations, particularly during the 2020 fiscal year.
- Economic Profit Volatility
- Economic profit mirrored the movements of the spread ratio, starting with a deficit of 429 million US dollars in 2017. Profitability improved to 659 million US dollars in 2018 and remained positive in 2019 at 513 million US dollars. A significant contraction was observed in 2020, with economic profit dropping to 49 million US dollars, followed by a substantial recovery to 629 million US dollars in 2021.
- Invested Capital Stability
- Invested capital exhibited significantly less volatility than the profit metrics. Following a reduction from 14,406 million US dollars in 2017 to 12,895 million US dollars in 2018, the capital base grew incrementally each year, reaching 13,555 million US dollars by 2021. The relative stability of the invested capital suggests that the fluctuations in the economic spread ratio were primarily driven by changes in operating performance rather than major shifts in the invested capital base.
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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 | 629) | 49) | 513) | 659) | (429) | |
| 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 | 4.30% | 0.39% | 3.64% | 4.46% | -2.99% | |
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Boeing Co. | -15.13% | — | — | — | — | |
| Caterpillar Inc. | -6.62% | — | — | — | — | |
| Eaton Corp. plc | -14.04% | — | — | — | — | |
| GE Aerospace | -18.85% | — | — | — | — | |
| Honeywell International Inc. | -2.80% | — | — | — | — | |
| Lockheed Martin Corp. | 6.50% | — | — | — | — | |
| RTX Corp. | -7.30% | — | — | — | — | |
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 × 629 ÷ 14,627 = 4.30%
3 Click competitor name to see calculations.
The financial performance between 2017 and 2021 is characterized by significant volatility in economic value creation, shifting from a deficit in 2017 to a strong recovery by 2021. The company experienced a transition from value destruction to consistent value creation, although this progress was severely disrupted in 2020.
- Economic Profit Margin Trend
- A substantial reversal is observed between 2017 and 2018, as the economic profit margin shifted from -2.99% to 4.46%. Following this peak, the margin declined slightly to 3.64% in 2019 and experienced a sharp contraction to 0.39% in 2020, indicating that the surplus generated over the cost of capital nearly vanished. By 2021, the margin rebounded to 4.30%, nearly returning to the 2018 high.
- Correlation Between Revenue and Economic Profit
- Adjusted operating revenue and economic profit exhibit a strong positive correlation. The peak revenue of 14,778 million US$ in 2018 coincided with an economic profit of 659 million US$. Conversely, the lowest revenue point in 2020 (12,608 million US$) directly corresponded with the lowest positive economic profit of 49 million US$. The recovery in 2021, with revenue reaching 14,627 million US$, supported a restored economic profit of 629 million US$.
- Value Creation Analysis
- The transition from a negative economic profit of -429 million US$ in 2017 to positive values in all subsequent years indicates an improvement in the company's ability to generate returns exceeding its cost of capital. The 2020 dip represents a critical point of vulnerability where the margin of value creation became marginal, while the 2021 results demonstrate resilience and a return to an efficient capital utilization state.
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