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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

Trane Technologies plc, economic profit calculation

US$ in thousands

12 months ended:	Dec 31, 2022	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018
Net operating profit after taxes (NOPAT)¹	2,138,919)	1,673,718)	1,265,645)	1,640,972)	1,451,904)
Cost of capital²	16.26%	15.78%	15.49%	15.46%	15.54%
Invested capital³	13,518,500)	13,354,600)	13,835,000)	15,640,000)	13,684,819)

Economic profit⁴	(59,721)	(433,024)	(877,834)	(777,084)	(674,233)

Based on: 10-K (reporting date: 2022-12-31), 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).

¹ NOPAT. See details »

² Cost of capital. See details »

³ Invested capital. See details »

⁴ 2022 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 2,138,919 – 16.26% × 13,518,500 = -59,721

The analysis of economic value added from 2018 to 2022 reveals a consistent trend of negative economic profit, although the magnitude of these losses has diminished significantly over the period. While the organization has not yet exceeded its cost of capital, the trajectory indicates a steady progression toward economic value creation.

Net Operating Profit After Taxes (NOPAT): NOPAT exhibited volatility over the five-year period, reaching a peak of 2,138,919 thousand US dollars in 2022. A notable contraction occurred in 2020, where profit fell to 1,265,645 thousand US dollars, representing the lowest point in the sequence. However, a robust recovery followed, with substantial growth in 2021 and 2022, which served as the primary catalyst for improving the overall economic profit position.
Cost of Capital and Invested Capital: The cost of capital remained relatively stable, fluctuating within a narrow range between 15.46% and 16.26%, with a slight upward trend observed in the final two years. Invested capital peaked in 2019 at 15,640,000 thousand US dollars before declining and stabilizing between 13.3 billion and 13.8 billion US dollars from 2020 through 2022. The combination of a stabilized capital base and increasing NOPAT has effectively reduced the capital charge burden.
Economic Profit Performance: Economic profit remained negative throughout the period, peaking in deficit during 2020 at -877,834 thousand US dollars. Since that trough, there has been a marked improvement, with the deficit narrowing to -433,024 thousand US dollars in 2021 and further reducing to -59,721 thousand US dollars by 2022. The trend demonstrates a convergence toward a break-even point, suggesting that the operating returns are increasingly aligned with the required return on invested capital.

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Trane Technologies plc, NOPAT calculation

US$ in thousands

12 months ended:	Dec 31, 2022	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018
Net earnings attributable to Trane Technologies plc	1,756,500)	1,423,400)	854,900)	1,410,900)	1,337,600)
Deferred income tax expense (benefit)¹	67,800)	(25,200)	22,200)	16,800)	(143,800)
Increase (decrease) in allowance for credit losses²	3,800)	(100)	7,800)	9,500)	5,800)
Increase (decrease) in LIFO reserve³	57,300)	31,500)	7,600)	2,100)	14,600)
Increase (decrease) in deferred revenue⁴	6,000)	7,300)	1,600)	11,900)	(800)
Increase (decrease) in standard product warranty liability⁵	27,400)	13,500)	31,300)	5,800)	8,400)
Increase (decrease) in equity equivalents⁶	162,300)	27,000)	70,500)	46,100)	(115,800)
Interest expense	223,500)	233,700)	248,700)	243,000)	220,700)
Interest expense, operating lease liability⁷	14,079)	10,196)	13,705)	22,090)	24,566)
Adjusted interest expense	237,579)	243,896)	262,405)	265,090)	245,266)
Tax benefit of interest expense⁸	(49,892)	(51,218)	(55,105)	(55,669)	(51,506)
Adjusted interest expense, after taxes⁹	187,687)	192,678)	207,300)	209,421)	193,760)
Interest income	(9,200)	(4,000)	(4,500)	(3,100)	(6,400)
Investment income, before taxes	(9,200)	(4,000)	(4,500)	(3,100)	(6,400)
Tax expense (benefit) of investment income¹⁰	1,932)	840)	945)	651)	1,344)
Investment income, after taxes¹¹	(7,268)	(3,160)	(3,555)	(2,449)	(5,056)
(Income) loss from discontinued operations, net of tax¹²	21,500)	20,600)	121,400)	(40,600)	21,500)
Net income (loss) attributable to noncontrolling interest	18,200)	13,200)	15,100)	17,600)	19,900)
Net operating profit after taxes (NOPAT)	2,138,919)	1,673,718)	1,265,645)	1,640,972)	1,451,904)

Based on: 10-K (reporting date: 2022-12-31), 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).

¹ Elimination of deferred tax expense. See details »

² Addition of increase (decrease) in allowance for credit losses.

³ Addition of increase (decrease) in LIFO reserve. See details »

⁴ Addition of increase (decrease) in deferred revenue.

⁵ Addition of increase (decrease) in standard product warranty liability.

⁶ Addition of increase (decrease) in equity equivalents to net earnings attributable to Trane Technologies plc.

⁷ 2022 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 469,300 × 3.00% = 14,079

⁸ 2022 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 237,579 × 21.00% = 49,892

⁹ Addition of after taxes interest expense to net earnings attributable to Trane Technologies plc.

¹⁰ 2022 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 9,200 × 21.00% = 1,932

¹¹ Elimination of after taxes investment income.

¹² Elimination of discontinued operations.

Net earnings attributable to Trane Technologies plc: Net earnings exhibit variability over the five-year period analyzed. The value increased from approximately 1.34 billion US dollars in 2018 to about 1.41 billion in 2019, representing moderate growth. However, a significant decline occurred in 2020, with net earnings dropping to approximately 854.9 million US dollars. This downturn was followed by a strong recovery in 2021, when net earnings rose again to roughly 1.42 billion US dollars. The upward trend continued into 2022, reaching the highest observed value of approximately 1.76 billion US dollars, indicating overall positive growth in the latter years despite the earlier dip.
Net operating profit after taxes (NOPAT): NOPAT demonstrates a generally increasing trend, with fluctuations noticeable in the dataset. Starting at roughly 1.45 billion US dollars in 2018, NOPAT increased to around 1.64 billion in 2019. A decline is observed in 2020, where it decreased to nearly 1.27 billion US dollars. Subsequent years show a recovery trend: in 2021, NOPAT rose significantly to approximately 1.67 billion, followed by a substantial increase in 2022 to nearly 2.14 billion US dollars. This pattern of decrease in 2020 followed by strong growth thereafter mirrors the trend observed in net earnings and suggests resilience and effective operational performance improvements post-2020.

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Trane Technologies plc, cash operating taxes calculation

US$ in thousands

12 months ended:	Dec 31, 2022	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018
Tax expense	375,900)	333,500)	296,800)	353,700)	281,300)
Less: Deferred income tax expense (benefit)	67,800)	(25,200)	22,200)	16,800)	(143,800)
Add: Tax savings from interest expense	49,892)	51,218)	55,105)	55,669)	51,506)
Less: Tax imposed on investment income	1,932)	840)	945)	651)	1,344)
Cash operating taxes	356,060)	409,078)	328,760)	391,918)	475,262)

Based on: 10-K (reporting date: 2022-12-31), 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).

Tax Expense Trend: The tax expense exhibits a fluctuating pattern over the five-year period. It increased from 281,300 thousand US dollars in 2018 to a peak of 353,700 thousand US dollars in 2019. Following this, there was a decline to 296,800 thousand US dollars in 2020, before rising again in 2021 to 333,500 thousand US dollars. In 2022, the tax expense continued to grow, reaching 375,900 thousand US dollars, the highest value in the series.
Cash Operating Taxes Trend: The cash operating taxes show a general downward trend with some recovery periods. After a high of 475,262 thousand US dollars in 2018, there was a notable decrease to 391,918 thousand US dollars in 2019, followed by a further decline to 328,760 thousand US dollars in 2020. In 2021, cash operating taxes rebounded to 409,078 thousand US dollars but then declined again to 356,060 thousand US dollars in 2022. Overall, the values in 2022 remain below the initial 2018 figure.
Comparative Insights: While tax expense shows a general upward trajectory with some volatility, cash operating taxes have generally decreased from the 2018 level, despite some recovery in 2021. This divergence suggests potential timing differences or adjustments in non-cash accounting components affecting reported tax expenses relative to actual cash outflows in taxes.

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Trane Technologies plc, invested capital calculation (financing approach)

US$ in thousands

	Dec 31, 2022	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018
Short-term borrowings and current maturities of long-term debt	1,048,000)	350,400)	775,600)	650,500)	350,600)
Long-term debt,excluding current maturities	3,788,300)	4,491,700)	4,496,500)	4,922,900)	3,740,700)
Operating lease liability¹	469,300)	443,300)	415,300)	566,400)	545,919)
Total reported debt & leases	5,305,600)	5,285,400)	5,687,400)	6,139,800)	4,637,219)
Total Trane Technologies plc shareholders’ equity	6,088,600)	6,255,900)	6,407,700)	7,267,600)	7,022,700)
Net deferred tax (assets) liabilities²	526,600)	438,100)	420,800)	464,600)	331,400)
Allowance for credit losses³	43,700)	39,900)	40,000)	42,200)	32,700)
LIFO reserve⁴	129,900)	72,600)	41,100)	85,600)	83,500)
Deferred revenue⁵	317,700)	311,700)	304,400)	304,100)	292,200)
Standard product warranty liability⁶	323,600)	296,200)	282,700)	284,700)	278,900)
Equity equivalents⁷	1,341,500)	1,158,500)	1,089,000)	1,181,200)	1,018,700)
Accumulated other comprehensive (income) loss, net of tax⁸	766,200)	637,600)	631,500)	1,006,600)	964,100)
Noncontrolling interest	16,600)	17,200)	19,400)	44,800)	42,100)
Adjusted total Trane Technologies plc shareholders’ equity	8,212,900)	8,069,200)	8,147,600)	9,500,200)	9,047,600)
Invested capital	13,518,500)	13,354,600)	13,835,000)	15,640,000)	13,684,819)

Based on: 10-K (reporting date: 2022-12-31), 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).

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.

⁶ Addition of standard product warranty liability.

⁷ Addition of equity equivalents to total Trane Technologies plc shareholders’ equity.

⁸ Removal of accumulated other comprehensive income.

Total Reported Debt & Leases: The total reported debt and leases displayed an overall increasing trend from 2018 through 2022. Starting at approximately 4.64 billion USD in 2018, the figure rose significantly to about 6.14 billion USD in 2019, marking the highest value within the period. Subsequently, the debt decreased to approximately 5.69 billion USD in 2020 and continued to decline to 5.29 billion USD in 2021. In 2022, the total reported debt and leases slightly increased to around 5.31 billion USD. This pattern indicates a peak in 2019, followed by a gradual reduction and stabilization in the recent years.
Total Shareholders’ Equity: The total shareholders’ equity showed a decreasing trend over the five-year period. Beginning at roughly 7.02 billion USD in 2018, equity increased slightly to about 7.27 billion USD in 2019. However, from 2019 onwards, equity declined consistently to approximately 6.41 billion USD in 2020, then to 6.26 billion USD in 2021, and further to 6.09 billion USD in 2022. This steady reduction suggests a shrinking equity base over time.
Invested Capital: Invested capital increased from approximately 13.68 billion USD in 2018 to a peak of about 15.64 billion USD in 2019. Following this peak, invested capital decreased to around 13.83 billion USD in 2020 and continued to decline to 13.35 billion USD in 2021. In 2022, there was a slight increase to roughly 13.52 billion USD. This trend reflects a significant build-up of capital in 2019, followed by a contraction and subsequent stabilization during the last two years.

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Trane Technologies plc, cost of capital calculations

Dec 31, 2022

	Capital (fair value)¹	Weights					Cost of capital
Equity²	41,952,745)	41,952,745)	÷	47,022,045)	=	0.89	0.89	×	17.82%	=	15.90%
Debt³	4,600,000)	4,600,000)	÷	47,022,045)	=	0.10	0.10	×	4.41% × (1 – 21.00%)	=	0.34%
Operating lease liability⁴	469,300)	469,300)	÷	47,022,045)	=	0.01	0.01	×	3.00% × (1 – 21.00%)	=	0.02%
Total:	47,022,045)					1.00					16.26%

Based on: 10-K (reporting date: 2022-12-31).

¹ US$ in thousands

² Equity. See details »

³ Debt. See details »

⁴ Operating lease liability. See details »

Dec 31, 2021

	Capital (fair value)¹	Weights					Cost of capital
Equity²	36,658,474)	36,658,474)	÷	42,701,774)	=	0.86	0.86	×	17.82%	=	15.30%
Debt³	5,600,000)	5,600,000)	÷	42,701,774)	=	0.13	0.13	×	4.42% × (1 – 21.00%)	=	0.46%
Operating lease liability⁴	443,300)	443,300)	÷	42,701,774)	=	0.01	0.01	×	2.30% × (1 – 21.00%)	=	0.02%
Total:	42,701,774)					1.00					15.78%

Based on: 10-K (reporting date: 2021-12-31).

¹ US$ in thousands

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	34,741,446)	34,741,446)	÷	41,456,746)	=	0.84	0.84	×	17.82%	=	14.93%
Debt³	6,300,000)	6,300,000)	÷	41,456,746)	=	0.15	0.15	×	4.44% × (1 – 21.00%)	=	0.53%
Operating lease liability⁴	415,300)	415,300)	÷	41,456,746)	=	0.01	0.01	×	3.30% × (1 – 21.00%)	=	0.03%
Total:	41,456,746)					1.00					15.49%

Based on: 10-K (reporting date: 2020-12-31).

¹ US$ in thousands

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	34,560,998)	34,560,998)	÷	41,327,398)	=	0.84	0.84	×	17.82%	=	14.90%
Debt³	6,200,000)	6,200,000)	÷	41,327,398)	=	0.15	0.15	×	4.35% × (1 – 21.00%)	=	0.52%
Operating lease liability⁴	566,400)	566,400)	÷	41,327,398)	=	0.01	0.01	×	3.90% × (1 – 21.00%)	=	0.04%
Total:	41,327,398)					1.00					15.46%

Based on: 10-K (reporting date: 2019-12-31).

¹ US$ in thousands

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	25,124,995)	25,124,995)	÷	29,914,914)	=	0.84	0.84	×	17.82%	=	14.97%
Debt³	4,244,000)	4,244,000)	÷	29,914,914)	=	0.14	0.14	×	4.50% × (1 – 21.00%)	=	0.50%
Operating lease liability⁴	545,919)	545,919)	÷	29,914,914)	=	0.02	0.02	×	4.50% × (1 – 21.00%)	=	0.06%
Total:	29,914,914)					1.00					15.54%

Based on: 10-K (reporting date: 2018-12-31).

¹ US$ in thousands

² Equity. See details »

³ Debt. See details »

⁴ Operating lease liability. See details »

Trane Technologies plc, economic spread ratio calculation, comparison to benchmarks

	Dec 31, 2022	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018
Selected Financial Data (US$ in thousands)
Economic profit¹	(59,721)	(433,024)	(877,834)	(777,084)	(674,233)
Invested capital²	13,518,500)	13,354,600)	13,835,000)	15,640,000)	13,684,819)
Performance Ratio
Economic spread ratio³	-0.44%	-3.24%	-6.35%	-4.97%	-4.93%
Benchmarks
Economic Spread Ratio, Competitors⁴
Boeing Co.	-20.46%	-19.06%	—	—	—
Caterpillar Inc.	-6.38%	-5.79%	—	—	—
Eaton Corp. plc	-9.76%	-9.37%	—	—	—
GE Aerospace	-13.79%	-18.70%	—	—	—
Honeywell International Inc.	-3.09%	-2.00%	—	—	—
Lockheed Martin Corp.	14.31%	15.29%	—	—	—
RTX Corp.	-4.69%	-4.16%	—	—	—

Based on: 10-K (reporting date: 2022-12-31), 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).

¹ Economic profit. See details »

² Invested capital. See details »

³ 2022 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -59,721 ÷ 13,518,500 = -0.44%

⁴ Click competitor name to see calculations.

Between 2018 and 2022, the financial performance relative to the cost of capital indicates a period of initial deterioration followed by a significant recovery. Throughout the entire five-year period, economic profit remained negative, though the magnitude of these losses decreased substantially in the final two years.

Economic Profit Trends: A downward trend in economic profit was observed from 2018 to 2020, with losses widening from US$ 674.2 million to a peak deficit of US$ 877.8 million. Following this trough, a strong reversal occurred, as losses narrowed to US$ 433.0 million in 2021 and further improved to US$ 59.7 million by December 31, 2022, signaling a move toward positive economic value creation.
Invested Capital Stability: Invested capital exhibited moderate volatility, peaking at US$ 15.64 billion in 2019 before stabilizing between US$ 13.35 billion and US$ 13.84 billion from 2020 through 2022. The lack of significant expansion in the capital base during the recovery phase suggests that the improvement in economic profit was driven by operational efficiencies or increased returns rather than capital injections.
Economic Spread Ratio Analysis: The economic spread ratio mirrored the trajectory of economic profit, reaching its lowest point of -6.35% in 2020. A consistent recovery is noted thereafter, with the ratio improving to -3.24% in 2021 and nearly reaching the break-even threshold at -0.44% in 2022. This trend indicates that the return on invested capital has converged closely with the cost of capital over the observed period.

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Trane Technologies plc, economic profit margin calculation, comparison to benchmarks

	Dec 31, 2022	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018
Selected Financial Data (US$ in thousands)
Economic profit¹	(59,721)	(433,024)	(877,834)	(777,084)	(674,233)

Net revenues	15,991,700)	14,136,400)	12,454,700)	16,598,900)	15,668,200)
Add: Increase (decrease) in deferred revenue	6,000)	7,300)	1,600)	11,900)	(800)
Adjusted net revenues	15,997,700)	14,143,700)	12,456,300)	16,610,800)	15,667,400)
Performance Ratio
Economic profit margin²	-0.37%	-3.06%	-7.05%	-4.68%	-4.30%
Benchmarks
Economic Profit Margin, Competitors³
Boeing Co.	-15.62%	-15.14%	—	—	—
Caterpillar Inc.	-6.18%	-6.67%	—	—	—
Eaton Corp. plc	-14.47%	-14.06%	—	—	—
GE Aerospace	-12.51%	-18.88%	—	—	—
Honeywell International Inc.	-4.08%	-2.79%	—	—	—
Lockheed Martin Corp.	5.77%	6.53%	—	—	—
RTX Corp.	-7.69%	-7.22%	—	—	—

Based on: 10-K (reporting date: 2022-12-31), 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).

¹ Economic profit. See details »

² 2022 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted net revenues
= 100 × -59,721 ÷ 15,997,700 = -0.37%

³ Click competitor name to see calculations.

The financial performance from 2018 through 2022 demonstrates a significant recovery trend in economic value creation, transitioning from a period of increasing economic loss to a position near economic break-even.

Economic Profit Trend: Economic profit exhibited a downward trajectory between 2018 and 2020, reaching a peak deficit of US$ 877.8 million in 2020. However, a strong reversal occurred in the subsequent two years, with losses narrowing to US$ 433.0 million in 2021 and further improving to US$ 59.7 million by the end of 2022. This represents a substantial reduction in economic loss over the final three years of the analyzed period.
Adjusted Net Revenues Analysis: Revenue patterns show significant volatility, characterized by a growth phase in 2019 followed by a sharp contraction in 2020, where revenues fell to US$ 12.46 billion. A consistent recovery followed, with revenues climbing back to US$ 16.00 billion in 2022, effectively returning to the levels observed prior to the 2020 downturn.
Economic Profit Margin Dynamics: The economic profit margin mirrored the volatility of net revenues and total economic profit. The margin deteriorated from -4.30% in 2018 to a low of -7.05% in 2020, coinciding with the period of lowest revenue. A rapid recovery is evident post-2020, with the margin improving to -3.06% in 2021 and nearly reaching a neutral state at -0.37% in 2022.

The convergence of the economic profit margin toward zero suggests a systematic improvement in the ability to generate returns above the cost of capital. The correlation between the recovery in adjusted net revenues and the narrowing of economic losses indicates that scale and revenue growth were primary drivers in restoring economic value.

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Trane Technologies plc (NYSE:TT)

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