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
Trane Technologies plc, economic profit calculation
US$ in thousands
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 = -59,358
The analysis of economic value added reveals a period of sustained value destruction that significantly improved toward the end of the observed five-year window. While economic profit remained negative throughout the period, there is a clear trajectory toward positive value creation, driven primarily by substantial growth in operational profitability and a stabilization of the invested capital base.
- Net Operating Profit After Taxes (NOPAT)
- An overall upward trend in NOPAT is observed, increasing from 1,451,904 thousand US$ in 2018 to 2,138,919 thousand US$ by 2022. A notable contraction occurred in 2020, where NOPAT declined to 1,265,645 thousand US$, followed by a strong recovery in 2021 and 2022. This growth indicates an enhanced capacity to generate operational earnings from the existing asset base.
- Cost of Capital and Invested Capital
- The cost of capital remained relatively stable between 15.46% and 15.77% from 2018 to 2021, before rising to 16.26% in 2022. During the same period, invested capital peaked in 2019 at 15,640,000 thousand US$ and subsequently trended downward to 13,518,500 thousand US$ by 2022. The contraction and eventual stabilization of invested capital served to limit the capital charge, despite the rising cost of capital in the final year.
- Economic Profit Performance
- Economic profit experienced a downward trend in the early years, reaching a deficit peak of -877,485 thousand US$ in 2020. However, a significant reversal is observed from 2021 onward, with the negative value narrowing to -432,679 thousand US$ in 2021 and further reducing to -59,358 thousand US$ by 2022. This convergence toward a break-even point suggests that operational gains are successfully offsetting the cost of capital, positioning the organization for potential positive economic value added in subsequent periods.
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Net Operating Profit after Taxes (NOPAT)
Trane Technologies plc, NOPAT calculation
US$ in thousands
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.
An analysis of the financial results from 2018 to 2022 reveals a trajectory of growth interrupted by a significant contraction in 2020, followed by a strong recovery. Both Net Operating Profit After Taxes (NOPAT) and net earnings attributable to the company reached their five-year peaks in 2022, indicating a positive long-term trend in operational profitability.
- Net Operating Profit After Taxes (NOPAT) Performance
- NOPAT demonstrated a general upward trend, rising from US$ 1,451,904 thousand in 2018 to US$ 2,138,919 thousand in 2022. A temporary decline was observed in 2020, where NOPAT fell to US$ 1,265,645 thousand. This was followed by a robust recovery in 2021 and 2022, with the 2022 figure representing a 47.3% increase over the 2018 baseline.
- Net Earnings Volatility
- Net earnings exhibited higher volatility than NOPAT. While starting at US$ 1,337,600 thousand in 2018 and ending at US$ 1,756,500 thousand in 2022, the company experienced a sharp decline in 2020 to US$ 854,900 thousand. The recovery in 2021 was rapid, returning to levels slightly above 2019, before achieving a peak in 2022.
- Correlation Between Operating Profit and Net Earnings
- A consistent positive correlation is observed between NOPAT and net earnings, as both metrics fluctuated in the same direction annually. Notably, NOPAT remained higher than net earnings in every reported year. The variance between the two metrics widened most significantly in 2020 and 2022, suggesting that non-operating items or capital structure costs had a varying impact on the final net income relative to the core operating performance.
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Cash Operating Taxes
Trane Technologies plc, cash operating taxes calculation
US$ in thousands
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).
A comparative analysis of tax expense and cash operating taxes from 2018 to 2022 reveals divergent trajectories between accrual-based reporting and actual cash outflows. While tax expense generally trended upward over the five-year period, cash operating taxes experienced significant volatility and remained below the initial 2018 levels by the end of the period.
- Tax Expense Trends
- Tax expense exhibited a general growth pattern, rising from 281.3 million in 2018 to 375.9 million in 2022. This progression was interrupted by a contraction in 2020, where the expense fell to 296.8 million, before resuming an upward trajectory in 2021 and 2022. The net increase over the period suggests a growth in taxable income or adjustments in the effective tax rate.
- Cash Operating Taxes Trends
- Cash operating taxes demonstrated a fluctuating trend, starting at a peak of 475.3 million in 2018 and declining to a low of 328.8 million in 2020. Despite a recovery in 2021 to 409.1 million, the amount decreased again to 356.1 million in 2022. This volatility indicates that cash tax payments did not mirror the steady rise seen in the accrual-based tax expense.
- Variance Between Accrual and Cash Taxes
- A significant divergence is observed between the reported tax expense and the actual cash operating taxes paid. From 2018 through 2021, cash operating taxes consistently exceeded tax expenses, which often suggests the payment of prior-year tax liabilities or the impact of non-deductible expenses. However, a reversal occurred in 2022, where tax expense (375.9 million) surpassed cash operating taxes (356.1 million), implying a shift toward the accumulation of deferred tax liabilities or a change in the timing of tax settlements.
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Invested Capital
Trane Technologies plc, invested capital calculation (financing approach)
US$ in thousands
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.
The analysis of invested capital from 2018 to 2022 reveals a period of initial expansion followed by a contraction and subsequent stabilization. Total invested capital reached a peak in 2019 before experiencing a downward trend and a marginal recovery by the end of the observed period.
- Total Reported Debt and Leases
- A significant increase in debt was observed between 2018 and 2019, with values rising from 4.64 billion to 6.14 billion. This peak was followed by a consistent reduction through 2021, before stabilizing at approximately 5.31 billion by December 31, 2022. This pattern suggests a period of aggressive financing followed by a deleveraging phase.
- Shareholders' Equity
- Shareholders' equity demonstrated a persistent downward trajectory after peaking in 2019 at 7.27 billion. From 2020 through 2022, equity declined annually, ending the period at 6.09 billion. This steady erosion of the equity base indicates a consistent return of capital to shareholders or a reduction in retained earnings over the final three years of the period.
- Invested Capital Dynamics
- The total invested capital mirrored the volatility of its components, peaking in 2019 at 15.64 billion. The subsequent decline to 13.35 billion by 2021 was driven by the simultaneous reduction of both debt and equity. A slight reversal is noted in 2022, where invested capital rose to 13.52 billion, primarily attributable to a marginal increase in total reported debt and leases offsetting the continued decline in shareholders' equity.
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Cost of Capital
Trane Technologies plc, cost of capital calculations
| 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 »
| 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 | 15.77% | ||||||||||
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 »
| 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 »
| 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 »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 25,124,995) | 25,124,995) | ÷ | 29,914,914) | = | 0.84 | 0.84 | × | 17.82% | = | 14.96% | ||
| 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 | 15.53% | ||||||||||
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 »
Economic Spread Ratio
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 | (59,358) | (432,679) | (877,485) | (776,690) | (673,887) | |
| 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% | -6.34% | -4.97% | -4.92% | |
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Boeing Co. | -20.44% | -19.05% | — | — | — | |
| Caterpillar Inc. | -6.34% | -5.74% | — | — | — | |
| Eaton Corp. plc | -9.74% | -9.35% | — | — | — | |
| GE Aerospace | -13.77% | -18.68% | — | — | — | |
| Honeywell International Inc. | -3.10% | -2.01% | — | — | — | |
| Lockheed Martin Corp. | 14.24% | 15.22% | — | — | — | |
| RTX Corp. | -4.74% | -4.20% | — | — | — | |
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 × -59,358 ÷ 13,518,500 = -0.44%
4 Click competitor name to see calculations.
The financial data indicates a period of negative economic value added followed by a significant recovery trend. Between 2018 and 2022, the company consistently operated with a negative economic spread, though the magnitude of this deficit diminished substantially toward the end of the period.
- Economic Profit Analysis
- Economic profit experienced an initial decline, reaching its lowest point in 2020 at negative 877.49 million US dollars. Following this trough, a strong upward trajectory was observed, with losses narrowing to negative 432.68 million US dollars in 2021 and further improving to negative 59.36 million US dollars by December 31, 2022. This represents a substantial recovery in the company's ability to generate returns above its cost of capital.
- Invested Capital Trends
- Invested capital remained relatively stable throughout the five-year period, fluctuating within a range of approximately 13.35 billion to 15.64 billion US dollars. A peak in invested capital occurred in 2019, followed by a gradual reduction and stabilization around 13.52 billion US dollars by 2022. The relative stability of the capital base suggests that the improvements in economic profit were driven by operational performance rather than significant divestitures or capital reductions.
- Economic Spread Ratio Interpretation
- The economic spread ratio mirrored the trajectory of economic profit, reflecting the inefficiency of capital utilization relative to the cost of capital. The ratio deteriorated from negative 4.92% in 2018 to a period low of negative 6.34% in 2020. However, a sharp reversal occurred in the subsequent two years, with the ratio improving to negative 3.24% in 2021 and nearly reaching a break-even point at negative 0.44% in 2022. This convergence toward zero indicates that the company is approaching a threshold of positive economic value creation.
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Economic Profit Margin
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 | (59,358) | (432,679) | (877,485) | (776,690) | (673,887) | |
| 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% | -7.04% | -4.68% | -4.30% | |
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Boeing Co. | -15.61% | -15.13% | — | — | — | |
| Caterpillar Inc. | -6.14% | -6.62% | — | — | — | |
| Eaton Corp. plc | -14.45% | -14.04% | — | — | — | |
| GE Aerospace | -12.48% | -18.85% | — | — | — | |
| Honeywell International Inc. | -4.09% | -2.80% | — | — | — | |
| Lockheed Martin Corp. | 5.74% | 6.50% | — | — | — | |
| RTX Corp. | -7.77% | -7.30% | — | — | — | |
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 × -59,358 ÷ 15,997,700 = -0.37%
3 Click competitor name to see calculations.
The analysis of the five-year period ending December 31, 2022, reveals a significant trajectory of recovery regarding economic value creation. While economic profit remained negative throughout the analyzed timeframe, there is a clear trend toward break-even, characterized by a sharp reduction in economic losses following a trough in 2020.
- Economic Profit Performance
- Economic profit experienced a steady decline from December 31, 2018, through December 31, 2020, reaching a peak deficit of negative 877.49 million US dollars. This downward trend reversed significantly in 2021, with losses narrowing to negative 432.68 million US dollars, and continued to improve through 2022, ending the period at negative 59.36 million US dollars.
- Adjusted Net Revenue Correlation
- Revenue figures demonstrated notable volatility, peaking in 2019 at 16.61 billion US dollars before dropping to 12.46 billion US dollars in 2020. The subsequent recovery of revenues to 16.00 billion US dollars by the end of 2022 aligns with the improvement in economic profit, suggesting a positive correlation between top-line recovery and the reduction of economic losses.
- Economic Profit Margin Dynamics
- The economic profit margin mirrored the trend of absolute economic profit, deteriorating from negative 4.30% in 2018 to a low of negative 7.04% in 2020. A consistent recovery was observed thereafter, with the margin improving to negative 3.06% in 2021 and nearly reaching a neutral position at negative 0.37% by December 31, 2022.
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