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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	16.19%	15.70%	15.42%	15.39%	15.46%
Invested capital³	13,518,500)	13,354,600)	13,835,000)	15,640,000)	13,684,819)

Economic profit⁴	(49,126)	(422,953)	(867,649)	(765,594)	(664,136)

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 – 16.19% × 13,518,500 = -49,126

An analysis of the financial performance from 2018 to 2022 reveals a consistent trend of negative economic profit, although a significant recovery trajectory is evident toward the end of the period. While the entity did not generate value above its cost of capital during these five years, the deficit narrowed substantially by 2022.

Net Operating Profit After Taxes (NOPAT): NOPAT exhibited a general upward trend, increasing from US$ 1,451,904 thousand in 2018 to US$ 2,138,919 thousand in 2022. A notable contraction occurred in 2020, where profit fell to US$ 1,265,645 thousand, but this was followed by a robust recovery in 2021 and a peak in 2022, suggesting improved operational efficiency and earnings power.
Invested Capital and Cost of Capital: Invested capital peaked in 2019 at US$ 15,640,000 thousand before trending downward to US$ 13,354,600 thousand by 2021, with a slight increase to US$ 13,518,500 thousand in 2022. Concurrently, the cost of capital remained relatively stable around 15.4% between 2018 and 2020, before rising to 16.19% by 2022, indicating an increase in the required rate of return on invested capital.
Economic Profit Trends: Economic profit remained negative throughout the analyzed period, reaching its lowest point in 2020 at negative US$ 867,649 thousand. However, a sharp reversal is observed starting in 2021, with the loss reducing to negative US$ 422,953 thousand, and further improving to negative US$ 49,126 thousand in 2022. This convergence toward a break-even point is primarily driven by the substantial growth in NOPAT, which effectively offset the rising cost of capital and the capital charge on invested assets.

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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	×	17.73%	=	15.82%
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					16.19%

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	×	17.73%	=	15.22%
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					15.70%

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	×	17.73%	=	14.86%
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					15.42%

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	×	17.73%	=	14.83%
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					15.39%

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	×	17.73%	=	14.89%
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					15.46%

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	(49,126)	(422,953)	(867,649)	(765,594)	(664,136)
Invested capital²	13,518,500)	13,354,600)	13,835,000)	15,640,000)	13,684,819)
Performance Ratio
Economic spread ratio³	-0.36%	-3.17%	-6.27%	-4.90%	-4.85%
Benchmarks
Economic Spread Ratio, Competitors⁴
Boeing Co.	-20.41%	-19.02%	—	—	—
Caterpillar Inc.	-6.38%	-5.78%	—	—	—
Eaton Corp. plc	-9.70%	-9.31%	—	—	—
GE Aerospace	-13.77%	-18.68%	—	—	—
Honeywell International Inc.	-3.00%	-1.91%	—	—	—
Lockheed Martin Corp.	14.50%	15.48%	—	—	—
RTX Corp.	-4.53%	-4.01%	—	—	—

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 × -49,126 ÷ 13,518,500 = -0.36%

⁴ Click competitor name to see calculations.

Between 2018 and 2022, a consistent trajectory of recovery in economic value creation is observed. While economic profit remained negative throughout the period, the magnitude of value destruction decreased significantly in the latter years, indicating a narrowing gap between the return on invested capital and the cost of capital.

Economic Profit: Economic profit experienced a decline from 2018 through 2020, reaching a trough of -867,649 thousand USD. Subsequently, a sharp reversal occurred, with the deficit narrowing to -422,953 thousand USD in 2021 and further improving to -49,126 thousand USD by 2022, signaling a near-convergence toward a positive economic profit state.
Invested Capital: The capital base remained relatively stable over the five-year period, fluctuating between approximately 13.3 billion and 15.6 billion USD. A peak in invested capital was recorded in 2019 at 15,640,000 thousand USD, followed by a period of stabilization ending at 13,518,500 thousand USD in 2022.
Economic Spread Ratio: The economic spread ratio mirrored the trend of economic profit, showing peak deterioration in 2020 at -6.27%. From 2021 onward, a strong recovery trend is evident, as the ratio improved to -3.17% and ultimately reached -0.36% by December 31, 2022. This progression indicates that the entity is rapidly approaching a point where its returns exceed its cost of capital.

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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	(49,126)	(422,953)	(867,649)	(765,594)	(664,136)

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	-0.31%	-2.99%	-6.97%	-4.61%	-4.24%
Benchmarks
Economic Profit Margin, Competitors³
Boeing Co.	-15.59%	-15.10%	—	—	—
Caterpillar Inc.	-6.18%	-6.67%	—	—	—
Eaton Corp. plc	-14.39%	-13.98%	—	—	—
GE Aerospace	-12.49%	-18.86%	—	—	—
Honeywell International Inc.	-3.95%	-2.67%	—	—	—
Lockheed Martin Corp.	5.85%	6.61%	—	—	—
RTX Corp.	-7.43%	-6.96%	—	—	—

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 × -49,126 ÷ 15,997,700 = -0.31%

³ Click competitor name to see calculations.

An analysis of the financial performance from 2018 to 2022 reveals a period of initial economic value erosion followed by a significant recovery trend toward an economic break-even point.

Economic Profit Margin Trend: The economic profit margin exhibited a volatile trajectory, characterized by a deterioration phase followed by a strong recovery. The margin declined from -4.24% in 2018 to a peak deficit of -6.97% in 2020. Subsequently, a sharp reversal occurred, with the margin improving to -2.99% in 2021 and nearly reaching a neutral state at -0.31% by the end of 2022. This progression indicates a systematic narrowing of the gap between the return on invested capital and the cost of capital.
Revenue Dynamics and Impact: Adjusted net revenues experienced a notable contraction in 2020, falling to 12.46 billion from a 2019 peak of 16.61 billion. This decline in revenue coincided with the widest economic profit deficit. However, the subsequent recovery of revenues to approximately 16.00 billion in 2022 suggests that the restoration of top-line scale played a critical role in improving the economic profit margin.
Economic Profit Recovery: Absolute economic profit losses widened from 664.1 million in 2018 to 867.6 million in 2020. A significant turnaround was observed starting in 2021, as losses were reduced to 423.0 million, further plummeting to 49.1 million in 2022. This trajectory demonstrates a substantial reduction in economic value destruction, moving the organization closer to generating positive economic value added.

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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