Trane Technologies plc (NYSE:TT)

The period under review demonstrates a fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, while the cost of capital generally increased. Invested capital remained relatively stable, though with some variation. These factors combined to influence the trend in economic profit, which moved from substantial negative values towards near breakeven.

NOPAT Trend

Net operating profit after taxes increased from US$1,451,904 thousand in 2018 to US$1,640,972 thousand in 2019. A subsequent decrease was observed in 2020, falling to US$1,265,645 thousand, before recovering to US$1,673,718 thousand in 2021. The most significant increase occurred in 2022, reaching US$2,138,919 thousand.

Cost of Capital Trend

The cost of capital showed a slight decrease from 15.49% in 2018 to 15.41% in 2019. It then remained relatively stable at 15.44% in 2020 and increased to 15.72% in 2021. The largest increase in the cost of capital occurred in 2022, rising to 16.21%.

Invested Capital Trend

Invested capital increased from US$13,684,819 thousand in 2018 to US$15,640,000 thousand in 2019. A decrease was then noted in 2020, down to US$13,835,000 thousand, followed by a further decrease to US$13,354,600 thousand in 2021. In 2022, invested capital slightly increased to US$13,518,500 thousand.

Economic Profit Trend

Economic profit was negative throughout the observed period. The largest negative economic profit was recorded in 2019 at -US$769,115 thousand, followed by -US$870,770 thousand in 2020. A reduction in the negative value was seen in 2021, with economic profit at -US$426,039 thousand. The most substantial improvement occurred in 2022, where economic profit reached -US$52,373 thousand, indicating a significant narrowing of the economic loss.

The increasing NOPAT, coupled with a relatively stable invested capital base, contributed to the improvement in economic profit observed in the later years. However, the rising cost of capital partially offset these gains. The trend suggests a move towards improved value creation, although the entity did not generate positive economic profit during the analyzed timeframe.

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.

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.

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.

The economic spread ratio exhibited a consistent, though moderating, improvement between 2018 and 2022. Initially negative, the ratio moved closer to zero over the observed period, indicating a diminishing gap between the return on invested capital and the cost of capital. This improvement coincided with fluctuations in economic profit and invested capital.

Economic Spread Ratio

In 2018, the economic spread ratio stood at -4.88%. This value declined slightly to -4.92% in 2019, suggesting a marginal worsening in the relationship between returns and capital costs. A more substantial decline was observed in 2020, with the ratio reaching -6.29%, representing the lowest point in the analyzed timeframe. However, the ratio improved significantly in 2021 to -3.19%, and continued to improve in 2022, reaching -0.39%. This indicates a substantial narrowing of the difference between the return generated and the cost of capital employed.

The economic spread ratio’s movement appears correlated with the trend in economic profit. While economic profit remained negative throughout the period, its magnitude decreased from 2020 to 2022. This reduction in negative economic profit contributed to the observed improvement in the economic spread ratio. Invested capital experienced fluctuations, decreasing from 2019 to 2021 before increasing slightly in 2022, but the primary driver of the economic spread ratio’s improvement appears to be the reduction in the absolute value of economic profit.

Economic Profit & Invested Capital Relationship

The negative economic profit values across all years indicate that the company’s returns did not cover its cost of capital during this period. However, the decreasing magnitude of the economic loss, coupled with a relatively stable invested capital base, resulted in the improved economic spread ratio. The trend suggests increasing efficiency in capital allocation or improved operational performance, though returns still fall short of covering the cost of capital.

The progression from a ratio of -4.88% to -0.39% suggests a positive trajectory in value creation, even though absolute economic profit remains negative. Continued monitoring of these metrics is recommended to determine if the trend towards a positive economic spread ratio will continue.

The economic profit margin exhibited a consistent, though moderating, improvement between 2018 and 2022. Initially negative and substantial, the margin moved closer to zero over the five-year period. This improvement occurred alongside fluctuations in both economic profit and adjusted net revenues.

Economic Profit Margin Trend

The economic profit margin began at -4.26% in 2018 and deteriorated to -6.99% in 2020, representing the lowest point in the observed period. A significant positive shift occurred in 2021, with the margin improving to -3.01%. This positive trend continued into 2022, reaching -0.33%, indicating a substantial reduction in the magnitude of the economic loss.

Relationship to Economic Profit

Economic profit itself demonstrated a similar pattern. While consistently negative, the absolute value of economic profit decreased from US$667,230 thousand in 2018 to US$52,373 thousand in 2022. This reduction in the size of the economic loss directly correlates with the improvement in the economic profit margin. The largest reduction in economic profit occurred between 2020 and 2021.

Relationship to Adjusted Net Revenues

Adjusted net revenues experienced a decline in 2020, falling to US$12,456,300 thousand from US$16,610,800 thousand in 2019. Revenues then recovered, reaching US$15,997,700 thousand in 2022. The most significant improvement in the economic profit margin coincided with the recovery in adjusted net revenues, suggesting a link between revenue generation and profitability, as measured by economic profit.

The observed trend suggests a strengthening of the company’s ability to generate returns exceeding its cost of capital, although it has not yet achieved positive economic profit. The narrowing of the economic profit margin indicates increasing efficiency in converting revenues into economic profit.