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Economic Value Added (EVA)
Difficulty: Advanced
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
United Technologies Corp., economic profit calculation
USD $ in millions
12 months ended | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | |
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Net operating profit after taxes (NOPAT)1 | ![]() |
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Cost of capital2 | ![]() |
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Invested capital3 | ![]() |
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Economic profit4 | ![]() |
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Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-05).
2018 Calculations
1 NOPAT. See Details »
2 Cost of capital. See Details »
3 Invested capital. See Details »
4 Economic profit = NOPAT – Cost of capital × Invested capital
= –
×
=
Item | Description | The company |
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Economic profit | Economic profit is a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital. | United Technologies Corp.’s economic profit declined from 2016 to 2017 and from 2017 to 2018. |
Net Operating Profit after Taxes (NOPAT)
United Technologies Corp., NOPAT calculation
USD $ in millions
Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-05).
2018 Calculations
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 service and product warranties and product performance guarantees.
5 Addition of increase (decrease) in accrued restructuring costs.
6 Addition of increase (decrease) in equity equivalents to net income attributable to common shareowners.
7 Addition of interest expense on capitalized operating leases. See Details »
8 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= × 21.00% =
9 Addition of after taxes interest expense to net income attributable to common shareowners.
10 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= × 21.00% =
11 Elimination of after taxes investment income.
12 Elimination of discontinued operations.
Item | Description | The company |
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NOPAT | Net operating profit after taxes is income from operations, but after removement of taxes calculated on cash basis that are relevant to operating income. | United Technologies Corp.’s NOPAT declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level. |
Cash Operating Taxes
United Technologies Corp., cash operating taxes calculation
USD $ in millions
Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-05).
Item | Description | The company |
---|---|---|
Cash operating taxes | Cash operating taxes are estimated by adjusting income tax expense for changes in deferred taxes and tax benefit from the interest deduction. | United Technologies Corp.’s cash operating taxes increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level. |
Invested Capital
United Technologies Corp., invested capital calculation (financing approach)
USD $ in millions
Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-05).
1 Addition of capitalized operating leases. See Details »
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 service and product warranties and product performance guarantees.
6 Addition of accrued restructuring costs.
7 Addition of equity equivalents to shareowners’ equity.
8 Removal of accumulated other comprehensive income.
9 Subtraction of available-for-sale securities.
Item | Description | The company |
---|---|---|
Invested capital | Capital is an approximation of the economic book value of all cash invested in going-concern business activities. | United Technologies Corp.’s invested capital increased from 2016 to 2017 and from 2017 to 2018. |
Cost of Capital
United Technologies Corp., cost of capital calculations
Fair Value1 | Weights | Cost of Capital | |||||||||
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Equity2 | ![]() |
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Debt3 | ![]() |
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PV of operating lease payments4 | ![]() |
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Total: | ![]() |
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Based on: 10-K (filing date: 2019-02-07).
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Fair Value1 | Weights | Cost of Capital | |||||||||
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Equity2 | ![]() |
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Debt3 | ![]() |
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PV of operating lease payments4 | ![]() |
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Total: | ![]() |
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Based on: 10-K (filing date: 2018-02-09).
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Fair Value1 | Weights | Cost of Capital | |||||||||
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Equity2 | ![]() |
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÷ | ![]() |
= | ![]() |
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× | ![]() |
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Debt3 | ![]() |
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= | ![]() |
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PV of operating lease payments4 | ![]() |
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= | ![]() |
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Total: | ![]() |
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Based on: 10-K (filing date: 2017-02-09).
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Fair Value1 | Weights | Cost of Capital | |||||||||
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Equity2 | ![]() |
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÷ | ![]() |
= | ![]() |
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× | ![]() |
= | ![]() |
Debt3 | ![]() |
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÷ | ![]() |
= | ![]() |
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× | ![]() |
= | ![]() |
PV of operating lease payments4 | ![]() |
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÷ | ![]() |
= | ![]() |
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× | ![]() |
= | ![]() |
Total: | ![]() |
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Based on: 10-K (filing date: 2016-02-11).
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Fair Value1 | Weights | Cost of Capital | |||||||||
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Equity2 | ![]() |
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÷ | ![]() |
= | ![]() |
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× | ![]() |
= | ![]() |
Debt3 | ![]() |
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÷ | ![]() |
= | ![]() |
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× | ![]() |
= | ![]() |
PV of operating lease payments4 | ![]() |
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÷ | ![]() |
= | ![]() |
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× | ![]() |
= | ![]() |
Total: | ![]() |
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Based on: 10-K (filing date: 2015-02-05).
1 USD $ in millions
2 Equity. See Details »
3 Debt. See Details »
4 PV of operating lease payments. See Details »
Economic Spread
United Technologies Corp., economic spread calculation
Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
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Selected Financial Data (USD $ in millions) | ||||||
Economic profit1 | ![]() |
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Invested capital2 | ![]() |
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Ratio | ||||||
Economic spread3 | ![]() |
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Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-05).
2018 Calculations
1 Economic profit. See Details »
2 Invested capital. See Details »
3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × ÷
=
Ratio | Description | The company |
---|---|---|
Economic spread | The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital. | United Technologies Corp.’s economic spread deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018. |
Economic Profit Margin
United Technologies Corp., economic profit margin calculation
Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
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Selected Financial Data (USD $ in millions) | ||||||
Economic profit1 | ![]() |
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Net sales | ![]() |
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Ratio | ||||||
Economic profit margin2 | ![]() |
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Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-05).
2018 Calculations
1 Economic profit. See Details »
2 Economic profit margin = 100 × Economic profit ÷ Net sales
= 100 × ÷
=
Ratio | Description | The company |
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Economic profit margin | The ratio of economic profit to sales. It is the company’s profit margin covering income efficiency and asset management. Economic profit margin is not biased in favor of capital-intensive business models, because any added capital is a cost to the economic profit margin. | United Technologies Corp.’s economic profit margin deteriorated from 2016 to 2017 and from 2017 to 2018. |