Economic Value Added (EVA)
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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.
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Eaton Corp. plc pages available for free this week:
- Income Statement
- Analysis of Profitability Ratios
- Enterprise Value (EV)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Selected Financial Data since 2005
- Return on Assets (ROA) since 2005
- Debt to Equity since 2005
- Price to Earnings (P/E) since 2005
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Economic Profit
Eaton Corp. plc, economic profit calculation
US$ in millions
| 12 months ended: | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | |
|---|---|---|---|---|---|---|
| Net operating profit after taxes (NOPAT)1 | ||||||
| Cost of capital2 | ||||||
| Invested capital3 | ||||||
| Economic profit4 | ||||||
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2024 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= – × =
The financial performance, as measured by economic profit, demonstrates a consistent pattern of negative value creation over the five-year period. While net operating profit after taxes (NOPAT) increased, it has not been sufficient to overcome the cost of capital employed. A review of the key components reveals trends impacting this outcome.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT exhibited a clear upward trend, increasing from US$1,541 million in 2020 to US$3,854 million in 2024. This represents a substantial improvement in operational profitability over the period. The largest single-year increase occurred between 2022 and 2023.
- Cost of Capital
- The cost of capital experienced a gradual increase from 15.57% in 2020 to 16.78% in 2024. While the increase is relatively modest, it contributes to the persistent negative economic profit. The rate of increase slowed between 2023 and 2024.
- Invested Capital
- Invested capital showed a steady, albeit slow, increase from US$27,450 million in 2020 to US$31,924 million in 2024. This suggests continued investment in the business, but the returns on this investment, relative to the cost of capital, remain insufficient.
- Economic Profit
- Economic profit remained negative throughout the observed period, ranging from -US$2,734 million in 2020 to -US$1,503 million in 2024. Although the magnitude of the loss decreased each year, indicating improvement, the company did not generate returns exceeding its cost of capital. The most significant reduction in the economic loss occurred between 2022 and 2024, coinciding with the largest NOPAT increase.
In summary, the increasing NOPAT is a positive sign, but the rising cost of capital and continued investment in capital, coupled with the inability to generate returns above the cost of that capital, resulted in ongoing economic losses. The trend suggests that while operational efficiency is improving, further attention is needed to capital allocation and cost of capital management to achieve positive economic profit.
Net Operating Profit after Taxes (NOPAT)
Eaton Corp. plc, NOPAT calculation
US$ in millions
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for credit losses.
3 Addition of increase (decrease) in deferred revenue liabilities.
4 Addition of increase (decrease) in product warranty accruals.
5 Addition of increase (decrease) in liabilities related to workforce reductions, plant closing and other associated costs.
6 Addition of increase (decrease) in equity equivalents to net income attributable to Eaton ordinary shareholders.
7 2024 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= × =
8 2024 Calculation
Tax benefit of interest expense, net = Adjusted interest expense, net × Statutory income tax rate
= × 25.00% =
9 Addition of after taxes interest expense to net income attributable to Eaton ordinary shareholders.
- Net Income Attributable to Eaton Ordinary Shareholders
- The net income shows a consistent upward trend over the five-year period. Starting at $1,410 million in 2020, it increased to $2,144 million in 2021, representing a significant growth of approximately 52%. This positive momentum continued with a more moderate increase to $2,462 million in 2022. Subsequently, the growth accelerated again, reaching $3,218 million in 2023 and further increasing to $3,794 million by the end of 2024. Overall, the net income more than doubled during the period, reflecting strong profitability improvements.
- Net Operating Profit After Taxes (NOPAT)
- NOPAT also exhibits a steady rise through the reporting years. Beginning at $1,541 million in 2020, it increased substantially to $2,328 million in 2021, an increase of around 51%. The upward trajectory continued at a slower pace in 2022 with $2,473 million. Growth accelerated significantly thereafter, reaching $3,310 million in 2023 and $3,854 million in 2024. The pattern closely mirrors that of net income, indicating improved operating efficiency and successful management of expenses and taxes.
- General Observations
- Both net income and NOPAT exhibit strong and consistent growth over the five years, highlighting an overall enhancement in the company's profitability and operational performance. The most substantial percentage increases occur between 2020 and 2021, followed by steady gains each subsequent year. The continuous upward trend suggests successful execution of business strategies leading to improved financial results.
Cash Operating Taxes
Eaton Corp. plc, cash operating taxes calculation
US$ in millions
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
- Income Tax Expense
- The income tax expense showed significant fluctuations over the five-year period. Starting at $331 million in 2020, it more than doubled in 2021, reaching $750 million. This was followed by a decrease to $445 million in 2022. However, the tax expense increased again in the subsequent years, rising to $604 million in 2023 and further to $768 million in 2024. Overall, despite variability, the trend indicates a general increase over the period, with a notable peak in 2021.
- Cash Operating Taxes
- Cash operating taxes exhibited a consistent upward trend from 2020 to 2024. Starting at $497 million in 2020, the figure rose substantially to $819 million in 2021. Though there was a slight decline in 2022 to $614 million, the amount increased again to $830 million in 2023 and further to $964 million in 2024. The pattern suggests ongoing growth in cash operating tax payments over the timeframe, with a temporary dip observed in 2022.
- Comparative Insights
- When comparing income tax expense and cash operating taxes, both show generally increasing trends through the years, despite some fluctuations. The income tax expense appears more volatile, with sharper increases and decreases, while cash operating taxes demonstrate a steadier increase. The largest deviations for both metrics occur in 2021, indicating possible changes in tax policies, financial performance, or accounting treatments during that year. By the end of the period, cash operating taxes surpass income tax expense, potentially reflecting differences in timing, recognition, or tax planning strategies.
Invested Capital
Eaton Corp. plc, invested capital calculation (financing approach)
US$ in millions
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
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 deferred revenue liabilities.
5 Addition of product warranty accruals.
6 Addition of liabilities related to workforce reductions, plant closing and other associated costs.
7 Addition of equity equivalents to total Eaton shareholders’ equity.
8 Removal of accumulated other comprehensive income.
9 Subtraction of short-term investments.
- Total reported debt & leases
- The total reported debt and lease obligations have shown a consistent upward trend over the five-year period. Starting at $8,500 million in 2020, the figure increased to $9,984 million by the end of 2024. The most notable annual increment occurred between 2022 and 2023, where debt increased by approximately $696 million. This trend suggests a gradual rise in the company’s financial leverage over time.
- Total Eaton shareholders’ equity
- Shareholders’ equity demonstrated growth from $14,930 million in 2020 to a peak of $19,036 million in 2023, before slightly declining to $18,488 million in 2024. The steady increase from 2020 through 2023 indicates an accumulation of residual interest in the company assets, reflecting potentially retained earnings or capital inflows. The slight decrease in the final year may imply dividend payouts, share repurchases, or other equity adjustments.
- Invested capital
- Invested capital, which represents the total capital provided by shareholders and debt holders, showed a steady increase from $27,450 million in 2020 to $31,924 million in 2024. The incremental rises each year suggest ongoing investments in the company’s operational assets or capital expenditures. The rate of growth in invested capital is moderate and appears to align with the increases observed in both reported debt and equity, indicating balanced financing activities.
Cost of Capital
Eaton Corp. plc, cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2024-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2023-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2022-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2021-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | ÷ | = | × | = | |||||||||
| Debt3 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Operating lease liability4 | ÷ | = | × | × (1 – 25.00%) | = | ||||||||
| Total: | |||||||||||||
Based on: 10-K (reporting date: 2020-12-31).
1 US$ in millions
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
Eaton Corp. plc, economic spread ratio calculation, comparison to benchmarks
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | ||||||
| Invested capital2 | ||||||
| Performance Ratio | ||||||
| Economic spread ratio3 | ||||||
| Benchmarks | ||||||
| Economic Spread Ratio, Competitors4 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 Economic profit. See details »
2 Invested capital. See details »
3 2024 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × ÷ =
4 Click competitor name to see calculations.
The period under review demonstrates a consistent pattern of negative economic profit, alongside increasing invested capital. This has resulted in a progressively less negative economic spread ratio over the five-year period.
- Economic Profit
- Economic profit exhibits a negative value throughout the analyzed timeframe, ranging from negative US$2,734 million in 2020 to negative US$1,503 million in 2024. While consistently negative, the magnitude of the loss decreases each year, indicating an improving, though still unfavorable, profitability relative to the cost of capital.
- Invested Capital
- Invested capital shows a steady upward trend, increasing from US$27,450 million in 2020 to US$31,924 million in 2024. This suggests continued investment in the business, despite the negative economic profit. The consistent growth in invested capital, coupled with the decreasing economic loss, implies that new investments are becoming incrementally more efficient at generating returns, though still below the cost of capital.
- Economic Spread Ratio
- The economic spread ratio, expressed as a percentage, consistently registers negative values. However, it demonstrates a clear improving trend, moving from -9.96% in 2020 to -4.71% in 2024. This improvement is driven by the decreasing economic profit losses and the increasing invested capital. The ratio indicates that the company’s return on invested capital is less than its weighted average cost of capital, but the gap is narrowing over time. The rate of improvement appears to be accelerating in the later years of the period.
In summary, while the company continues to generate negative economic profit, the trend suggests a positive trajectory in value creation. The increasing invested capital is being deployed with incrementally improving efficiency, leading to a reduced shortfall between returns and the cost of capital, as evidenced by the improving economic spread ratio.
Economic Profit Margin
Eaton Corp. plc, economic profit margin calculation, comparison to benchmarks
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Economic profit1 | ||||||
| Net sales | ||||||
| Add: Increase (decrease) in deferred revenue liabilities | ||||||
| Adjusted net sales | ||||||
| Performance Ratio | ||||||
| Economic profit margin2 | ||||||
| Benchmarks | ||||||
| Economic Profit Margin, Competitors3 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 Economic profit. See details »
2 2024 Calculation
Economic profit margin = 100 × Economic profit ÷ Adjusted net sales
= 100 × ÷ =
3 Click competitor name to see calculations.
The economic profit margin exhibited a consistent, albeit gradual, improvement over the five-year period. While negative throughout, the magnitude of the loss decreased year-over-year. This improvement occurred in conjunction with increasing adjusted net sales.
- Economic Profit Margin
- The economic profit margin began at -15.29% in 2020 and progressively improved to -6.04% in 2024. The largest single-year improvement occurred between 2022 and 2023, with a shift of 3.71 percentage points. The rate of improvement slowed between 2023 and 2024, increasing by 2.47 percentage points.
Adjusted net sales demonstrated a consistent upward trend throughout the period. This growth in sales likely contributed to the observed improvement in the economic profit margin, although the margin remained negative, indicating that the cost of capital exceeded the economic profit generated.
- Adjusted Net Sales
- Adjusted net sales increased from US$17,881 million in 2020 to US$24,870 million in 2024. The largest absolute increase in sales occurred between 2023 and 2024, adding US$1,556 million. Year-over-year growth rates were relatively consistent, averaging approximately 10% annually.
Economic profit itself also showed improvement, moving from a loss of US$2,734 million in 2020 to a loss of US$1,503 million in 2024. This reduction in the absolute value of the loss aligns with the improving economic profit margin and increasing adjusted net sales.
- Economic Profit
- The economic profit decreased in absolute value from US$2,734 million in 2020 to US$1,503 million in 2024. The largest reduction in the loss occurred between 2020 and 2021, decreasing by US$387 million. The reduction in loss slowed in the most recent period, decreasing by US$481 million between 2023 and 2024.
In summary, the organization experienced increasing sales alongside a diminishing economic loss, as evidenced by the improving economic profit margin and decreasing economic profit. While still operating at an economic loss, the trend suggests a positive trajectory.