Express Scripts Holding Co. (NASDAQ:ESRX)

The period between 2013 and 2017 demonstrates a consistent pattern of negative economic profit, although the magnitude of the loss decreased and then slightly increased over the observed timeframe. Net operating profit after taxes exhibited an overall upward trend, while the cost of capital generally decreased. Invested capital fluctuated, but remained relatively stable overall.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,817,712 thousand in 2013 to US$3,375,341 thousand in 2016, representing substantial growth. However, a slight decrease was observed in 2017, with NOPAT falling to US$3,274,103 thousand. This suggests a potential plateauing of operational profitability.

Cost of Capital

The cost of capital experienced a modest decline from 13.56% in 2013 to 12.49% in 2016. This indicates a decreasing cost of funding for the business. The cost of capital then increased slightly to 12.55% in 2017, potentially reflecting changes in market conditions or risk assessment.

Invested Capital

Invested capital decreased from US$41,289,230 thousand in 2013 to US$35,712,343 thousand in 2016. A subsequent increase was noted in 2017, bringing the invested capital to US$37,007,152 thousand. These fluctuations may be attributable to capital expenditure decisions, asset sales, or changes in working capital requirements.

Economic Profit

Economic profit remained negative throughout the period, starting at a loss of US$-3,780,607 thousand in 2013. The losses diminished progressively, reaching US$-1,083,553 thousand in 2016. However, economic profit worsened slightly in 2017, with a loss of US$-1,370,072 thousand. This indicates that, despite increasing NOPAT, the return generated was consistently below the cost of capital, and the gap widened slightly in the final year.

The observed trend suggests that while operational performance, as measured by NOPAT, improved, the business did not generate sufficient returns to cover its cost of capital. The slight increase in the economic loss in 2017 warrants further investigation to determine the underlying causes and potential corrective actions.

Net Income Attributable to Express Scripts

The net income attributable to the company showed a consistent upward trend throughout the five-year period. Starting from approximately 1.84 billion US dollars in 2013, the net income increased annually, reaching about 4.52 billion US dollars by the end of 2017. This represents a more than doubling of net income over the duration analyzed, indicating strong profitability growth.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures likewise showed an overall increasing trend, rising from roughly 1.82 billion US dollars in 2013 to over 3.27 billion US dollars in 2017. The growth is generally steady, with an especially notable increase between 2015 and 2016. However, unlike net income, NOPAT slightly declined in 2017 compared to the previous year, decreasing from approximately 3.38 billion to 3.27 billion US dollars.

Comparative Insights

Both net income and NOPAT demonstrate sustained profitability improvements over the analyzed timeframe, highlighting effective operational and financial management. The disparity in 2017, where net income continued rising but NOPAT decreased, may suggest changes in operating efficiency, tax impact, or other factors affecting post-tax operating profits.

Provision for Income Taxes

The provision for income taxes exhibits fluctuation over the five-year period. It begins at 1,104,000 thousand US dollars at the end of 2013, then decreases slightly in 2014 to 1,031,200 thousand US dollars. A notable increase occurs in 2015, with the provision reaching 1,364,300 thousand US dollars, followed by a decline in 2016 to 999,500 thousand US dollars. By the end of 2017, there is a significant drop to 397,300 thousand US dollars, marking the lowest figure in the observed timeframe.

Cash Operating Taxes

Cash operating taxes demonstrate more variability with an overall upward trajectory throughout the period. Starting at 1,890,614 thousand US dollars in 2013, the amount decreases to 1,669,615 thousand US dollars in 2014. Subsequently, a sharp increase is observed in 2015, reaching 2,004,540 thousand US dollars. In 2016, cash operating taxes decline again to 1,743,214 thousand US dollars before climbing significantly to 2,292,125 thousand US dollars by the end of 2017, the highest level recorded in the five years.

Comparative Observations

Overall, the provision for income taxes and cash operating taxes do not follow the same trend patterns. While the provision for income taxes peaks in 2015 before steadily declining to its lowest point in 2017, cash operating taxes show a general increasing trend despite year-to-year fluctuations. The divergence between these two tax-related metrics may suggest differences in tax accounting policies, timing differences, or changes in cash flow management relating to tax obligations.

Total Reported Debt & Leases

The total reported debt and leases show a fluctuating trend over the five-year period. The value decreased slightly from approximately 14.27 billion USD at the end of 2013 to about 13.86 billion USD in 2014. However, from 2014 onward, the debt increased steadily, reaching around 16.25 billion USD by the end of 2017. This reflects a rising leverage position in the latter years.

Total Express Scripts Stockholders’ Equity

Stockholders’ equity demonstrates a declining trend from 2013 through 2016, dropping from roughly 21.84 billion USD in 2013 to about 16.24 billion USD in 2016. This decline represents a significant reduction in equity over this period. Notably, in 2017, there is a reversal of this downward trend with equity increasing to about 18.12 billion USD, suggesting a partial recovery or accumulation of retained earnings or capital injection during that year.

Invested Capital

Invested capital also declined consistently from 2013 to 2016, moving from approximately 41.29 billion USD to around 35.71 billion USD. In 2017, a modest increase to about 37.01 billion USD is observed. This trend indicates a contraction in the total capital employed by the company initially, followed by a slight expansion towards the end of the period.

The economic spread ratio demonstrates a consistent, though decelerating, improvement over the five-year period. While negative throughout the observed timeframe, the ratio indicates a diminishing gap between the return generated from invested capital and the cost of that capital.

Economic Spread Ratio Trend

The economic spread ratio moved from -9.16% in 2013 to -3.70% in 2017. This represents a substantial, albeit incomplete, recovery. The largest single-year improvement occurred between 2015 and 2016, with the ratio increasing by 3.45 percentage points. The rate of improvement slowed considerably between 2016 and 2017, increasing by only 0.67 percentage points.

The trend in economic profit mirrors the improvement in the economic spread ratio, though it remains negative. The magnitude of the economic loss decreased each year, indicating that the company is becoming more efficient at generating returns on its invested capital. However, the absolute value of economic profit increased from -$1,370,072 thousand in 2017 to -$3,780,607 thousand in 2013.

Invested Capital

Invested capital decreased from $41,289,230 thousand in 2013 to $35,712,343 thousand in 2016, before increasing to $37,007,152 thousand in 2017. This suggests a period of capital reduction followed by a modest reinvestment. The fluctuations in invested capital likely influence the economic spread ratio, alongside changes in economic profit.

The observed trend suggests a positive trajectory in the company’s ability to generate returns relative to its capital costs. However, continued negative economic profit and economic spread ratio values indicate that the company is still destroying economic value, even if at a decreasing rate. Further investigation into the drivers of economic profit and invested capital is warranted to understand the sustainability of this trend.

The economic profit margin exhibited a consistent, though decelerating, improvement from 2013 to 2016, followed by a slight deterioration in 2017. Throughout the observed period, the economic profit margin remained negative, indicating that the company’s returns did not exceed its cost of capital.

Economic Profit Margin Trend

The economic profit margin demonstrated a negative trend from 2013 to 2017. Initially, the margin stood at -3.63% in 2013. It improved to -3.32% in 2014, -2.38% in 2015, and further to -1.08% in 2016. However, in 2017, the margin slightly worsened to -1.37%.

The rate of improvement in the economic profit margin slowed over time. The largest single-year improvement occurred between 2015 and 2016, while the change from 2016 to 2017 represented a reversal of the prior positive trend. This suggests that factors contributing to the earlier improvements may have diminished or been offset by other influences.

Relationship to Revenues

Revenues experienced a slight decline from 2013 to 2017, moving from US$104,098,800 thousand to US$100,064,600 thousand. While revenues decreased, the economic profit margin improved for the first four years of the period, indicating that improvements in profitability, relative to capital employed, were initially able to offset the revenue decline. The subsequent deterioration in the margin in 2017, despite relatively stable revenues, suggests that the cost of capital may have increased or operational efficiencies diminished.

The consistently negative economic profit margin throughout the period indicates that the company was not generating returns sufficient to cover its cost of capital. The observed trend suggests a gradual, but incomplete, movement towards improved capital allocation efficiency, followed by a recent setback.