O’Reilly Automotive Inc. (NASDAQ:ORLY)

The period under review demonstrates a consistent upward trend in economic profit. This positive performance is supported by increases in net operating profit after taxes and, for the most part, a stable invested capital base. However, the cost of capital also exhibits some fluctuation, which warrants consideration.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased steadily from US$1,241,849 thousand in 2017 to US$2,362,405 thousand in 2021. This represents a substantial growth trajectory, indicating improved operational efficiency and profitability over the five-year period. The largest year-over-year increase occurred between 2020 and 2021.

Cost of Capital

The cost of capital experienced a slight increase from 14.55% in 2017 to 15.27% in 2018, followed by a decrease to 14.92% in 2019. It remained relatively stable at 14.96% in 2020 before rising to 15.68% in 2021. While generally remaining within a narrow range, the increase in 2021 suggests potentially higher financing costs or increased risk perception.

Invested Capital

Invested capital generally increased from US$5,440,691 thousand in 2017 to US$6,200,132 thousand in 2020. A slight decrease was observed in 2021, with invested capital falling to US$5,766,861 thousand. This suggests a potential shift in capital allocation strategy or a reduction in capital-intensive assets towards the end of the period.

Economic Profit

Economic profit shows a clear and consistent upward trend, rising from US$449,966 thousand in 2017 to US$1,457,918 thousand in 2021. This growth is driven by the increasing NOPAT, and despite fluctuations in the cost of capital and invested capital, the company consistently generated a positive economic profit throughout the period. The most significant increase in economic profit occurred between 2020 and 2021, mirroring the substantial growth in NOPAT.

Overall, the financial performance appears strong, as evidenced by the consistent growth in economic profit. The increase in NOPAT is a key driver of this performance. Monitoring the cost of capital and invested capital trends will be important to sustain this positive trajectory.

The financial performance over the examined five-year period demonstrates consistent growth in profitability metrics.

Net Income

The net income shows a steady upward trend, increasing each year from approximately 1.13 billion US dollars in 2017 to about 2.16 billion US dollars in 2021. This represents a near doubling of net income over the period, suggesting effective management of costs and/or increased revenues contributing to bottom-line growth.

Net Operating Profit After Taxes (NOPAT)

The NOPAT also exhibits a consistent increase over the years, rising from roughly 1.24 billion US dollars in 2017 to approximately 2.36 billion US dollars in 2021. This confirms improving operating efficiency and profitability from core operations after accounting for taxes. The growth in NOPAT outpaces net income slightly, indicating favorable operational performance trends.

The patterns indicate sustained improvement in both net income and operating profits, reflecting positive financial health and operational effectiveness over the analyzed timeframe. No volatility or decline is noted, implying stability and strong earnings progression year on year.

The financial data for the period ending December 31, 2017 through December 31, 2021 reveals notable trends in the company's tax-related expenses.

Net Income Tax Expense

This item exhibits fluctuations over the years with an overall upward trend. Beginning at $504,000 thousand in 2017, the figure decreases significantly to $369,600 thousand in 2018. Thereafter, it rises moderately to $399,287 thousand in 2019, followed by a substantial increase to $514,103 thousand in 2020, and continues to increase, reaching $617,229 thousand in 2021. The data indicates a recovery and growth in net income tax expense after the dip in 2018, potentially reflecting higher taxable income or changes in tax strategy or rates.

Cash Operating Taxes

This measure closely aligns with the net income tax expense pattern but consistently remains higher. It starts at $565,004 thousand in 2017 and follows a similar decline to $392,060 thousand in 2018. Following this, it rises steadily to $422,745 thousand in 2019, then more markedly to $551,050 thousand in 2020, and finally to $641,484 thousand in 2021. The steady increase after 2018 suggests growing cash tax obligations, which could be indicative of increased profitability, changes in tax payments timing, or adjustments in deferred tax assets and liabilities.

Overall, both tax expense and cash operating taxes show a notable decline in 2018, followed by consistent and significant increases through 2021. The gap between cash operating taxes and net income tax expense remains evident, with cash taxes being higher throughout, which may highlight timing differences or other tax accounting adjustments. The progressive increase in taxes by 2021 aligns with likely improvements in company earnings or changes in tax policy impacting the effective tax rates or cash tax payments.

Total Reported Debt & Leases

The total reported debt and leases demonstrated a consistent upward trend from 2017 through 2020, increasing from approximately 4.92 billion US dollars to about 6.16 billion US dollars. However, in 2021, there was a noticeable decline to approximately 5.87 billion US dollars, indicating a reduction in debt levels after several years of accumulation.

Shareholders’ Equity (Deficit)

Shareholders’ equity experienced a significant downward trajectory over the period. Starting at around 653 million US dollars in 2017, equity decreased sharply in 2018 to approximately 354 million US dollars, then displayed a modest rise in 2019 to roughly 397 million US dollars. Following this brief improvement, equity plunged to about 140 million US dollars in 2020 and turned negative by 2021, reaching a deficit of approximately 66 million US dollars. This shift to negative equity signals financial strain and potential solvency concerns.

Invested Capital

Invested capital increased steadily from roughly 5.44 billion US dollars in 2017 to a peak of around 6.20 billion US dollars in 2020. However, in 2021, a decline occurred, bringing invested capital down to approximately 5.77 billion US dollars. This pattern suggests that after a phase of capital expansion, a contraction phase began in the most recent year under review.

Overall Analysis

The financial data reveals increasing leverage up to 2020, followed by a reduction in debt levels in 2021. Concurrently, the persistent decrease in shareholders’ equity, culminating in a deficit, indicates deteriorating net worth and potentially heightened financial risk. The invested capital trajectory reflects these shifts, with initial growth succeeded by a downturn in the final year. Together, these trends suggest the company faced mounting financial pressures, necessitating deleveraging and potentially restructuring efforts in 2021.

The economic spread ratio demonstrates a consistent upward trend over the observed five-year period. Economic profit also increased steadily throughout the period, while invested capital fluctuated. The relationship between these items, as reflected in the economic spread ratio, suggests improving financial performance.

Economic Spread Ratio

The economic spread ratio began at 8.27% in 2017 and increased to 25.28% in 2021. This represents a substantial improvement, indicating a growing difference between the return generated from invested capital and the cost of that capital. The most significant increase occurred between 2020 and 2021, with a jump of 8.73 percentage points.

Economic Profit

Economic profit exhibited a consistent year-over-year increase, rising from US$449,966 thousand in 2017 to US$1,457,918 thousand in 2021. This positive trend contributes directly to the increasing economic spread ratio.

Invested Capital

Invested capital increased from 2017 to 2020, peaking at US$6,200,132 thousand. However, it decreased in 2021 to US$5,766,861 thousand. Despite this decrease in the most recent year, the continued growth in economic profit resulted in a higher economic spread ratio.

The combination of increasing economic profit and a relatively stable, though slightly decreasing, invested capital base has driven the observed improvement in the economic spread ratio. This suggests that the company is becoming more efficient at generating returns from its investments.

The economic profit margin demonstrates a consistent upward trend over the five-year period. Economic profit itself increased steadily, contributing to this positive movement in the margin.

Economic Profit Margin

In 2017, the economic profit margin stood at 5.01%. This figure increased to 6.89% in 2018, representing a substantial gain. While the margin experienced a slight decrease to 6.73% in 2019, it resumed its upward trajectory, reaching 8.84% in 2020. The most significant increase occurred between 2020 and 2021, with the margin rising to 10.94%.

The growth in economic profit margin correlates with increases in adjusted sales. However, the rate of increase in economic profit appears to be exceeding that of adjusted sales, particularly in 2020 and 2021, suggesting improved operational efficiency or cost management contributing to the margin expansion.

Economic Profit

Economic profit increased from US$449,966 thousand in 2017 to US$1,457,918 thousand in 2021. The growth was relatively consistent year-over-year, with the largest absolute increase occurring between 2020 and 2021 (US$431,962 thousand).

Adjusted Sales

Adjusted sales also exhibited consistent growth, moving from US$8,977,626 thousand in 2017 to US$13,326,463 thousand in 2021. The largest absolute increase in adjusted sales was observed between 2020 and 2021 (US$1,721,570 thousand).

The consistent growth in both economic profit and adjusted sales, coupled with the expanding economic profit margin, indicates a strengthening financial performance over the observed period.