Synopsys Inc. (NASDAQ:SNPS)

The financial performance, as measured by economic profit, exhibits a complex pattern over the observed period. While net operating profit after taxes (NOPAT) generally increased, economic profit consistently remained negative, and the magnitude of the loss worsened significantly in later years. This suggests that, despite growing operational profitability, the cost of capital and invested capital have outpaced the returns generated.

NOPAT Trend

Net operating profit after taxes demonstrated an initial increase from US$774.053 million in 2020 to US$800.432 million in 2021. A substantial surge occurred in 2022, reaching US$1,357.350 million, before declining to US$891.268 million in 2023. Further growth was observed in 2024, with NOPAT reaching US$1,062.721 million, followed by a significant increase to US$1,962.565 million in 2025.

Cost of Capital

The cost of capital remained relatively stable between 2020 and 2024, fluctuating between 18.30% and 18.46%. A notable decrease was observed in 2025, falling to 16.62%. This reduction in the cost of capital, however, did not translate into positive economic profit.

Invested Capital

Invested capital steadily increased from US$6,656.460 million in 2020 to US$7,739.574 million in 2022. Growth continued to US$8,083.758 million in 2023 and then accelerated significantly to US$10,307.049 million in 2024. A dramatic increase occurred in 2025, reaching US$46,390.870 million. This substantial rise in invested capital appears to be a primary driver of the worsening economic profit.

Economic Profit

Economic profit was negative throughout the entire period. Losses of US$444.005 million and US$476.942 million were recorded in 2020 and 2021, respectively. The loss narrowed slightly to US$65.290 million in 2022, but then widened again to US$601.361 million in 2023. The negative economic profit escalated considerably in 2024 to US$839.010 million, culminating in a substantial loss of US$5,749.730 million in 2025. The increasing divergence between NOPAT and economic profit suggests that the growth in invested capital is not generating commensurate returns.

In conclusion, while NOPAT demonstrates positive growth over the period, the consistently negative and worsening economic profit indicates that the company is not generating sufficient returns on its invested capital to cover its cost of capital. The significant increase in invested capital, particularly in 2025, appears to be a key factor contributing to this trend.

Net income attributed to Synopsys and Net Operating Profit After Taxes (NOPAT) both demonstrate fluctuating performance over the observed period. While net income generally increased through 2024, it experienced a significant decline in the final year. NOPAT exhibits a more volatile pattern, with increases followed by substantial decreases, indicating potential shifts in operational efficiency or capital allocation.

Overall Trend - NOPAT

NOPAT increased from US$774,053 thousand in 2020 to US$800,432 thousand in 2021, representing a modest growth rate. A substantial increase is then observed in 2022, reaching US$1,357,350 thousand. However, NOPAT decreased significantly in 2023 to US$891,268 thousand, followed by a smaller increase to US$1,062,721 thousand in 2024. The final year, 2025, shows a considerable rise to US$1,962,565 thousand.

Comparison with Net Income

In 2020 and 2021, NOPAT exceeded net income attributed to Synopsys. This relationship reversed in 2022, 2023, and 2024, where net income surpassed NOPAT. The difference between the two metrics widened in 2023 and 2024 before narrowing again in 2025. This suggests changes in non-operating items or accounting adjustments impacting net income relative to core operational profitability.

Year-over-Year Changes - NOPAT

The largest year-over-year increase in NOPAT occurred between 2021 and 2022 (a US$556,918 thousand increase). The most significant decrease occurred between 2022 and 2023 (a US$466,082 thousand decrease). The final year, 2024 to 2025, shows a substantial increase of US$900,000 thousand. These fluctuations warrant further investigation into the underlying drivers of profitability.

Volatility

NOPAT demonstrates considerable volatility throughout the period. The swings between years suggest sensitivity to external factors, internal operational changes, or both. The substantial increase in 2025, following a period of more moderate growth and a significant decline, is particularly noteworthy and requires further scrutiny.

The provision for income taxes exhibits considerable fluctuation over the observed period. Beginning with a significant benefit of -25,288 in 2020, the provision transitioned to a positive value of 49,155 in 2021, increasing substantially to 137,078 in 2022. A decrease to 83,657 was noted in 2023, followed by a further increase to 99,718 in 2024, and a subsequent decline to 55,991 in 2025.

Cash Operating Taxes Trend

Cash operating taxes demonstrate a consistent upward trend throughout the period. Starting at 89,449 in 2020, these taxes increased to 180,324 in 2021 and 175,476 in 2022. Further growth was observed in 2023, reaching 290,764, and continued into 2024 with a value of 473,015. This upward trajectory persisted in 2025, culminating in 561,026.

The divergence between the provision for income taxes and cash operating taxes is notable. While the provision for income taxes fluctuates, the cash operating taxes consistently increase. This suggests a potential decoupling between reported taxable income and actual cash outflows for taxes. The substantial benefit recorded in 2020 for the provision for income taxes contrasts sharply with the positive cash operating taxes paid in the same year, indicating the utilization of tax loss carryforwards or other tax credits. The increasing cash operating taxes, despite fluctuations in the provision, may reflect increased profitability and a reduced reliance on such tax benefits in later years.

Relationship between Provision and Cash Taxes

The cash operating taxes consistently exceed the provision (benefit) for income taxes, except in 2020. This difference suggests timing differences between when income is recognized for accounting purposes and when taxes are actually paid. These differences could stem from deferred tax assets and liabilities, or from differences in depreciation methods used for financial reporting versus tax purposes. The widening gap between the two figures in recent years indicates a growing divergence in these timing differences.

The substantial growth in cash operating taxes from 2020 to 2025 warrants further investigation to determine the underlying drivers, such as increased revenue, changes in tax rates, or shifts in the geographic distribution of income. The volatility in the provision for income taxes, while less pronounced in the later years, should also be examined to understand the factors contributing to these fluctuations.

The reported invested capital demonstrates a consistent upward trend over the period from October 31, 2020, to October 31, 2023. However, a significant increase is observed between October 31, 2023, and October 31, 2024, and again between October 31, 2024, and October 31, 2025, indicating a substantial shift in capital structure or investment activity during those periods.

Total Reported Debt & Leases

Total reported debt & leases remained relatively stable between 2020 and 2022, fluctuating within a narrow range. An increase is noted in 2023, followed by a slight decrease in 2024. However, a dramatic increase is evident in 2025, suggesting a significant new borrowing event or accounting change. This substantial rise warrants further investigation.

Total Synopsys Stockholders’ Equity

Total stockholders’ equity exhibited consistent growth from 2020 to 2024. The rate of growth accelerated between 2023 and 2024. A very large increase is observed between 2024 and 2025, mirroring the increase in debt and contributing to the overall rise in invested capital. This suggests significant retained earnings or equity issuance.

Invested Capital Trend

Invested capital increased steadily from US$6,656,460 thousand in 2020 to US$8,083,758 thousand in 2023. The growth rate accelerated considerably in 2024, reaching US$10,307,049 thousand, and continued to escalate dramatically in 2025, culminating in US$46,390,870 thousand. This substantial jump in invested capital in the final two periods is primarily driven by the concurrent increases in both debt and equity, and represents a significant change in the company’s capital structure. The magnitude of the increase in 2025 is particularly noteworthy and requires detailed examination to understand the underlying causes.

The substantial increases in both debt, equity, and consequently, invested capital in 2024 and 2025 suggest a period of significant investment or restructuring. Further analysis is needed to determine the specific nature of these investments and their potential impact on future financial performance.

The economic spread ratio demonstrates a consistently negative trend over the observed period. Initially, the ratio exhibited relatively small negative values, but these values have become increasingly negative, culminating in a substantial decline by the final period.

Economic Spread Ratio Trend

Beginning at -6.67% in 2020, the economic spread ratio decreased to -6.87% in 2021. A slight improvement was noted in 2022, with the ratio reaching -0.84%. However, this improvement was short-lived, as the ratio resumed its downward trajectory, reaching -7.44% in 2023 and -8.14% in 2024. The most significant decline occurred between 2024 and 2025, with the ratio falling to -12.39%.

The economic spread ratio’s movement correlates with changes in economic profit and invested capital. While economic profit remained negative throughout the period, its magnitude increased significantly in the later years. Simultaneously, invested capital also increased, but at a much faster rate than any potential improvement in economic profit, contributing to the worsening economic spread ratio.

Relationship to Economic Profit and Invested Capital

The increasing negativity of the economic spread ratio suggests that the company is generating returns on invested capital that are consistently below its cost of capital. The substantial increase in invested capital, coupled with the continued negative economic profit, amplifies this effect, resulting in a more pronounced negative spread. The dramatic increase in the negative economic spread ratio in 2025 is directly linked to the substantial increase in invested capital during that year.

The observed trend indicates a growing disparity between the returns generated by the company’s investments and the cost of those investments. This suggests a potential need to evaluate investment strategies and capital allocation efficiency.

The economic profit margin demonstrates a volatile pattern over the observed period. Initially, the margin exhibits a slight improvement, followed by significant deterioration in later years. Economic profit itself transitions from substantial negative values to even larger negative figures, indicating a widening gap between returns and the cost of capital.

Economic Profit Margin Trend

From October 31, 2020, to October 31, 2021, the economic profit margin improved modestly, moving from -11.46% to -10.93%. This suggests a slight increase in the efficiency of capital utilization or an improvement in profitability relative to the cost of capital during this period. However, this positive trend was short-lived.

A substantial decline is observed between October 31, 2021, and October 31, 2022, with the margin decreasing to -1.19%. This indicates a significant reduction in the ability to generate returns exceeding the cost of capital. The decline continues through October 31, 2023, reaching -10.50%, and accelerates dramatically to -13.64% by October 31, 2024.

The most pronounced deterioration occurs between October 31, 2024, and October 31, 2025, with the economic profit margin plummeting to -72.32%. This represents a substantial loss in value creation and suggests a significant underperformance relative to the cost of capital.

Economic Profit Trend

The absolute value of economic profit increased significantly over the period. Starting with a loss of US$444,005 thousand in 2020, it grew to US$476,942 thousand in 2021. A considerable reduction was seen in 2022, with a loss of US$65,290 thousand, but this was followed by a substantial increase in losses to US$601,361 thousand in 2023.

The losses continued to escalate, reaching US$839,010 thousand in 2024, before experiencing a dramatic surge to US$5,749,730 thousand in 2025. This indicates a rapidly worsening financial performance in terms of value creation.

Relationship between Revenue and Economic Profit Margin

Adjusted revenue consistently increased throughout the period, rising from US$3,875,816 thousand in 2020 to US$7,950,128 thousand in 2025. However, this revenue growth did not translate into improved economic profitability. In fact, the economic profit margin deteriorated despite the increasing revenue, suggesting that the cost of capital and/or operational inefficiencies are increasing at a faster rate than revenue.