Hershey Co. (NYSE:HSY)

The period under review demonstrates a generally positive trend in economic profit, alongside fluctuations in the underlying components. Net operating profit after taxes, cost of capital, and invested capital all exhibit distinct patterns over the five-year span.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced a decrease from 2018 to 2019, followed by consistent increases through 2022. The value rose from US$1,303,042 thousand in 2018 to US$1,821,868 thousand in 2022, representing a substantial overall growth despite the initial dip. The largest year-over-year increase occurred between 2020 and 2021.

Cost of Capital

The cost of capital showed a slight increase from 2018 to 2019, then a minor decrease in 2020. It subsequently increased steadily through 2022, reaching 8.84%. While the fluctuations are relatively small, the upward trend suggests a growing cost of financing operations over the period.

Invested Capital

Invested capital increased consistently throughout the period. Starting at US$6,545,593 thousand in 2018, it grew to US$8,759,552 thousand in 2022. The most significant increase in invested capital occurred between 2020 and 2021, mirroring the increase observed in NOPAT.

Economic Profit

Economic profit generally increased over the five years. Despite a decrease from 2018 to 2019, it recovered and demonstrated consistent growth through 2022, reaching US$1,047,156 thousand. This positive trend indicates that the company generated returns exceeding its cost of capital, creating value for its investors. The largest year-over-year increase in economic profit also occurred between 2021 and 2022.

The observed increases in both NOPAT and invested capital contribute to the overall positive trend in economic profit. While the cost of capital has risen modestly, the growth in NOPAT has outpaced this increase, resulting in improved economic performance. The substantial increases observed in both NOPAT and invested capital between 2020 and 2021 warrant further investigation to understand the underlying drivers of these changes.

Net income attributable to The Hershey Company

Over the five-year period, net income exhibited a generally upward trend. Starting at approximately 1.18 billion US dollars in 2018, it experienced a slight decline in 2019 to about 1.15 billion US dollars. However, the subsequent years show consistent growth, with net income increasing to roughly 1.28 billion in 2020, then to approximately 1.48 billion in 2021, and reaching about 1.64 billion by 2022. This reflects a steady improvement in profitability over the latter part of the period.

Net operating profit after taxes (NOPAT)

NOPAT followed a trend similar to that of net income, beginning at around 1.30 billion US dollars in 2018. There was a dip in 2019 to approximately 1.24 billion, followed by a continuous increase in the following years. In 2020, NOPAT rose to about 1.43 billion, then to roughly 1.60 billion in 2021, and further up to approximately 1.82 billion by 2022. The growth trajectory suggests improvements in operating efficiency and tax management resulting in higher operating profitability.

Overall insights

Both net income and NOPAT demonstrate resilience and growth after a modest decline in 2019. The upward trends from 2020 to 2022 indicate enhanced financial performance, with operating profits expanding at a slightly faster pace compared to net income. This may signify effective operational strategies and favorable market conditions contributing to increased earnings and operational efficiency.

The analysis of the annual financial data reveals distinct trends in the company's tax-related expenses over the five-year period ending December 31, 2022.

Provision for Income Taxes

The provision for income taxes exhibited fluctuations, starting at $239,010 thousand in 2018, then slightly decreasing to $234,032 thousand in 2019, followed by a further decline to $219,584 thousand in 2020. In 2021, there was a sharp increase to $314,405 thousand, representing the highest value in the observed timeframe. This increase, however, moderated in 2022, with the provision decreasing to $272,254 thousand, remaining higher than the values prior to 2021 but lower than the 2021 peak.

Cash Operating Taxes

Cash operating taxes demonstrated a similar pattern. Starting at $233,444 thousand in 2018, these taxes increased notably to $281,073 thousand in 2019, then declined to $225,816 thousand in 2020. A significant rise occurred in 2021, reaching $330,049 thousand, which was the highest during the period. This trend reversed in 2022 with a decrease to $266,447 thousand, yet the value was still above the amounts recorded for 2018 and 2020.

Overall, both provision for income taxes and cash operating taxes show a comparable trajectory with a moderate decline up to 2020, followed by a pronounced increase in 2021, and a partial reduction in 2022. The peak in 2021 for both items suggests either increased taxable income or changes in tax rates or policies impacting the tax expenses distinctly during that year. The reduction in 2022 indicates some relief but still reflects a relatively higher tax burden than in the years prior to 2021.

The financial data reveals several key trends over the five-year period ending in 2022. There is a general increase in total reported debt and leases, equity, and invested capital, which provides insight into the company's capital structure evolution and growth dynamics.

Total Reported Debt & Leases

The total reported debt and leases initially decreased from 4,683,658 thousand US dollars in 2018 to 4,479,857 thousand US dollars in 2019. Subsequently, it increased to 5,376,085 thousand US dollars by 2021, before slightly declining to 5,117,981 thousand US dollars in 2022. This indicates a modest fluctuation with an overall upward movement in debt and lease obligations over the observed period.

Total Stockholders’ Equity

The stockholders’ equity displayed a steady and robust growth trend throughout the five years. It more than doubled, rising from 1,398,721 thousand US dollars in 2018 to 3,299,544 thousand US dollars in 2022. This consistent increase suggests ongoing retained earnings and possibly additional capital contributions, contributing to strengthening the company's net asset base.

Invested Capital

Invested capital exhibited an upward trajectory across the period, increasing from 6,545,593 thousand US dollars in 2018 to 8,759,552 thousand US dollars in 2022. The growth was consistent year-over-year, indicating a steady expansion in the resources committed to the company's operations, funded by both debt and equity.

Overall, the company’s financial structure appears to have been progressively strengthened through increased equity and incremental invested capital. While total debt and leases showed some variability, the level remained elevated at the end of the period relative to the beginning, which alongside rising equity, suggests a balanced approach to financing growth and operations. The increasing invested capital underscores an expanding asset base supporting the business activities.

The economic spread ratio exhibited a generally positive trend over the observed period. While fluctuations occurred, the ratio demonstrated an overall increase from 2018 to 2022. This suggests an improving ability to generate returns exceeding the cost of capital.

Economic Spread Ratio

In 2018, the economic spread ratio stood at 11.62%. A decrease was noted in 2019, falling to 9.93%, representing the lowest value within the analyzed timeframe. Subsequent years saw recovery, with the ratio reaching 10.61% in 2020 and 10.20% in 2021. The most significant increase occurred between 2021 and 2022, with the ratio climbing to 11.95%, surpassing the initial 2018 level.

Economic profit increased consistently throughout the period, rising from US$760,693 thousand in 2018 to US$1,047,156 thousand in 2022. Invested capital also increased, though at a varying rate, moving from US$6,545,593 thousand in 2018 to US$8,759,552 thousand in 2022. The concurrent increase in both economic profit and invested capital supports the observed upward trend in the economic spread ratio.

Relationship between Economic Profit and Invested Capital

The growth in economic profit outpaced the growth in invested capital, particularly between 2021 and 2022. This differential contributed to the improvement in the economic spread ratio, indicating enhanced efficiency in capital utilization. The initial dip in the economic spread ratio in 2019 coincided with a larger relative increase in invested capital compared to economic profit.

The observed pattern suggests a strengthening financial performance in terms of value creation. The increasing economic spread ratio indicates a growing capacity to generate returns above the required rate of return on invested capital.

The economic profit margin exhibited a generally positive trend over the five-year period. While fluctuations occurred, the metric demonstrated an overall increase from 2018 to 2022. Economic profit itself also increased consistently throughout the period, contributing to the margin’s performance.

Economic Profit Margin

In 2018, the economic profit margin stood at 9.76%. A decrease was observed in 2019, with the margin falling to 8.33%. The margin then recovered in 2020, reaching 9.79%, nearly matching the 2018 level. A slight decline to 9.70% occurred in 2021, followed by a notable increase to 10.05% in 2022. This represents the highest margin value within the observed timeframe.

Economic Profit

Economic profit increased from US$760,693 thousand in 2018 to US$1,047,156 thousand in 2022. The lowest value during the period was recorded in 2019 at US$665,400 thousand. Subsequent years showed consistent growth, with increases from US$797,916 thousand in 2020 to US$870,433 thousand in 2021, culminating in the highest value in 2022.

Net Sales

Net sales demonstrated a consistent upward trend throughout the period, increasing from US$7,791,069 thousand in 2018 to US$10,419,294 thousand in 2022. The rate of increase appeared to accelerate in later years, with a more substantial jump in net sales between 2021 and 2022 compared to earlier periods.

The concurrent increases in both economic profit and net sales suggest a strong correlation between revenue generation and value creation. The increasing economic profit margin indicates that the company is becoming more efficient at converting sales into economic profit, potentially due to improved cost management or pricing strategies.