Analog Devices Inc. (NASDAQ:ADI)

The analysis reveals a consistent pattern of negative economic profit over the observed period. While net operating profit after taxes (NOPAT) fluctuates, it does not generate sufficient returns to cover the cost of capital employed. Invested capital demonstrates a significant increase initially, followed by a gradual decline, while the cost of capital remains relatively stable.

Economic Profit Trend

Economic profit remains negative throughout the six-year period. The largest negative economic profit is observed in 2021, at -6,888,150 US$ in thousands. While economic profit improves from 2021 to 2023, it remains substantial negative. A renewed decline is evident in 2024 and 2025, with economic profit reaching -6,151,907 and -5,053,860 US$ in thousands respectively.

NOPAT Performance

Net operating profit after taxes (NOPAT) decreased from 1,265,150 US$ in thousands in 2020 to 1,115,726 US$ in thousands in 2021. A significant increase is then observed in 2022, reaching 2,594,637 US$ in thousands, followed by a further increase to 3,141,095 US$ in thousands in 2023. However, NOPAT declines sharply in 2024 to 1,343,155 US$ in thousands, and increases again in 2025 to 2,187,350 US$ in thousands. Despite these increases, NOPAT levels are insufficient to generate positive economic profit.

Cost of Capital

The cost of capital exhibits relative stability throughout the period, ranging from 16.54% to 17.22%. A slight upward trend is observable, increasing from 16.54% in 2020 to 17.22% in 2024, before decreasing slightly to 17.21% in 2025. This consistent cost of capital, combined with the negative economic profit, suggests that the business is consistently failing to generate returns exceeding its funding costs.

Invested Capital

Invested capital increased substantially from 18,211,243 US$ in thousands in 2020 to 47,018,398 US$ in thousands in 2021. Following this peak, invested capital demonstrates a gradual downward trend, decreasing to 42,071,671 US$ in thousands by 2025. The initial increase in invested capital did not translate into improved economic profitability, and the subsequent reduction has not been sufficient to generate positive economic profit.

In summary, the organization consistently underperforms relative to its cost of capital. Fluctuations in NOPAT are not enough to offset the high cost of capital and substantial invested capital base, resulting in persistent negative economic profit. The trend suggests a need to evaluate capital allocation strategies and operational efficiency to improve returns.

Net Income Trend

The net income exhibits a generally positive trend with some fluctuations over the analyzed periods. From October 31, 2020, to October 30, 2021, net income increased moderately from approximately $1.22 billion to $1.39 billion. A significant surge is observed in the following year ending October 29, 2022, where net income almost doubles to about $2.75 billion. This upward trajectory continues into October 28, 2023, peaking near $3.31 billion. However, there is a notable decline in the subsequent year on November 2, 2024, with net income dropping to approximately $1.64 billion. The final period, November 1, 2025, sees a recovery with net income rising again to around $2.27 billion, though it remains below the peak of 2023.

NOPAT Trend

Net Operating Profit After Taxes (NOPAT) shows a trend broadly aligned with net income, suggesting operational performance closely mirrors overall profitability. Initially, NOPAT decreases from about $1.27 billion in 2020 to approximately $1.12 billion in 2021. This is followed by a marked increase in 2022 to roughly $2.59 billion and continues to rise to around $3.14 billion by 2023. Similar to net income, NOPAT experiences a decline in November 2024, falling to about $1.34 billion, before recovering to approximately $2.19 billion in November 2025.

Comparative Insights

The parallel movements in net income and NOPAT imply that variations in profitability are largely driven by operating performance rather than shifts in non-operating activities or tax impacts. Both metrics demonstrate substantial growth between 2021 and 2023, reflecting a period of strong operational efficiency or favorable market conditions. The decrease seen in 2024 may indicate operational challenges, increased costs, or external factors adversely affecting profitability, followed by partial recovery in 2025.

Overall Observations

Over the six-year span, the company experienced significant growth in profitability metrics with a peak in 2023. The subsequent dip in 2024 suggests some volatility or transitional challenges that warrant further investigation. The recovery in 2025 indicates resilience and improvement but does not reach prior peak levels by the end of the observed period. Continued monitoring of operational efficiency and market conditions would be advisable to sustain or improve profitability.

Provision for (benefit from) income tax

The provision for income tax exhibits significant volatility across the observed periods. In the fiscal year ending October 31, 2020, the provision was a positive amount of approximately $90.9 million, suggesting a recorded tax expense. However, in the subsequent year, there was a notable reversal to a tax benefit of approximately $61.7 million. Following this, the provision returned to a substantial tax expense, peaking at about $350.2 million in 2022 and sustaining relatively high values through 2023 and beyond, with figures of approximately $293.4 million, $142.1 million, and $444.8 million for the years ending October 28, 2023, November 2, 2024, and November 1, 2025, respectively. This fluctuation might indicate changes in taxable income, tax planning strategies, or adjustments in deferred tax assets and liabilities.

Cash operating taxes

Cash paid for operating taxes has shown a consistent upward trend over the reported years, indicating increasing cash outflows related to tax payments. Starting at approximately $246.6 million for the fiscal year ending October 31, 2020, it rose to $385.9 million in 2021 and then nearly doubled to about $720.3 million in 2022. The upward trajectory continued, reaching $796.5 million in 2023. There is a slight dip in the following year to $563.8 million in 2024, but the amount increases again to around $739.0 million in 2025. This pattern suggests that while some years experienced a temporary reduction, the overall cash tax burden has increased substantially, potentially reflecting higher taxable earnings or changes in tax legislation or company operations affecting cash tax payments.

The analysis of the financial data reveals distinct trends in the company's capital structure over the six-year period under review. The total reported debt and leases demonstrate a consistent upward trajectory, increasing from approximately $5.47 billion in late 2020 to nearly $8.95 billion by late 2025. This growth indicates an increasing reliance on debt financing or lease commitments over time, reflecting either an expansion in operations, capital expenditures, or refinancing activities.

Conversely, shareholders’ equity experienced a notable surge between 2020 and 2021, rising sharply from roughly $12.0 billion to nearly $38.0 billion. However, following this spike, equity levels have gradually declined each subsequent year, decreasing to about $33.8 billion by 2025. This downward trend could suggest factors such as dividend distributions exceeding net income, share repurchases, or accumulated losses, which have eroded equity after its initial increase.

Invested capital, representing the total funds invested in the company’s operations, similarly rose steeply from $18.2 billion in 2020 to $47.0 billion in 2021. Following this peak, invested capital steadily declined year-over-year, falling to approximately $42.1 billion in 2025. The decrease in invested capital alongside the declining equity suggests a strategic reduction or reallocation of invested resources, possibly through asset divestitures or operational efficiencies.

Total Reported Debt & Leases

Displays a steady increase, implying greater leverage or lease commitments over the analyzed period.

Shareholders’ Equity

Exhibits a significant increase followed by a gradual but persistent decline, indicating shifts in retained earnings, dividends, or capital management strategies.

Invested Capital

Rises sharply early on, then decreases gradually, reflecting changes in asset base investment and capital deployment.

Overall, the data suggest a financial strategy characterized by increased debt utilization, initial capital accumulation or revaluation, and subsequent capital base contraction. This pattern should be further examined in the context of profitability, cash flow, and market conditions to assess sustainability and risk implications.

The economic spread ratio demonstrates a consistently negative relationship with invested capital over the observed period. While fluctuations occur year-to-year, the overall trend suggests a persistent underperformance relative to the cost of capital.

Economic Spread Ratio Trend

The economic spread ratio began at -9.59% in 2020 and deteriorated to -14.65% in 2021, representing the most significant single-year decline within the examined timeframe. A partial recovery was noted in 2022, with the ratio improving to -11.41%. This improvement was followed by a further, though smaller, decline to -10.05% in 2023. The ratio then experienced a substantial decrease in 2024, reaching -14.14%, before moderating slightly to -12.01% in 2025. This indicates a volatile performance, but consistently negative value creation.

The magnitude of economic profit, while consistently negative, appears to be influenced by changes in invested capital. The largest negative economic profit occurred in 2021, coinciding with the largest increase in invested capital. Despite a decrease in invested capital in subsequent years, economic profit remained negative, suggesting that operational performance is a significant driver of the negative economic spread.

Relationship between Economic Profit and Invested Capital

A review of the figures reveals that despite a general decrease in invested capital from 2022 through 2025, economic profit remains substantially negative. This suggests that the primary issue is not necessarily the amount of capital employed, but rather the return generated on that capital. The consistent negative economic profit indicates that the company’s returns are failing to cover its cost of capital, even as the capital base shrinks.

The economic spread ratio’s movement suggests that while the company has attempted to optimize its capital structure, the underlying profitability challenges persist. The 2024 decline in the economic spread ratio, despite a continued reduction in invested capital, is particularly noteworthy and warrants further investigation.

The economic profit margin demonstrates significant volatility over the observed period. Initially negative, the margin experienced a substantial decline before exhibiting some improvement, followed by a renewed downturn and a slight recovery. A consistent pattern of economic loss is evident throughout the entire timeframe.

Economic Profit Margin Trend

In fiscal year 2020, the economic profit margin stood at -31.18%. This figure deteriorated sharply in 2021, reaching -94.12%, representing the most substantial negative margin observed. A considerable improvement occurred in 2022, with the margin increasing to -42.76%. This positive trend continued into 2023, with a further improvement to -36.07%. However, the margin experienced a significant decline in 2024, falling to -65.26%, the second-lowest value in the series. A partial recovery is noted in 2025, with the margin moving to -45.86%.

The economic profit margin’s movement appears to be inversely related to revenue, though not consistently. While revenue increased substantially between 2020 and 2022, the economic profit margin did not improve proportionally, indicating that the cost of capital or operational inefficiencies may have increased at a faster rate. The decline in revenue in 2024 coincided with a dramatic worsening of the economic profit margin, suggesting a strong correlation between revenue performance and economic profitability. The slight revenue increase in 2025 was accompanied by a modest improvement in the economic profit margin.

Magnitude of Economic Loss

The economic profit figures, which underpin the margin calculations, consistently show substantial losses. The largest loss occurred in 2021 at -6,888,150 (US$ in thousands), while the smallest loss was recorded in 2020 at -1,746,773 (US$ in thousands). Losses remained above -4,438,212 (US$ in thousands) throughout the period, indicating a persistent inability to generate returns exceeding the cost of capital.

The fluctuations in the economic profit margin suggest potential challenges in managing costs relative to revenue generation. Further investigation into the underlying drivers of these costs and the cost of capital would be necessary to understand the reasons for the sustained economic losses and the volatility in the economic profit margin.