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 invested capital, resulting in economic losses each year.

NOPAT Trend

Net operating profit after taxes demonstrates considerable volatility. It decreased from US$1,265,150 thousand in 2020 to US$1,115,726 thousand in 2021. A substantial increase is then observed in 2022, reaching US$2,594,637 thousand, followed by a further rise to US$3,141,095 thousand in 2023. However, NOPAT declined significantly in 2024 to US$1,343,155 thousand, and shows a partial recovery to US$2,187,350 thousand in 2025.

Cost of Capital

The cost of capital remains relatively stable throughout the period, fluctuating between 14.40% and 14.98%. A slight upward trend is discernible, increasing from 14.40% in 2020 to 14.98% in 2024, before decreasing slightly to 14.97% in 2025. This consistency suggests that the company’s risk profile and market conditions influencing its capital costs have remained largely unchanged.

Invested Capital

Invested capital experiences a significant increase from US$18,211,243 thousand in 2020 to US$47,018,398 thousand in 2021. Following this substantial rise, invested capital decreases moderately over the subsequent years, reaching US$42,071,671 thousand in 2025. This suggests a period of substantial investment followed by a stabilization and slight reduction in capital employed.

Economic Profit

Economic profit remains negative across all years examined. The largest economic loss occurred in 2021, at US$-5,845,552 thousand. While the magnitude of the loss decreased in 2022 and 2023, it remains substantial. The economic loss increased again in 2024 to US$-5,175,250 thousand, and remains significant in 2025 at US$-4,111,040 thousand. The consistent negative economic profit indicates that the company is not generating returns exceeding its cost of capital.

The fluctuations in NOPAT, coupled with a relatively stable cost of capital and a large invested capital base, contribute to the persistent negative economic profit. Despite increases in NOPAT in 2022 and 2023, these were insufficient to offset the cost of capital applied to the substantial invested capital.

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 exhibits fluctuations over the observed period, consistently remaining negative, indicating that the company’s return on invested capital is less than its cost of capital. A general trend of decreasing profitability, as measured by economic profit, is apparent throughout the period, though with some variation.

Economic Spread Ratio

The economic spread ratio decreased from -7.45% in 2020 to -12.43% in 2021, representing a significant widening of the gap between the cost of capital and the return generated. A subsequent improvement was noted in 2022, with the ratio moving to -9.17%, and further improvement in 2023 to -7.81%. However, this positive trend reversed in 2024, with the ratio declining to -11.89%, and continued to -9.77% in 2025. This suggests increasing difficulty in generating returns exceeding the cost of capital in the later years of the observation period.

Economic Profit

Economic profit demonstrates a pattern of negative values throughout the period. The magnitude of the loss increased substantially from -1,357,541 in 2020 to -5,845,552 in 2021. While the absolute value of the loss decreased in 2022 (-4,128,546) and 2023 (-3,450,057), it increased again in 2024 (-5,175,250) before decreasing slightly to -4,111,040 in 2025. This indicates that, despite fluctuations, the company consistently failed to generate economic profit.

Invested Capital

Invested capital increased significantly from 18,211,243 in 2020 to 47,018,398 in 2021. Following this substantial increase, invested capital experienced a modest decline over the subsequent years, moving from 45,019,927 in 2022 to 44,182,132 in 2023, 43,520,510 in 2024, and 42,071,671 in 2025. The decrease in invested capital in the later years may reflect strategic decisions to optimize capital allocation, but it has not been sufficient to improve the economic spread ratio.

The interplay between these metrics suggests that while the company has attempted to manage its invested capital, it has struggled to generate returns that cover its cost of capital, resulting in consistent economic losses. The recent deterioration in the economic spread ratio, despite a decrease in invested capital, warrants further investigation.

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

Economic Profit Margin Trend

In fiscal year 2020, the economic profit margin stood at -24.23%. This figure deteriorated markedly in 2021, reaching -79.88%, representing the most substantial negative margin observed. A considerable improvement occurred in 2022, with the margin increasing to -34.36%. This positive trend continued into 2023, with a further improvement to -28.04%. However, in 2024, the margin worsened considerably to -54.90%, indicating a significant decline in economic profitability. A partial recovery is seen in 2025, with the margin moving to -37.31%.

The economic profit margin’s movement appears to be inversely related to revenue, but the relationship is not perfectly linear. While revenue increased significantly between 2020 and 2022, the economic profit margin did not improve proportionally. The largest revenue figure was recorded in 2023, yet the economic profit margin remained negative and did not reach the levels seen in 2022. The decline in revenue in 2024 coincided with a substantial worsening of the economic profit margin, and the subsequent revenue increase in 2025 was accompanied by a partial margin recovery.

Economic Profit

The absolute value of economic profit consistently remains substantial throughout the period. While the economic profit margin fluctuates, the underlying economic profit remains in the millions of US dollars, always negative. The largest negative economic profit occurred in 2021 at -5,845,552 US$ in thousands, while the smallest occurred in 2020 at -1,357,541 US$ in thousands.

The observed volatility in the economic profit margin suggests potential challenges in translating revenue growth into economic profit. Further investigation into the factors driving the cost of capital and operational efficiency would be necessary to understand the underlying causes of these fluctuations and to identify opportunities for improvement.