Automatic Data Processing Inc. (NASDAQ:ADP)

Over the observed period, the financial performance, as measured by economic profit, demonstrates a generally positive trajectory with some fluctuations. Net operating profit after taxes (NOPAT) and invested capital both exhibit increases over the six-year span, though not consistently year-over-year. The cost of capital remains relatively stable. These factors combine to produce a pattern of increasing economic profit, peaking in 2020 before experiencing a slight decline in the most recent year.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,527,436 thousand in 2016 to US$2,508,856 thousand in 2020, representing a substantial growth of approximately 64.3%. However, a decrease to US$2,334,712 thousand was observed in 2021. The largest year-over-year increase occurred between 2019 and 2020. The decline in 2021 suggests potential challenges in maintaining the profitability levels achieved in the prior year.

Cost of Capital

The cost of capital remained consistently around 11.5% to 11.7% throughout the period. The fluctuations were minimal, ranging from 11.44% in 2016 to 11.67% in 2019 and 11.66% in 2021. This relative stability indicates a consistent risk profile and financing structure over the analyzed timeframe.

Invested Capital

Invested capital generally increased over the period, rising from US$7,921,908 thousand in 2016 to US$10,152,600 thousand in 2021. A notable increase occurred between 2018 and 2019, coinciding with a significant rise in NOPAT. The growth in invested capital suggests ongoing investment in the business and expansion of operations.

Economic Profit

Economic profit increased from US$621,145 thousand in 2016 to a peak of US$1,395,171 thousand in 2020, demonstrating a more than doubling of economic value creation. A subsequent decrease to US$1,151,021 thousand in 2021 indicates a reduction in value creation, despite the continued growth in NOPAT and invested capital. This suggests that while absolute profits increased, they did not increase at a rate sufficient to offset the increased capital employed, or that the cost of capital had a greater impact in the final year.

In summary, the period demonstrates a positive trend in economic profit, driven by increases in NOPAT and invested capital. However, the slight decline in economic profit in 2021 warrants further investigation to understand the underlying factors contributing to this shift.

Net Earnings

The net earnings exhibited an overall increasing trend from 2016 to 2021. Starting at $1,492,500 thousand in 2016, the figure rose to $1,733,400 thousand in 2017 before experiencing a slight decline to $1,620,800 thousand in 2018. After this dip, net earnings showed a significant increase to $2,292,800 thousand in 2019, continuing upward to $2,466,500 thousand in 2020 and reaching $2,598,500 thousand in 2021. This pattern suggests a strong recovery and consistent growth momentum in recent years despite minor fluctuations.

Net Operating Profit After Taxes (NOPAT)

The NOPAT values closely mirror the net earnings trend with increasing values from 2016 through 2020 followed by a decline in 2021. Initially, NOPAT rose from $1,527,436 thousand in 2016 to $1,771,847 thousand in 2017 but then decreased to $1,628,778 thousand in 2018. It rebounded substantially to $2,290,136 thousand in 2019 and increased further to a peak of $2,508,856 thousand in 2020. In 2021, however, NOPAT declined to $2,334,712 thousand. This decline in 2021 contrasts with the continued rise in net earnings, highlighting potential changes in operational efficiency, tax impacts, or adjustments in operating expenses.

Comparative Insights

Both metrics demonstrate a pattern of growth punctuated by a downturn in 2018, followed by robust increases through 2020. The divergence observed in 2021, where net earnings continued to grow but NOPAT decreased, may require further investigation. This discrepancy could point to factors such as non-operating income influences on net earnings, changes in tax structures, or operational cost shifts affecting NOPAT independently of net profits. Overall, the financial data shows resilience with strong profitability gains over the period analyzed.

Provision for Income Taxes

The provision for income taxes showed fluctuations over the period under review. It initially increased from 741,300 thousand US dollars in mid-2016 to 797,700 thousand US dollars by mid-2017. This was followed by a notable decline to 550,300 thousand US dollars in mid-2018. Subsequently, the provision rose again, reaching 712,800 thousand US dollars in 2019 and remaining relatively stable around 716,100 thousand US dollars in 2020. By mid-2021, it increased slightly to 762,700 thousand US dollars. Overall, the data indicate some volatility with a general tendency towards recovery and growth in the latter years.

Cash Operating Taxes

Cash operating taxes mirrored the trends of provision for income taxes, reflecting a general correlation between the two metrics. Starting at 744,765 thousand US dollars in 2016, cash operating taxes slightly decreased to 794,364 thousand US dollars in 2017 before falling significantly to 559,875 thousand US dollars in 2018. Subsequently, there was an increase to 713,664 thousand US dollars in 2019. In 2020, there was a slight decrease to 694,262 thousand US dollars, followed by a substantial jump to 1,018,322 thousand US dollars in 2021. The sharp increase in 2021 suggests a possible change in tax obligations or operational cash flows impacting tax payments.

Comparative Insights

Both the provision for income taxes and cash operating taxes show some alignment in their patterns with synchronous ups and downs over the years. However, cash operating taxes experienced a more pronounced increase in 2021 compared to the provision for income taxes, indicating either an adjustment in timing or recognition of actual cash tax payments vis-à-vis accounting provisions. This divergence in the final year could warrant further investigation to understand underlying causes such as changes in tax policy, fiscal adjustments, or operational factors.

Total reported debt & leases

The total reported debt and leases figures indicate some fluctuations over the analyzed periods. Initially, the debt remained relatively stable between 2016 and 2018, with values just above 2.4 billion US dollars. In 2019, there was a noticeable increase to approximately 2.81 billion, followed by a decrease in 2020 to around 2.46 billion. However, by 2021, the debt sharply increased to approximately 3.45 billion, representing the highest level within the given timeframe.

Stockholders’ equity

The stockholders’ equity showed a declining trend from 2016 to 2018, dropping from about 4.48 billion to around 3.46 billion US dollars. A significant recovery is observed in 2019, with equity rising sharply to approximately 5.4 billion, continuing to increase moderately in 2020 to about 5.75 billion. In 2021, there was a slight decrease to roughly 5.67 billion, though equity remained well above the levels seen in the initial years.

Invested capital

Invested capital experienced a downward trend from 2016 through 2018, declining from approximately 7.92 billion to about 7.29 billion US dollars. In 2019, invested capital increased markedly to roughly 9.46 billion, and then grew slightly in 2020 to approximately 9.58 billion. The upward movement continued into 2021, reaching around 10.15 billion, the highest level in the period examined.

Overall analysis

The data reflect a period of contraction in both equity and invested capital through 2018, followed by a phase of robust growth starting in 2019. The sudden increase in total debt in 2021, coupled with the continued growth in invested capital, suggests increased leverage and investment activity during that year. Despite the spike in debt in 2021, stockholders’ equity remained relatively strong compared to earlier years, indicating a potentially balanced approach to financing growth with a mix of debt and equity.

The economic spread ratio demonstrates a generally positive trend over the observed period, though with some fluctuation. Economic profit also exhibits growth, but at varying rates. Invested capital generally increased throughout the period, with a slight decrease between 2016 and 2017.

Economic Spread Ratio

The economic spread ratio increased from 7.84% in 2016 to 12.01% in 2017, representing a significant improvement. It then experienced a slight decrease to 10.70% in 2018 before rising again to 12.53% in 2019. The highest value was recorded in 2020 at 14.56%, indicating the most substantial spread between return on invested capital and the cost of capital during the analyzed timeframe. A subsequent decrease to 11.34% was observed in 2021. This suggests improving efficiency in capital allocation and profitability, with a peak in 2020, followed by a modest decline in the most recent year.

Economic Profit

Economic profit increased from US$621,145 thousand in 2016 to US$902,795 thousand in 2017, a substantial gain. A decrease was then noted in 2018, falling to US$780,009 thousand. Subsequent years saw increases, reaching US$1,185,688 thousand in 2019 and peaking at US$1,395,171 thousand in 2020. The most recent year, 2021, showed a decrease to US$1,151,021 thousand, though still remaining above the levels observed in 2016, 2017, and 2018. This indicates overall profitability growth, with a notable peak in 2020, followed by a reduction in the latest period.

Invested Capital

Invested capital decreased slightly from US$7,921,908 thousand in 2016 to US$7,519,836 thousand in 2017. It continued to decline to US$7,289,794 thousand in 2018. A significant increase was then observed, rising to US$9,463,158 thousand in 2019. Further increases occurred in 2020 and 2021, reaching US$9,580,300 thousand and US$10,152,600 thousand respectively. This demonstrates a general trend of increasing capital investment, particularly from 2018 onwards, suggesting expansion or strategic investments.

The combination of these trends suggests that while invested capital has generally increased, the economic spread ratio and economic profit have largely followed a positive trajectory, indicating effective utilization of capital and strong financial performance, particularly in 2020. The slight declines observed in 2021 warrant further investigation to determine the underlying causes and potential implications.

The economic profit margin demonstrates a generally positive trend over the observed period, though with some fluctuation. Economic profit itself increased significantly from 2016 to 2020, before experiencing a slight decrease in 2021. Adjusted revenues consistently increased year-over-year throughout the entire period.

Economic Profit Margin Trend

The economic profit margin began at 5.31% in 2016 and rose to a peak of 9.59% in 2020. This indicates increasing efficiency in generating profit from revenue during those years. A decrease to 7.68% was observed in 2021, suggesting a potential moderation in profitability relative to revenue.

Relationship between Economic Profit and Margin

While economic profit increased substantially between 2016 and 2020, the economic profit margin did not increase proportionally. This suggests that the cost of capital, or other adjustments made to arrive at economic profit, also increased during this period, albeit at a slower rate than revenue and overall profit. The decline in economic profit in 2021, coupled with a corresponding decrease in the margin, reinforces this observation.

Revenue Growth and Margin Impact

Adjusted revenues exhibited consistent growth throughout the period. However, the margin’s fluctuation indicates that revenue growth alone does not fully explain the company’s profitability. The margin’s performance is also influenced by the relationship between economic profit and revenue, as described above.

In summary, the economic profit margin generally improved from 2016 to 2020, but experienced a decline in 2021. This trend is closely tied to both the growth in economic profit and the consistent increase in adjusted revenues, suggesting a complex interplay of factors influencing overall profitability.