Automatic Data Processing Inc. (NASDAQ:ADP)

This analysis reviews key financial indicators over a six-year period ending June 30, 2021, focusing on net operating profit after taxes (NOPAT), cost of capital, invested capital, and economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced an overall upward trend from 2016 through 2020, rising from approximately $1.53 billion to $2.51 billion. The growth peaked in fiscal year 2020, followed by a slight decline in 2021 to about $2.33 billion. Despite this recent decrease, the NOPAT in 2021 remains significantly higher than the levels recorded in the initial years of the period.

Cost of Capital

The cost of capital showed a modest but consistent increase over the six-year span. Starting at 11.19% in 2016, it rose gradually to 11.41% by 2021. This incremental rise indicates a slightly higher required return on investment, which may influence the firm's investment and financing decisions.

Invested Capital

The amount of invested capital displayed mixed patterns. Initially, it decreased from approximately $7.92 billion in 2016 to $7.29 billion in 2018. Then, it sharply increased in 2019 to about $9.46 billion, followed by continued growth to $10.15 billion in 2021. This indicates a significant reinvestment or expansion activity starting in 2019.

Economic Profit

Economic profit, representing residual earnings after accounting for the cost of capital, rose substantially from $641 million in 2016 to a peak of $1.42 billion in 2020. This indicates growing value creation over this period. However, similar to NOPAT, economic profit declined sharply in 2021 to approximately $1.18 billion, although it remained above the values seen in the earlier years.

Overall, the data reflects strong performance and improved profitability through 2020, supported by increased NOPAT and economic profit despite a rising cost of capital. The notable growth in invested capital since 2019 suggests strategic investment activity that may have contributed to this performance. The declines in NOPAT and economic profit in 2021 warrant attention, as they may signal emerging challenges or changes in operating conditions.

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.

Economic Profit

The economic profit demonstrates a fluctuating but generally upward trend from June 30, 2016, to June 30, 2021. Starting at approximately 640.8 million US dollars in 2016, it increased significantly to a peak of around 1.42 billion US dollars in 2020. However, there is a decline observed in 2021 to approximately 1.18 billion US dollars, which still remains notably higher than in the earlier years.

Invested Capital

The invested capital shows a somewhat volatile pattern over the same period. It initially decreases from roughly 7.92 billion US dollars in 2016 to about 7.29 billion in 2018. Subsequently, there is a marked increase, with the invested capital reaching approximately 10.15 billion US dollars by 2021, indicating a substantial investment expansion starting from 2019.

Economic Spread Ratio

The economic spread ratio exhibits a generally positive trend with some variability. Beginning at 8.09% in 2016, the ratio rises to a peak of 14.82% in 2020, reflecting improved efficiency or profitability relative to the invested capital. In 2021, the ratio decreases to 11.59%, which remains elevated compared to the initial periods, suggesting sustained strong economic returns despite the recent reduction.

Summary Insights

The data reveal periods of strong growth in economic profit and economic spread ratio, particularly notable in 2019 and 2020. Although economic profit and spread ratio both decline in 2021 from their 2020 highs, their values remain higher than in preceding years. The invested capital trend shows an initial dip followed by a notable increase, which may correspond to strategic investments fueling growth. Overall, the company appears to have enhanced its economic profitability and capital utilization efficiency over these years, despite some volatility.

Trend in Economic Profit

The economic profit demonstrated an overall increasing trend from 2016 to 2020, starting at 640,782 thousand USD in 2016 and peaking at 1,419,346 thousand USD in 2020. However, in 2021, there was a decline to 1,176,770 thousand USD, indicating a reduction in profitability after four consecutive years of growth.

Changes in Adjusted Revenues

Adjusted revenues consistently increased throughout the period under review, rising from 11,690,800 thousand USD in 2016 to 14,988,600 thousand USD in 2021. This steady growth reflects expanding sales or service income, with no apparent downturns during the timeframe.

Economic Profit Margin Analysis

The economic profit margin showed fluctuations over the years, starting at 5.48% in 2016. It rose to 7.44% in 2017, subsequently declining to 6% in 2018 before reaching a peak of 9.75% in 2020. In 2021, the margin decreased to 7.85%, signifying some volatility in profitability relative to revenues.

Overall Insights

The data indicate that while the company experienced consistent revenue growth, its economic profit and profit margin exhibited variability, suggesting potential changes in cost structures, operational efficiency, or other financial factors impacting profitability. The decline in economic profit and margin in 2021 after consecutive increases may warrant a closer examination of expense management or external factors influencing earnings during that period.