Axon Enterprise Inc. (NASDAQ:AXON)

The period under review demonstrates significant fluctuations in economic profit. Initially, the company experienced economic losses, which subsequently transitioned to a substantial economic profit in the most recent year. This analysis details the observed trends in net operating profit after taxes, cost of capital, invested capital, and their combined effect on economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited considerable volatility. It decreased substantially from 2018 to 2019, followed by a recovery in 2020. A further decline occurred in 2021, before a dramatic increase in 2022. This suggests changing operational performance or external factors impacting profitability.

Cost of Capital

The cost of capital remained relatively stable between 2018 and 2021, fluctuating within a narrow range around 14.9%. A noticeable decrease was observed in 2022, falling to 14.28%. This reduction in the cost of capital likely contributed to the improved economic profit in that year.

Invested Capital

Invested capital showed a decreasing trend from 2018 to 2019. It then increased significantly in 2020 and continued to rise substantially through 2022. This indicates a growing need for capital to support operations or expansion initiatives.

Economic Profit

Economic profit was negative from 2018 through 2021, indicating that the company’s returns were insufficient to cover its cost of capital. The magnitude of the loss increased each year until 2021. However, 2022 saw a significant shift, with economic profit turning positive and reaching US$96,559 thousand. This positive economic profit suggests the company generated returns exceeding its cost of capital in the latest period.

The substantial increase in NOPAT coupled with a slight decrease in the cost of capital and a continued increase in invested capital were key drivers of the positive economic profit observed in 2022. Prior to 2022, the company consistently failed to generate returns sufficient to cover its cost of capital, resulting in economic losses. The trend reversal in 2022 is a notable development.

Net Income (Loss)

The company experienced significant fluctuations in net income over the analyzed period. Starting with a substantial net income of $29,205 thousand in 2018, there was a sharp decline to $882 thousand in 2019, followed by a transition into losses in 2020 and 2021, with amounts of -$1,724 thousand and -$60,018 thousand, respectively. In 2022, the company reversed this trend dramatically, recording a significant net income of $147,139 thousand. This volatility indicates periods of financial difficulty followed by a substantial recovery and profitability improvement in the most recent year.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a somewhat different pattern, though it also showed variability. The value started at $78,057 thousand in 2018 and then decreased considerably to $17,857 thousand in 2019. In 2020, NOPAT increased to $51,762 thousand, suggesting operational profitability improvement despite the net loss reported that year. A decline occurred again in 2021 to $38,523 thousand; however, a substantial increase to $326,174 thousand was evident in 2022. This increase in 2022 indicates enhanced operational efficiency and profitability on an after-tax basis.

Overall Trends and Insights

The data reveal a period of instability between 2018 and 2021, characterized by fluctuating and often negative net income, contrasted with positive but volatile NOPAT values. The divergence between net income and NOPAT especially during 2020 and 2021 suggests that non-operating factors or extraordinary charges may have negatively impacted net income. The strong recovery in 2022 across both net income and NOPAT points to improved financial health, possibly driven by operational improvements or a favorable change in the cost or revenue structure. The considerable growth in 2022 in both metrics reflects a pivotal turnaround likely resulting from strategic adjustments or market conditions.

Provision for income taxes (income tax benefit)

Over the five-year period, the provision for income taxes exhibited significant volatility and fluctuation. Initially, there was a negative provision in 2018, indicating an income tax benefit of 1,101 thousand US dollars. This turned positive in 2019, reaching 1,188 thousand US dollars, followed by another shift back to a negative provision in 2020 at -4,567 thousand US dollars. The most pronounced change occurred in 2021 with a substantial negative provision amounting to -81,357 thousand US dollars, suggesting a major income tax benefit that year. However, in 2022, the provision reversed to a positive figure of 49,379 thousand US dollars.

Cash operating taxes

Cash operating taxes demonstrated a generally increasing trend over the analyzed period, with a pronounced exception in 2021. Starting at 7,666 thousand US dollars in 2018, the amount increased steadily to 9,266 thousand US dollars in 2019 and further to 12,034 thousand US dollars in 2020. In 2021, there was a sharp decline, with cash operating taxes reported as negative 851 thousand US dollars, indicating a cash inflow or refund situation. Subsequently, in 2022, the cash operating taxes surged significantly to 27,888 thousand US dollars, more than doubling the previous peak.

The financial data reveals several notable trends in the company's capital structure and financial positioning over the five-year period ending in 2022.

Total Reported Debt & Leases

There is a relatively stable and moderate level of debt from 2018 through 2021, fluctuating between approximately 10.6 million and 27 million USD. However, in 2022, this figure experiences a dramatic increase to over 717 million USD. This sharp rise indicates a significant change in the company's financing strategy or capital structure, suggesting either a substantial new borrowing, lease obligation, or financial arrangement undertaken in the latest period.

Stockholders’ Equity

Stockholders' equity shows steady growth throughout all years, moving from around 467 million USD in 2018 to approximately 1.27 billion USD in 2022. The increase suggests consistent retention of earnings or capital injections, strengthening the company's net worth and reflecting profitable operations or equity financing activities.

Invested Capital

Invested capital fluctuates during the initial years, decreasing from roughly 632 million USD in 2018 to 500 million USD in 2019, then rising again to 723 million USD in 2020. From 2020 onward, invested capital increases significantly, peaking at approximately 1.61 billion USD by the end of 2022. This upward trend illustrates increased capital employed in the business, likely fuelled by the substantial growth in reported debt and equity, indicating expanded operational scale or investment in long-term assets.

Overall, the data suggests a period of gradual growth and stability up to 2021, followed by a marked increase in financial leverage and total capital employed in 2022. The spike in reported debt and leases may raise considerations regarding risk and debt service capacity, while the ongoing growth in equity and invested capital reflects a larger asset base and potentially heightened business activities.

The economic spread ratio exhibited significant fluctuations between 2018 and 2022. Initially negative, the ratio demonstrated a substantial decline from 2018 to 2019, followed by a period of relative stabilization before experiencing a marked deterioration in 2021. A significant positive shift occurred in 2022, indicating a substantial improvement in value creation.

Economic Spread Ratio Trend

In 2018, the economic spread ratio stood at -2.53%. This value decreased considerably to -11.35% in 2019, representing a worsening of the return generated relative to the cost of capital. The ratio experienced a slight improvement to -7.76% in 2020, but then declined further to -11.86% in 2021, suggesting continued underperformance. A dramatic reversal occurred in 2022, with the ratio rising to 6.01%, indicating that returns exceeded the cost of capital for the first time within the observed period.

The economic profit mirrored the trend in the economic spread ratio, remaining negative until 2022. The magnitude of the economic loss increased from US$15,988 thousand in 2018 to US$149,786 thousand in 2021. The positive economic profit of US$96,559 thousand in 2022 aligns with the positive economic spread ratio, confirming the creation of economic value during that year.

Invested Capital

Invested capital decreased from US$631,660 thousand in 2018 to US$500,291 thousand in 2019. It then increased substantially, reaching US$722,746 thousand in 2020 and US$1,262,920 thousand in 2021. This growth continued into 2022, with invested capital reaching US$1,607,800 thousand. The increasing invested capital base, coupled with initially negative economic profit, likely contributed to the worsening economic spread ratio observed between 2018 and 2021.

The substantial improvement in both the economic spread ratio and economic profit in 2022 suggests a significant shift in the company’s ability to generate returns exceeding its cost of capital. This positive trend occurred alongside continued growth in invested capital, indicating improved capital efficiency.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin trended downward for several years before becoming positive in the most recent period. This suggests a changing ability to generate returns exceeding the cost of capital.

Economic Profit Margin Trend

In 2018, the economic profit margin was -3.36%. This indicates that the company’s economic profit was 3.36% less than what would be expected given its cost of capital and sales. The margin deteriorated substantially in 2019, reaching -10.23%, and continued to decline, albeit at a slower rate, to -7.47% in 2020. The most significant decline occurred in 2021, with the margin falling to -14.41%, representing the largest negative spread over the analyzed period.

A substantial shift occurred in 2022, as the economic profit margin turned positive, reaching 7.17%. This represents a significant improvement and indicates that the company generated economic profit exceeding its cost of capital, relative to sales.

The movement in economic profit margin closely mirrors the trend in economic profit itself. The negative economic profit values from 2018 to 2021 align with the negative margins, while the positive economic profit in 2022 corresponds with the positive margin. The increasing adjusted net sales throughout the period did not translate into positive economic profit until 2022, suggesting improvements in cost of capital management or operational efficiency were key drivers of the turnaround.

Relationship to Adjusted Net Sales

Adjusted net sales increased consistently throughout the period, from US$476,219 thousand in 2018 to US$1,346,663 thousand in 2022. However, this revenue growth did not consistently result in improved economic profitability until 2022. The substantial increase in sales in 2021 did not prevent the economic profit margin from reaching its lowest point.

The substantial improvement in the economic profit margin in 2022 warrants further investigation to understand the underlying factors contributing to this positive shift. Analysis should focus on changes in cost of capital, operational efficiencies, and pricing strategies.