Axon Enterprise Inc. (NASDAQ:AXON)

The period under review demonstrates significant fluctuations in economic profit. Initially, the company experienced economic losses, followed by a substantial shift to 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 significantly from 2018 to 2019, then recovered in 2020, followed by a further decline in 2021. However, a dramatic increase in NOPAT occurred in 2022, reaching its highest value over the observed period. This suggests a substantial improvement in operational profitability in the latest year.

Cost of Capital

The cost of capital remained relatively stable between 2018 and 2021, fluctuating within a narrow range around 14.8%. A slight decrease was observed in 2022, to 14.23%, indicating a marginally reduced cost of financing for the company.

Invested Capital

Invested capital showed an increasing trend throughout the period. It decreased from 2018 to 2019, but then increased substantially in 2020 and 2021. The largest increase occurred between 2021 and 2022, indicating significant capital deployment during that period.

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 economic loss increased from 2018 to 2021, reaching a peak in 2021. However, a significant turnaround occurred in 2022, with economic profit becoming positive and reaching a substantial value. This positive economic profit suggests that the company generated returns exceeding its cost of capital in the most recent year.

The shift from consistent economic losses to substantial economic profit in 2022 is primarily driven by the significant increase in NOPAT, coupled with a slight decrease in the cost of capital. While invested capital also increased, the substantial growth in profitability outweighed the impact of increased capital employed, resulting in a positive economic profit. The trend suggests improved efficiency and profitability in the latest year.

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 before recovering to positive territory in the final year of the observed period. This movement correlates with changes in economic profit and invested capital.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -2.47%. This value deteriorated considerably to -11.29% in 2019, indicating a widening gap between the cost of capital and the returns generated from invested capital. A slight improvement was noted in 2020, with the ratio moving to -7.70%, though it remained negative. The ratio further decreased to -11.80% in 2021, representing the lowest point in the observed period. A dramatic shift occurred in 2022, with the ratio increasing to 6.06%, signifying that returns on invested capital exceeded the cost of capital.

The economic spread ratio’s movement is closely tied to the evolution of economic profit. The negative ratios from 2018 to 2021 reflect periods of economic loss, where the company’s returns were insufficient to cover its cost of capital. The positive ratio in 2022 directly corresponds with the positive economic profit reported for that year.

Relationship with Invested Capital

Invested capital increased from US$631.66 million in 2018 to US$1,607.80 million in 2022. While invested capital generally increased throughout the period, the economic spread ratio did not consistently improve alongside it. The substantial increase in invested capital between 2020 and 2021 did not translate into improved returns, as evidenced by the worsening economic spread ratio in 2021. The positive economic spread ratio in 2022 suggests that the increased invested capital, combined with improved profitability, finally generated returns exceeding the cost of capital.

The substantial volatility in the economic spread ratio suggests a period of operational or strategic transition. The ultimate positive outcome in 2022 indicates a successful shift towards value creation, where the company is now generating returns that exceed its cost of capital.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin demonstrated a substantial decline before ultimately turning positive in the most recent year examined.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -3.28%. This metric deteriorated considerably over the subsequent two years, reaching -10.17% in 2019 and -7.42% in 2020. The most pronounced decline occurred in 2021, with the margin falling to -14.34%. A significant reversal is observed in 2022, as the economic profit margin rose sharply to 7.24%, indicating a substantial improvement in economic profitability relative to sales.

The movement in the economic profit margin closely mirrors the trend in economic profit. The negative economic profit values from 2018 through 2021 align with the negative margins, while the positive economic profit in 2022 corresponds with the positive margin achieved in that year.

Relationship to Adjusted Net Sales

Adjusted net sales consistently increased throughout the period, moving from US$476,219 thousand in 2018 to US$1,346,663 thousand in 2022. Despite this consistent growth in sales, the economic profit margin remained negative for the first four years, suggesting that the cost of capital exceeded the returns generated from sales. The positive margin in 2022 indicates that sales growth, coupled with improvements in profitability, finally surpassed the cost of capital.

The substantial shift from a negative to a positive economic profit margin in 2022 warrants further investigation to understand the underlying drivers of this improvement. Factors such as increased operational efficiency, improved pricing strategies, or a decrease in the cost of capital could be contributing to this positive trend.