Axon Enterprise Inc. (NASDAQ:AXON)

The financial performance, as measured by economic profit, exhibited significant fluctuations between 2018 and 2022. Initially, the company experienced negative economic profit, which worsened through 2021 before turning positive in the most recent year. This shift is attributable to changes in both net operating profit after taxes and invested capital, alongside a slight decrease in the cost of capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated considerable volatility. It decreased substantially from 2018 to 2019, recovered in 2020, declined again in 2021, and then experienced a dramatic increase in 2022. This suggests potential operational improvements or a change in business conditions in the final year of the period.

Cost of Capital

The cost of capital remained relatively stable between 2018 and 2021, fluctuating around 13.10%. A modest decrease to 12.55% was observed in 2022. This reduction, while not substantial, likely contributed positively to the improvement in economic profit.

Invested Capital

Invested capital increased steadily throughout the period, with the most significant growth occurring between 2020 and 2022. This expansion in invested capital, without a corresponding increase in NOPAT in the earlier years, contributed to the negative economic profit observed in those years. The substantial increase in NOPAT in 2022, however, allowed the company to generate positive economic profit despite the higher invested capital base.

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 negative economic profit increased each year until 2021, reaching a peak of -126,880 thousand US dollars. A significant turnaround occurred in 2022, with economic profit becoming positive at 124,408 thousand US dollars. This represents a substantial improvement and suggests the company is now generating returns exceeding its cost of capital.

In summary, the period began with the company destroying economic value, but concluded with the creation of substantial economic profit. This positive shift is primarily driven by a significant increase in NOPAT, coupled with a slight reduction in the cost of capital, despite a consistently increasing invested capital base.

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. This movement correlates with changes in economic profit and invested capital over the period.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -0.72%. It experienced a marked deterioration in 2019, falling to -9.53%. A slight improvement occurred in 2020, with the ratio reaching -5.94%, but this was followed by a further decline to -10.05% in 2021. A substantial positive shift occurred in 2022, with the ratio increasing significantly to 7.74%.

The negative economic spread ratios from 2018 to 2021 indicate that the company’s return on invested capital was less than its cost of capital during those years, resulting in value destruction. The substantial increase to a positive ratio in 2022 suggests a reversal of this trend, indicating that the company generated returns exceeding its cost of capital and created economic value.

Relationship to Economic Profit

The economic spread ratio’s trajectory closely mirrors the trend in economic profit. Negative economic profits were recorded from 2018 through 2021, aligning with the negative spread ratios. The transition to positive economic profit in 2022 directly corresponds with the positive economic spread ratio observed in that year.

Relationship to Invested Capital

Invested capital increased consistently from 2018 to 2022. While the initial negative spread ratios occurred with a relatively stable invested capital base, the worsening ratios in 2019 and 2021 coincided with periods of significant increases in invested capital. The positive spread ratio in 2022 occurred alongside the highest level of invested capital during the analyzed period, suggesting improved capital utilization and profitability.

The observed pattern suggests that while increases in invested capital did not initially translate into value creation, the company eventually achieved a level of profitability that allowed it to generate returns exceeding its cost of capital, even with a larger capital base.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin progressively deteriorated before becoming positive in the final year of the observed period.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -0.95%. This indicates that the company’s economic profit was less than 1% of adjusted net sales. The margin then experienced a substantial decline, reaching -8.59% in 2019, suggesting a worsening of economic profitability relative to sales. This downward trend continued into 2020 with a margin of -5.72%, although the rate of decline slowed. The most significant negative margin was recorded in 2021 at -12.21%, representing the period of lowest economic profitability. A dramatic shift occurred in 2022, with the economic profit margin increasing to 9.24%, signifying a substantial improvement in economic profit relative to adjusted net sales.

The economic profit itself mirrors this trend. Negative economic profit values were recorded from 2018 through 2021, with the largest negative value occurring in 2021. The transition to a positive economic profit in 2022 directly corresponds with the positive economic profit margin observed in that year.

Relationship between Adjusted Net Sales and Economic Profit Margin

Adjusted net sales consistently increased throughout the period, rising 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, indicating that the increase in sales did not translate into sufficient economic profit. The positive correlation between increasing sales and the eventual positive economic profit margin in 2022 suggests that a critical sales threshold, combined with other factors influencing profitability, was reached in that year.

The substantial improvement in the economic profit margin in 2022 warrants further investigation to understand the underlying drivers of this change, such as cost management, operational efficiencies, or changes in the cost of capital.