Cintas Corp. (NASDAQ:CTAS)

The analysis reveals a notable progression in economic profit over the observed period. Initially, the entity experienced economic losses, but transitioned to generating positive economic profit in recent years. This shift is attributable to increases in net operating profit after taxes and, to a lesser extent, changes in invested capital and the cost of capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a fluctuating pattern. A decrease was observed from 2019 to 2020, followed by increases in subsequent years, culminating in a substantial value in 2024. This indicates improving operational profitability over the latter part of the period.

Cost of Capital

The cost of capital exhibited a consistent upward trend throughout the period, increasing from 18.97% in 2019 to 20.30% in 2024. This suggests a rising cost of funding for the entity, potentially due to changes in market interest rates or perceived risk.

Invested Capital

Invested capital remained relatively stable between 2019 and 2021, with a slight decrease in 2020. From 2021 onward, a consistent increase in invested capital is apparent, reaching its highest value in 2024. This suggests ongoing investment in the business.

Economic Profit

Economic profit began with negative values in 2019 and 2020, indicating that the entity’s returns were insufficient to cover its cost of capital. A turning point occurred in 2022, with economic profit becoming positive and increasing significantly through 2024. The substantial growth in economic profit from 2022 to 2024 suggests improved value creation for investors.

The increasing trend in economic profit, despite a rising cost of capital, is a positive indicator. The entity’s ability to generate returns exceeding its cost of capital has improved considerably, suggesting effective capital allocation and operational performance. Continued monitoring of these trends will be crucial to assess the sustainability of this positive performance.

The financial data reveals notable trends in profitability over the six-year period ending May 31, 2024. Both net income and net operating profit after taxes (NOPAT) demonstrate consistent growth, indicating strengthening financial performance.

Net Income Trends

Net income experienced minor fluctuations in the early years, with a slight decrease from 884,981 thousand USD in 2019 to 876,037 thousand USD in 2020. From 2020 onwards, net income shows a steady upward trajectory, increasing annually to reach 1,571,592 thousand USD by 2024. This upward trend suggests successful operational and revenue enhancements that have contributed to improved bottom-line results.

NOPAT Trends

NOPAT follows a similar pattern but with more pronounced growth. After a slight dip from 1,006,907 thousand USD in 2019 to 973,389 thousand USD in 2020, NOPAT increased significantly each year thereafter, culminating at 1,624,422 thousand USD in 2024. The stronger growth in NOPAT compared to net income may reflect efficiency improvements, effective tax management, or a focus on after-tax operating profitability.

Comparative Insights

Over the period analyzed, the gap between NOPAT and net income widened, indicating that operating profitability net of taxes is improving at a faster rate than net income alone. This could suggest improved operational efficiency or changes in financial structure affecting income components outside operating results.

Overall Pattern

The data illustrates resilience and gradually accelerating profitability growth following 2020, which may correspond with recovery or strategic initiatives undertaken by the company. The consistent upward movement in these key profitability metrics over multiple years points toward a robust and improving financial profile.

The financial data demonstrates a noticeable upward trend in income tax expense over the six-year period. Starting at approximately $220 million in 2019, the tax expense decreased slightly in the following two years, reaching a low point of around $177 million in 2021. From 2021 onwards, however, there is a significant increase, peaking at just over $400 million in 2024. This reflects a substantial rise in tax obligations in the most recent years.

Similarly, cash operating taxes exhibit a consistent increase throughout the period. Beginning at about $208 million in 2019, the cash operating taxes experienced a progressive growth, with a minor dip in 2022 around $231 million, followed by a sharp rise in subsequent years. By 2024, cash operating taxes peaked at approximately $454 million, more than doubling the starting figure.

Income Tax Expense

Initial decline from 2019 to 2021, followed by a strong upward trajectory through 2024.

Cash Operating Taxes

Consistent growth with a slight fluctuation in 2022, culminating in a substantial increase by 2024.

Overall Trends

Both income tax expense and cash operating taxes show marked increases over the analyzed period, especially from 2021 onward, indicating rising tax burdens which may reflect higher taxable income or changes in tax rates or regulations.

The financial data over the six-year period reveals several notable trends in the company's capital structure and financial position.

Total reported debt & leases

Debt levels exhibit some fluctuations but generally show a decreasing trend from 2019 through 2024. The total reported debt decreased from approximately $3.05 billion in 2019 to around $2.67 billion in 2024, with the highest value observed in 2019 and a notable decline by 2020. Debt levels increased slightly during 2021 and 2022 but again decreased in subsequent years.

Shareholders’ equity

Shareholders’ equity increases consistently over the period, reflecting growth in net assets attributable to shareholders. It rose from about $3.00 billion in 2019 to approximately $4.32 billion in 2024, with a significant rise between 2019 and 2021, followed by some variability but an overall upward trajectory through to 2024. This suggests strengthening financial stability and retained earnings growth.

Invested capital

The invested capital, representing the total amount of capital invested in the company's operations, experiences moderate growth. Starting at roughly $6.50 billion in 2019, it remains relatively stable through 2020 but then steadily increases to about $7.22 billion by 2024. This gradual growth indicates continued investment in business assets or operations, supporting expansion or enhancement efforts.

Overall, the data indicates that the company has been managing its debt prudently while enhancing its equity base and overall capital investment. This pattern implies a strengthening balance sheet and potentially a lower financial risk profile over the analyzed period.

The economic spread ratio demonstrates a clear improving trend over the observed period. Initially negative, the ratio transitions to positive values, indicating increasing value creation. This improvement is closely linked to the fluctuations in economic profit and invested capital.

Economic Spread Ratio Trend

From May 31, 2019, to May 31, 2020, the economic spread ratio declined from -3.48% to -4.35%, suggesting a worsening gap between returns and the cost of capital. A subsequent recovery began in 2021, with the ratio moving to -2.93%. This positive momentum continued through 2022 (0.96%), 2023 (1.38%), and culminated in a significant increase to 2.20% by May 31, 2024. This represents a substantial shift from value destruction to value creation.

The economic spread ratio’s progression mirrors the changes in economic profit. The negative economic profit values in 2019, 2020, and 2021 directly contributed to the negative spread ratios during those years. The positive economic profit reported in 2022, 2023, and 2024 is directly correlated with the positive and increasing economic spread ratio.

Invested Capital’s Influence

Invested capital experienced a moderate increase throughout the period, rising from US$6,499,367 thousand in 2019 to US$7,220,061 thousand in 2024. While invested capital grew, the more substantial growth in economic profit, particularly in the later years, drove the improvement in the economic spread ratio. The ratio’s increase suggests that the returns generated from the invested capital are exceeding the cost of that capital at an increasing rate.

The consistent improvement in the economic spread ratio from 2021 to 2024 indicates enhanced efficiency in capital allocation and improved profitability. The company appears to be generating increasingly higher returns on its invested capital, signifying a strengthening financial performance.

The economic profit margin demonstrates a clear improving trend over the observed period. Initially negative, the metric transitions to positive values and exhibits increasing magnitude.

Economic Profit Margin

From May 31, 2019, to May 31, 2020, the economic profit margin declined from -3.28% to -3.98%. This indicates a worsening economic loss relative to revenue during this period.

A subsequent improvement is observed between May 31, 2020, and May 31, 2021, with the economic profit margin increasing to -2.78%. While still negative, the rate of economic loss diminished.

May 31, 2022, marks a significant turning point, as the economic profit margin becomes positive at 0.81%. This signifies that the company began generating economic profit, meaning returns exceeded the cost of capital.

The positive trend continues, with the economic profit margin increasing to 1.07% on May 31, 2023, and further to 1.65% on May 31, 2024. This demonstrates a consistent and accelerating ability to generate returns above the cost of capital.

The progression from negative to positive economic profit margins, coupled with the increasing percentage values, suggests improving operational efficiency and/or effective capital allocation over the analyzed timeframe. The magnitude of the increase from 2022 to 2024 indicates a strengthening of the company’s economic performance.

Relationship to Revenue

Revenue consistently increased throughout the period. The shift to positive economic profit margin, particularly in later years, suggests that revenue growth was accompanied by improvements in profitability relative to the capital employed to generate that revenue.

The trend in economic profit, moving from substantial losses to significant gains, directly supports the observed improvement in the economic profit margin. The increasing economic profit values reinforce the conclusion that the company is becoming more effective at creating value for its investors.