Cisco Systems Inc. (NASDAQ:CSCO)

The period under review demonstrates fluctuating economic profit performance. Net operating profit after taxes (NOPAT) initially decreased before stabilizing and then experiencing a significant decline. Simultaneously, the cost of capital exhibited a slight upward trend followed by a decrease, while invested capital showed a substantial increase in later years.

Economic Profit Trend

Economic profit peaked in 2020 at US$6,350 million, then decreased to US$4,394 million in 2021. A moderate recovery occurred in 2022 and 2023, reaching US$4,961 million and US$5,022 million respectively. However, economic profit declined sharply to US$1,182 million in 2024 and became negative in 2025, reaching -US$1,490 million. This indicates a diminishing ability to generate returns exceeding the cost of capital in the latter years.

NOPAT Analysis

NOPAT decreased from US$12,905 million in 2020 to US$11,686 million in 2021. It then recovered to US$12,468 million in 2022 and further to US$12,636 million in 2023. A subsequent decrease to US$12,178 million in 2024 was followed by a substantial drop to US$9,841 million in 2025. This suggests increasing pressure on operational profitability towards the end of the period.

Cost of Capital

The cost of capital increased from 12.25% in 2020 to 12.91% in 2023, indicating a rising cost of funding. However, it decreased to 11.98% in 2024 and then rose slightly to 12.34% in 2025. These fluctuations may reflect changes in market conditions and the company’s risk profile.

Invested Capital

Invested capital steadily increased from US$53,498 million in 2020 to US$59,063 million in 2022. A significant jump occurred in 2024, reaching US$91,785 million, and remained relatively stable at US$91,789 million in 2025. This substantial increase in invested capital, without a corresponding increase in economic profit, contributed to the negative economic profit in 2025.

The combination of declining NOPAT and increasing invested capital, coupled with a fluctuating cost of capital, resulted in a significant deterioration of economic profit. The negative economic profit in 2025 signals that the company’s investments are no longer generating returns sufficient to cover the cost of capital.

Net Income

The net income experienced a slight decline from 11,214 million USD in 2020 to 10,591 million USD in 2021, followed by an increase to a peak of 12,613 million USD in 2023. However, after this peak, net income decreased significantly in the subsequent years, reaching 10,320 million USD in 2024 and further down to 10,180 million USD in 2025. Overall, the trend demonstrates volatility with a general downward movement in the last two years.

Net Operating Profit After Taxes (NOPAT)

The NOPAT showed a declining trend from 12,905 million USD in 2020 to 11,686 million USD in 2021, then rose to 12,468 million USD in 2022 and stabilized somewhat in 2023 at 12,636 million USD. However, similar to net income, NOPAT decreased notably in 2024 and more sharply in 2025, falling to 12,178 million USD and 9,841 million USD respectively. This indicates decreasing operational profitability over the last two years examined.

Summary

Both net income and NOPAT exhibited fluctuations over the six-year period, with initial declines, mid-period recoveries, and then a marked decline in the most recent years. The declining net income and operating profit in 2024 and 2025 suggest challenges affecting profitability and operational efficiency. Such trends may warrant further investigation into factors impacting earnings and operational costs during these years.

Provision for Income Taxes

The provision for income taxes exhibits a downward trend over the analyzed period. Starting at $2,756 million in July 2020, the provision declines slightly to $2,671 million in July 2021 and remains relatively stable through July 2023, fluctuating marginally around the mid-2600s. A notable decrease occurs in July 2024 to $1,914 million, followed by a further significant reduction to $920 million in July 2025. This consistent decrease in income tax provision suggests either improved tax efficiency, changes in taxable income, or tax planning strategies reducing tax liabilities.

Cash Operating Taxes

Cash operating taxes demonstrate more variability across the same time frame. Beginning at $2,718 million in July 2020, the cash taxes increase steadily to peak at $4,688 million in July 2023, marking the highest point within the observed period. After this peak, cash operating taxes sharply decline to $2,835 million in July 2024 and further decrease to $2,211 million in July 2025. The increase through mid-2023, followed by a rapid fall, may reflect timing differences in tax payments, changes in cash tax obligations, or alterations in tax regulations impacting cash outflows.

Comparative Insights

While both provision for income taxes and cash operating taxes show declines in the latter years, the disparity in their patterns is notable. The provision decreases steadily, whereas cash taxes rise considerably before dropping. This divergence could indicate differences in accrued tax liabilities versus actual cash payments, highlighting potential timing differences, deferred tax impacts, or effective tax rate adjustments. The divergence may warrant further examination of tax expense recognition versus cash tax payments and their drivers.

The financial data reveals several notable trends over the examined periods.

Total reported debt & leases

This item shows a generally decreasing trend from July 2020 through July 2023, declining from 15,585 million US dollars to 9,411 million US dollars. However, there is a significant increase observed in the subsequent two years, with the value rising sharply to 32,232 million US dollars in July 2024, before slightly decreasing to 29,643 million US dollars in July 2025. This suggests a considerable increase in debt and lease obligations in the more recent years after a prior period of debt reduction.

Equity

Equity exhibits a consistent upward trend throughout the entire timeframe. Starting at 37,920 million US dollars in July 2020, it gradually increases with minor fluctuations to reach 46,843 million US dollars by July 2025. This progression indicates steady growth in shareholders' equity, reflecting either retained earnings accumulation or capital infusions over the years.

Invested capital

Invested capital remains relatively stable from July 2020 through July 2023, fluctuating moderately between approximately 53,498 million to 58,979 million US dollars. A marked increase occurs in July 2024, where invested capital jumps sharply to approximately 91,785 million US dollars, maintaining this level into July 2025. This significant upsurge aligns with the increase in total debt and leases, implying increased investment possibly funded by the higher debt levels.

Overall, the data reflects a strategic shift starting in 2024 characterized by elevated leverage and invested capital, while equity continues a steady growth path throughout the entire period. The increased debt suggests augmented financing activity, potentially for expansion or acquisition purposes, supported by the rise in invested capital. The stability and growth in equity throughout the years provide a positive signal regarding the company’s financial foundation.

The economic spread ratio demonstrates a declining trend over the observed period. Initially strong, the ratio exhibits a considerable decrease in later years, culminating in a negative value. This suggests a diminishing ability to generate returns exceeding the cost of capital.

Economic Spread Ratio Trend

The economic spread ratio began at 11.87% in July 2020. It decreased to 7.65% in July 2021, and then experienced a modest increase to 8.40% in July 2022 and 8.52% in July 2023. However, a significant decline is observed in July 2024, falling to 1.29%. This downward trajectory continues into July 2025, with the ratio becoming negative at -1.62%.

The economic profit generally followed an increasing trend until July 2023, but this positive trend is not sustained. While economic profit remained positive through July 2023, the substantial increase in invested capital, coupled with the declining economic spread ratio, resulted in a negative economic profit in July 2025.

Relationship between Invested Capital and Economic Profit

Invested capital increased consistently from US$53,498 million in July 2020 to US$91,789 million in July 2025. Despite positive economic profit figures in the earlier years, the increasing invested capital base, combined with the decreasing economic spread ratio, ultimately led to a negative economic profit of US$-1,490 million in July 2025. This indicates that the returns generated from the increased capital were insufficient to cover the cost of that capital.

The shift from positive to negative economic profit, alongside the declining economic spread ratio, suggests a potential deterioration in the efficiency of capital allocation. Further investigation into the drivers of increased invested capital and the factors contributing to the reduced economic spread would be warranted.

The economic profit margin demonstrates a fluctuating performance over the observed period. Initially strong, the margin experienced a decline before stabilizing and then exhibiting a significant downturn in the later years.

Economic Profit Margin Trend

In fiscal year 2020, the economic profit margin stood at 12.38%. This figure decreased to 8.53% in 2021, followed by a modest recovery to 9.42% in 2022. The margin then decreased slightly to 8.47% in 2023. A substantial decline is evident in 2024, with the margin falling to 2.08%. This downward trend accelerated in 2025, resulting in a negative economic profit margin of -2.62%.

Relationship to Adjusted Revenue

Adjusted revenue generally increased from 2020 to 2023, moving from US$51,280 million to US$59,284 million. However, despite this revenue growth, economic profit did not consistently increase, and the economic profit margin did not follow suit. Revenue decreased slightly in 2024 to US$56,728 million and remained relatively stable in 2025 at US$56,958 million. The decline in economic profit margin in 2024 and 2025 coincides with a plateau and slight decrease in adjusted revenue, but the magnitude of the margin decline suggests factors beyond revenue are at play.

Economic Profit Performance

Economic profit itself peaked at US$6,350 million in 2020 and decreased to US$4,394 million in 2021. It recovered somewhat to US$4,961 million in 2022 and US$5,022 million in 2023. However, economic profit decreased significantly to US$1,182 million in 2024 and became negative in 2025, reaching -US$1,490 million. This negative economic profit in 2025 directly contributes to the negative economic profit margin observed in that year.

The observed trends indicate a weakening ability to generate economic profit relative to adjusted revenue in the later periods. The shift to a negative economic profit margin in 2025 is a notable development and warrants further investigation into the underlying cost structure and capital efficiency.