Cisco Systems Inc. (NASDAQ:CSCO)

The period under review demonstrates a fluctuating pattern in economic profit. Initially, economic profit exhibited a decline followed by a period of relative stability, ultimately culminating in negative economic profit in the later years of the observation window.

Net Operating Profit After Taxes (NOPAT)

NOPAT remained relatively stable between 2020 and 2023, fluctuating between approximately US$11.7 billion and US$12.9 billion. However, a significant decrease is observed in 2024 and 2025, falling to US$12.2 billion and US$9.8 billion respectively. This suggests a potential weakening in core operational profitability towards the end of the period.

Cost of Capital

The cost of capital experienced a slight increase from 14.19% in 2020 to 14.97% in 2023. A decrease to 13.82% is then noted in 2024, followed by a rise to 14.27% in 2025. These fluctuations, while not dramatic, contribute to the overall changes in economic profit.

Invested Capital

Invested capital showed a consistent increase from US$53.5 billion in 2020 to US$59.1 billion in 2022, remaining relatively stable at approximately US$59.0 billion in 2023. A substantial increase is then observed in 2024 and 2025, reaching US$91.8 billion in both years. This significant rise in invested capital, without a corresponding increase in NOPAT, is a key driver of the declining economic profit.

Economic Profit

Economic profit decreased from US$5.3 billion in 2020 to US$3.2 billion in 2021, before recovering to US$3.8 billion in 2022 and 2023. However, a sharp reversal occurs in 2024, resulting in an economic loss of US$0.5 billion. This trend continues into 2025, with economic profit declining further to a loss of US$3.3 billion. The shift from positive to negative economic profit is primarily attributable to the combination of a declining NOPAT and a substantial increase in invested capital, partially offset by a slight decrease in the cost of capital in 2024.

The observed trend suggests that while the business generated positive economic profit in the initial years, its ability to generate returns exceeding its cost of capital diminished over time. The significant increase in invested capital without a commensurate increase in profitability is a critical factor contributing to this outcome.

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 in financial performance over the observed period. Initially positive and indicative of value creation, the ratio transitions to negative values, suggesting value destruction in the later years.

Economic Spread Ratio Trend

From July 2020 to July 2022, the economic spread ratio experienced a decrease from 9.93% to 6.38%. This indicates a diminishing spread between the return on invested capital and the cost of capital, though value creation remained positive. A slight increase to 6.46% was observed in July 2023, before a significant downturn. The ratio became negative in July 2024 at -0.55%, and further deteriorated to -3.55% in July 2025, signaling a substantial decline in economic profitability.

The economic spread ratio’s movement is closely linked to the fluctuations in economic profit. While invested capital generally increased throughout the period, the economic profit experienced a sharp decline beginning in July 2024, driving the negative economic spread ratio.

Relationship with Economic Profit

The economic spread ratio reflects the efficiency with which invested capital is generating returns above the cost of that capital. The positive economic profit values from July 2020 to July 2023 correlate with the positive economic spread ratios during those years. However, the shift to negative economic profit in July 2024 and July 2025 directly resulted in the corresponding negative economic spread ratios, indicating that returns are no longer exceeding the cost of capital.

The substantial increase in invested capital in July 2024, coupled with the simultaneous decline in economic profit, appears to be a key driver of the negative economic spread ratio observed in the final two periods. This suggests that the additional capital deployed did not generate sufficient returns to cover its cost.

Invested Capital Impact

Invested capital increased steadily from US$53,498 million in July 2020 to US$59,063 million in July 2022, then experienced a significant jump to US$91,785 million in July 2024 and remained relatively stable in July 2025. This substantial increase in capital employed, without a corresponding increase in economic profit, contributed significantly to the declining economic spread ratio and the eventual value destruction.

The economic profit margin exhibited a fluctuating pattern over the observed period. Initially positive, the metric declined before turning negative in the latter years of the observation window.

Economic Profit Margin Trend

The economic profit margin began at 10.36% in July 2020. A decrease was noted in July 2021, falling to 6.27%. The margin experienced a recovery in July 2022, reaching 7.15%, and remained relatively stable at 6.42% in July 2023. However, a significant shift occurred in July 2024, with the margin becoming negative at -0.89%. This negative trend intensified in July 2025, with the margin reaching -5.72%.

Adjusted revenue generally increased from July 2020 to July 2023, but showed a slight decrease in July 2024 and remained relatively flat in July 2025. This revenue pattern does not fully explain the substantial decline in the economic profit margin observed in the final two periods.

Relationship between Economic Profit and Adjusted Revenue

While adjusted revenue increased from US$51,280 million in July 2020 to US$59,284 million in July 2023, the economic profit remained relatively stable, fluctuating between US$3,232 million and US$5,312 million. The subsequent decrease in adjusted revenue to US$56,728 million in July 2024 coincided with a sharp decline in economic profit to US$ -507 million, and a further decline in economic profit to US$ -3,260 million in July 2025, despite only a marginal change in adjusted revenue to US$56,958 million. This suggests that factors beyond revenue are significantly impacting profitability.

The transition from positive to negative economic profit margins indicates a weakening in the company’s ability to generate returns exceeding its cost of capital. The increasing magnitude of the negative margins in the final two periods warrants further investigation into the underlying drivers of this performance.

Economic Profit Trend

Economic profit decreased from US$5,312 million in July 2020 to US$3,232 million in July 2021, then recovered to US$3,767 million in July 2022 and US$3,808 million in July 2023. A substantial decline was observed in July 2024, with economic profit becoming negative at US$ -507 million. This negative trend continued in July 2025, with economic profit reaching US$ -3,260 million.