Etsy Inc. (NASDAQ:ETSY)

The period under review demonstrates significant fluctuations in economic profit. Initially, the company experienced economic losses, followed by a period of economic profit, and then a return to substantial economic loss. These shifts correlate with changes in net operating profit after taxes, cost of capital, and invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited a consistent upward trend from 2017 to 2020, increasing from US$47.642 million to US$393.749 million. However, growth slowed in 2021, with NOPAT reaching US$413.095 million. This suggests a potential deceleration in operational profitability.

Cost of Capital

The cost of capital generally decreased over the period, moving from 23.75% in 2017 to 20.25% in 2021. There were minor fluctuations within this overall decline. The decrease in cost of capital would generally be expected to improve economic profit, all other factors being equal.

Invested Capital

Invested capital increased substantially throughout the period, rising from US$498.789 million in 2017 to US$2,842.921 million in 2021. This significant growth in invested capital likely reflects expansion and investment in the business. The rate of increase accelerated in later years.

Economic Profit

Economic profit was negative from 2017 to 2019, indicating that the company’s returns were insufficient to cover its cost of capital. The largest loss occurred in 2019 at -US$89.786 million. A positive economic profit of US$45.746 million was achieved in 2020, coinciding with the peak in NOPAT growth and a decrease in cost of capital. However, economic profit turned negative again in 2021, reaching -US$162.632 million, despite the continued growth in NOPAT. This suggests that the increase in invested capital outpaced the gains in NOPAT, and the lower cost of capital was insufficient to offset this effect.

The shift to negative economic profit in 2021, despite increased NOPAT, highlights the importance of considering the scale of investment alongside profitability. The substantial growth in invested capital appears to have had a dominant effect on economic profit in the most recent year.

Net Income

The net income demonstrates a generally increasing trend over the five-year period. Initially, the net income registers at 81,800 thousand USD at the end of 2017, followed by a slight decline to 77,491 thousand USD in 2018. From 2018 onwards, there is consistent growth, with net income rising to 95,894 thousand USD in 2019. This growth accelerates significantly in 2020, reaching 349,246 thousand USD, and continues to increase substantially in 2021, amounting to 493,507 thousand USD. The sharp increase during 2020 and 2021 indicates a notable improvement in profitability.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures also show a positive trajectory throughout the period. Starting at 47,642 thousand USD in 2017, NOPAT rises to 76,568 thousand USD in 2018, reflecting an increase in operating efficiency or profitability. The upward trend continues in 2019 with NOPAT reaching 103,763 thousand USD. A marked jump occurs in 2020, with NOPAT surging to 393,749 thousand USD, aligning with the sharp increase observed in net income during the same year. In 2021, NOPAT grows further but at a slower pace, reaching 413,095 thousand USD. This overall trend indicates enhanced operational performance and effective tax management over the years considered.

Summary of Trends

Both net income and NOPAT exhibit substantial growth, particularly between 2019 and 2021. The periods of 2020 and 2021 stand out as years of significant earnings expansion, indicating improved operational efficiency and overall profitability. The rise in NOPAT more closely aligns with operational improvements, while net income additionally reflects the impact of non-operational factors and tax considerations. The data suggests strengthened financial health and operational leverage leading to improved earnings capacity.

Income Tax Provision (Benefit)

The income tax provision shows significant fluctuations over the five-year period. Beginning in 2017, the provision was a substantial negative figure indicating a tax benefit of -$49,535 thousand. This negative trend decreased in magnitude over the following years, with the benefit lessening to -$22,413 thousand in 2018 and further narrowing to -$15,248 thousand in 2019. Notably, in 2020, the trend reversed to a positive tax provision of $16,463 thousand, indicating an actual tax expense during this year. However, in 2021, the tax provision returned to a negative value of -$21,853 thousand. This irregular pattern suggests volatility in taxable income or tax strategy changes across the years.

Cash Operating Taxes

Cash operating taxes displayed a marked upward trend throughout the observed period. The value, which was a minor negative amount of -$1,409 thousand in 2017, shifted to positive in 2018 at $5,774 thousand. Following this, the amount continued to increase consistently each year, reaching $2,782 thousand in 2019, then sharply rising to $23,282 thousand in 2020, and culminating in a substantial $69,622 thousand in 2021. This steady and sharp increase suggests a growing cash outflow related to taxes paid from operating activities, possibly reflecting higher taxable earnings or changes in tax payment timing or policies.

Total reported debt & leases

The total reported debt and leases show a significant and consistent increase over the five-year period. Starting from 88,048 thousand US dollars at the end of 2017, the figure rose substantially to 2,435,883 thousand US dollars by the end of 2021. This represents a nearly 28-fold increase, indicating a sharp rise in the company's leverage and financial obligations.

Stockholders’ equity

Stockholders’ equity experienced moderate growth from 396,894 thousand US dollars in 2017 to 742,424 thousand in 2020, peaking during the year 2020. However, there was a decline in 2021 to 628,619 thousand US dollars. Overall, equity increased by approximately 58% from 2017 to 2021, but the decline in the final year suggests potential pressures or adjustments impacting the company's net assets.

Invested capital

Invested capital exhibited a continuous and pronounced increase throughout the period evaluated. Beginning at 498,789 thousand US dollars in 2017, it more than quintupled to 2,842,921 thousand US dollars by the end of 2021. This upward trajectory suggests substantial capital deployment, likely reflecting expansion activities supported by rising debt levels and equity contributions.

The economic spread ratio exhibited considerable fluctuation between 2017 and 2021. Initially negative, the ratio improved significantly in 2020 before declining again in 2021. This movement correlates with changes in economic profit and invested capital over the same period.

Economic Spread Ratio Trend

The economic spread ratio began at -14.20% in 2017 and decreased to -9.16% in 2018. A further decline to -10.11% was observed in 2019. A substantial positive shift occurred in 2020, with the ratio reaching 3.07%. However, this improvement was reversed in 2021, as the ratio fell to -5.72%.

The economic spread ratio’s movement suggests a changing relationship between returns generated from invested capital and the cost of that capital. The positive value in 2020 indicates that returns exceeded the cost of capital, while the negative values in other years suggest the opposite. The magnitude of the negative values indicates the extent to which returns fell short of the cost of capital.

Relationship to Economic Profit

The economic spread ratio’s positive value in 2020 aligns with the positive economic profit reported for that year. Conversely, the negative economic spread ratios in 2017, 2018, 2019, and 2021 correspond with negative economic profit values. This correlation suggests that the economic spread ratio is a direct reflection of the company’s ability to generate profit exceeding its capital costs.

Relationship to Invested Capital

Invested capital increased consistently throughout the period, rising from US$498,789 thousand in 2017 to US$2,842,921 thousand in 2021. While economic profit was positive in 2020, the substantial increase in invested capital in subsequent years appears to have contributed to the return to a negative economic spread ratio in 2021. This suggests that the growth in invested capital may not have been matched by a proportional increase in economic profit.

The volatility in the economic spread ratio warrants further investigation to understand the underlying drivers of profitability and capital allocation decisions. The decline in 2021, despite continued growth in invested capital, is a particular area of concern.

The economic profit margin exhibited considerable fluctuation between 2017 and 2021. Initially negative, the margin improved significantly in 2020 before declining again in 2021. This performance appears closely linked to the trend in economic profit, as adjusted revenue consistently increased over the period.

Economic Profit Margin Trend

The economic profit margin began at -16.03% in 2017 and decreased to -8.12% in 2018, indicating a lessening of economic loss. A further decline to -10.97% occurred in 2019. A substantial positive shift was observed in 2020, with the margin reaching 2.65%, representing a move into economic profit. However, this positive trend reversed in 2021, with the margin falling to -6.98%, signifying a return to economic loss, though less severe than in the earlier years.

Relationship to Economic Profit

The economic profit margin directly reflects the economic profit. Negative economic profit values in 2017, 2018, 2019, and 2021 correspond to negative margins. The positive economic profit of US$45,746 thousand in 2020 is reflected in the positive margin of 2.65%. The magnitude of the economic profit directly influences the margin’s value.

Adjusted Revenue Impact

Adjusted revenue increased consistently throughout the period, from US$441,845 thousand in 2017 to US$2,330,189 thousand in 2021. Despite this consistent revenue growth, the economic profit margin did not consistently improve. This suggests that increases in costs or the capital charge associated with generating that revenue offset the benefits of higher sales, particularly in 2019 and 2021.

The volatility in the economic profit margin suggests that while revenue growth is occurring, the company’s ability to generate returns exceeding its cost of capital is inconsistent. Further investigation into the factors driving the cost of capital and operating expenses would be beneficial.