Express Scripts Holding Co. (NASDAQ:ESRX)

The period between 2013 and 2017 demonstrates a consistent pattern of negative economic profit, although the magnitude of the loss decreased and then increased slightly over the observed timeframe. Net operating profit after taxes exhibited an overall upward trend, while the cost of capital generally decreased. Invested capital fluctuated, contributing to the changes in economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,817,712 thousand in 2013 to US$1,953,528 thousand in 2014, representing a growth of approximately 7.4%. Further increases were observed in 2015 and 2016, reaching US$2,290,431 thousand and US$3,375,341 thousand respectively. However, NOPAT decreased to US$3,274,103 thousand in 2017, indicating a slight decline from the prior year.

Cost of Capital

The cost of capital began at 13.56% in 2013 and rose to 13.72% in 2014. A downward trend was then observed, decreasing to 12.48% in 2016. The cost of capital increased slightly to 12.55% in 2017. This suggests a decreasing cost of funding over the period, although the decrease was not sustained.

Invested Capital

Invested capital decreased from US$41,289,230 thousand in 2013 to US$38,622,209 thousand in 2014, a reduction of approximately 6.7%. It continued to decline in 2015 and 2016, reaching US$37,411,086 thousand and US$35,712,343 thousand respectively. In 2017, invested capital increased to US$37,007,152 thousand, but remained below the levels seen in 2013 and 2014.

Economic Profit

Economic profit was negative throughout the period. The largest loss occurred in 2013, at US$-3,779,769 thousand. The losses decreased in subsequent years, reaching US$-1,082,897 thousand in 2016, representing the smallest loss during the observed timeframe. However, economic profit deteriorated in 2017, increasing to a loss of US$-1,369,389 thousand. This suggests that while the business generated operating profit, it did not generate sufficient returns to cover the cost of its invested capital, and the situation worsened slightly in the final year.

Net Income Attributable to Express Scripts

The net income attributable to the company showed a consistent upward trend throughout the five-year period. Starting from approximately 1.84 billion US dollars in 2013, the net income increased annually, reaching about 4.52 billion US dollars by the end of 2017. This represents a more than doubling of net income over the duration analyzed, indicating strong profitability growth.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures likewise showed an overall increasing trend, rising from roughly 1.82 billion US dollars in 2013 to over 3.27 billion US dollars in 2017. The growth is generally steady, with an especially notable increase between 2015 and 2016. However, unlike net income, NOPAT slightly declined in 2017 compared to the previous year, decreasing from approximately 3.38 billion to 3.27 billion US dollars.

Comparative Insights

Both net income and NOPAT demonstrate sustained profitability improvements over the analyzed timeframe, highlighting effective operational and financial management. The disparity in 2017, where net income continued rising but NOPAT decreased, may suggest changes in operating efficiency, tax impact, or other factors affecting post-tax operating profits.

Provision for Income Taxes

The provision for income taxes exhibits fluctuation over the five-year period. It begins at 1,104,000 thousand US dollars at the end of 2013, then decreases slightly in 2014 to 1,031,200 thousand US dollars. A notable increase occurs in 2015, with the provision reaching 1,364,300 thousand US dollars, followed by a decline in 2016 to 999,500 thousand US dollars. By the end of 2017, there is a significant drop to 397,300 thousand US dollars, marking the lowest figure in the observed timeframe.

Cash Operating Taxes

Cash operating taxes demonstrate more variability with an overall upward trajectory throughout the period. Starting at 1,890,614 thousand US dollars in 2013, the amount decreases to 1,669,615 thousand US dollars in 2014. Subsequently, a sharp increase is observed in 2015, reaching 2,004,540 thousand US dollars. In 2016, cash operating taxes decline again to 1,743,214 thousand US dollars before climbing significantly to 2,292,125 thousand US dollars by the end of 2017, the highest level recorded in the five years.

Comparative Observations

Overall, the provision for income taxes and cash operating taxes do not follow the same trend patterns. While the provision for income taxes peaks in 2015 before steadily declining to its lowest point in 2017, cash operating taxes show a general increasing trend despite year-to-year fluctuations. The divergence between these two tax-related metrics may suggest differences in tax accounting policies, timing differences, or changes in cash flow management relating to tax obligations.

Total Reported Debt & Leases

The total reported debt and leases show a fluctuating trend over the five-year period. The value decreased slightly from approximately 14.27 billion USD at the end of 2013 to about 13.86 billion USD in 2014. However, from 2014 onward, the debt increased steadily, reaching around 16.25 billion USD by the end of 2017. This reflects a rising leverage position in the latter years.

Total Express Scripts Stockholders’ Equity

Stockholders’ equity demonstrates a declining trend from 2013 through 2016, dropping from roughly 21.84 billion USD in 2013 to about 16.24 billion USD in 2016. This decline represents a significant reduction in equity over this period. Notably, in 2017, there is a reversal of this downward trend with equity increasing to about 18.12 billion USD, suggesting a partial recovery or accumulation of retained earnings or capital injection during that year.

Invested Capital

Invested capital also declined consistently from 2013 to 2016, moving from approximately 41.29 billion USD to around 35.71 billion USD. In 2017, a modest increase to about 37.01 billion USD is observed. This trend indicates a contraction in the total capital employed by the company initially, followed by a slight expansion towards the end of the period.

The economic spread ratio demonstrates a consistent, though decelerating, improvement over the five-year period. While negative throughout the observed timeframe, the ratio indicates a diminishing gap between the cost of capital and returns generated from invested capital.

Economic Spread Ratio Trend

The economic spread ratio moved from -9.15% in 2013 to -3.70% in 2017. This represents a substantial, albeit incomplete, recovery. The largest single-year improvement occurred between 2015 and 2016, with the ratio increasing by 3.45 percentage points. The rate of improvement slowed considerably between 2016 and 2017, increasing by only 0.67 percentage points.

The trend in economic profit mirrors the improvement in the economic spread ratio, though it remains negative. The magnitude of the economic loss decreased each year, indicating that the company’s returns are gradually approaching the cost of capital. However, the company continues to destroy economic value.

Economic Profit and Invested Capital Relationship

Invested capital decreased from 2013 to 2016, then experienced a slight increase in 2017. This decrease in capital employed, coupled with the improving economic spread ratio, contributed to the reduction in the absolute value of economic profit. The continued negative economic profit suggests that while the efficiency of capital allocation is improving, it is not yet sufficient to generate positive economic returns.

The slowing rate of improvement in the economic spread ratio in the most recent year warrants further investigation. Potential factors contributing to this slowdown could include increased competition, rising costs, or limitations in growth opportunities. Continued monitoring of these trends is recommended to assess the sustainability of the observed improvements.

The economic profit margin exhibited a consistent, though decelerating, improvement from 2013 to 2016, followed by a slight deterioration in 2017. Throughout the observed period, the economic profit margin remained negative, indicating that the company’s returns did not exceed its cost of capital.

Economic Profit Margin Trend

From 2013 to 2016, the economic profit margin improved from -3.63% to -1.08%. This suggests a narrowing gap between the company’s operating profits and its capital costs. However, the rate of improvement diminished each year. The improvement from 2013 to 2014 was approximately 0.31 percentage points, while the improvement from 2015 to 2016 was only 0.30 percentage points.

In 2017, the economic profit margin slightly worsened to -1.37%, representing a 0.29 percentage point decline from the prior year. This indicates a potential reversal in the trend of improving profitability relative to capital costs.

Relationship to Revenues

Revenues experienced a modest decline from 2013 to 2017, decreasing from US$104,098,800 thousand to US$100,064,600 thousand. While revenues decreased, the economic profit margin’s improvement from 2013 to 2016 suggests that cost of capital management or operational efficiencies were initially offsetting the revenue decline. The 2017 deterioration in the economic profit margin, concurrent with a continued revenue decrease, suggests these offsetting factors were no longer sufficient.

The consistently negative economic profit values, coupled with the recent shift in the economic profit margin trend, warrant further investigation into the underlying drivers of profitability and capital costs. A deeper analysis of the components of economic profit – net operating profit after tax and the cost of capital – is recommended to identify areas for potential improvement.