Express Scripts Holding Co. (NASDAQ:ESRX)

The period under review demonstrates a consistent pattern of negative economic profit, although the magnitude of the loss decreased initially before increasing again. Net operating profit after taxes (NOPAT) exhibited an overall upward trend, while the cost of capital remained relatively stable. Invested capital generally decreased, with a slight increase in the most recent year presented.

NOPAT Trend

Net operating profit after taxes increased from US$1,817,712 thousand in 2013 to US$3,375,341 thousand in 2016. A slight decrease was observed in 2017, with NOPAT reported as US$3,274,103 thousand. This indicates improving operational profitability for the majority of the period.

Cost of Capital

The cost of capital fluctuated modestly between 12.46% and 13.70% over the five-year period. It began at 13.53% in 2013, peaked at 13.70% in 2014, and then declined to 12.52% in 2017. These changes were relatively small and do not appear to be a primary driver of the economic profit trend.

Invested Capital

Invested capital generally decreased from US$41,289,230 thousand in 2013 to US$35,712,343 thousand in 2016. A modest increase was noted in 2017, bringing the invested capital to US$37,007,152 thousand. This suggests a reduction in the capital employed by the business, followed by a slight reinvestment.

Economic Profit

Economic profit remained negative throughout the period, ranging from -US$3,769,181 thousand to -US$1,074,614 thousand. The losses decreased from 2013 to 2016, indicating improving economic returns. However, economic profit worsened in 2017, increasing the loss to -US$1,360,765 thousand. This suggests that while operational profitability improved, it did not improve sufficiently to cover the cost of capital employed.

The initial reduction in economic loss coincided with increases in NOPAT and decreases in invested capital. The subsequent increase in economic loss in 2017, despite continued high NOPAT, suggests a potential increase in the cost of capital or a less efficient utilization of invested capital relative to the profit generated.

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 moderating, negative trend over the five-year period. While remaining negative throughout, the ratio’s magnitude decreased from -9.13% in 2013 to -3.68% in 2017. This suggests an improving, but still insufficient, relationship between returns generated and the cost of capital employed.

Economic Spread Ratio Trend

The economic spread ratio experienced a decline in negativity from 2013 to 2016, moving from -9.13% to -3.01%. This indicates a narrowing gap between the return on invested capital and the cost of that capital. However, in 2017, the ratio slightly worsened to -3.68%, suggesting a potential reversal of the improving trend.

Concurrently, economic profit also exhibited a decreasing negative value, moving from -3,769,181 in 2013 to -1,360,765 in 2017. This parallel movement with the economic spread ratio suggests that the improvement in the ratio is directly linked to an increase in the absolute value of economic profit, though profit remains negative.

Invested Capital

Invested capital decreased from 41,289,230 in 2013 to 35,712,343 in 2016, before increasing to 37,007,152 in 2017. The initial decrease in invested capital likely contributed to the improvement in the economic spread ratio between 2013 and 2016, as a smaller capital base requires a lower absolute profit to achieve a positive spread. The subsequent increase in 2017 may have partially offset the gains made in prior years.

The consistent negative economic spread ratio indicates that, throughout the observed period, the company’s returns did not cover the cost of its invested capital. While the trend suggests a move towards improved capital efficiency, sustained negative values warrant continued monitoring and strategic adjustments to enhance profitability and capital allocation.

The economic profit margin exhibited a consistent, though decelerating, improvement from 2013 to 2016, followed by a slight deterioration in 2017. While remaining negative throughout the observed period, the magnitude of the loss decreased before increasing again in the most recent year.

Economic Profit Margin Trend

The economic profit margin began at -3.62% in 2013 and improved to -1.07% in 2016. This indicates a reduction in the difference between the company’s cost of capital and its operating profit. However, in 2017, the margin worsened to -1.36%, suggesting a reversal of this positive trend. The rate of improvement slowed each year from 2013 to 2016, indicating diminishing returns from efforts to improve economic profitability.

Revenues demonstrated relative stability across the five-year period. Fluctuations were minimal, ranging from approximately $100.06 billion to $104.10 billion. This suggests that changes in the economic profit margin were not primarily driven by revenue growth or decline, but rather by shifts in the cost of capital or operational efficiency.

Relationship between Economic Profit Margin and Revenues

The consistent revenue figures, coupled with the fluctuating economic profit margin, suggest that the company’s ability to generate economic profit is more sensitive to factors beyond top-line revenue. These factors could include changes in the cost of capital, operational expenses, or asset utilization. The slight decline in revenues from 2013 to 2017, while not substantial, may have contributed to the 2017 deterioration in the economic profit margin.

The economic profit itself, while negative, also showed a pattern of decreasing losses from 2013 to 2016, mirroring the improvement in the economic profit margin. The increase in the economic loss in 2017 aligns with the decline in the margin, reinforcing the observation that these two metrics are closely related.

Economic Profit and Margin Correlation

The strong correlation between the economic profit (in US$ thousands) and the economic profit margin (%) indicates that the margin accurately reflects the company’s economic profitability. The observed trends in both metrics suggest that while the company made progress in improving its economic performance between 2013 and 2016, this progress stalled and slightly reversed in 2017.