Kraft Heinz Co. (NASDAQ:KHC)

The analysis of economic profit from 2015 to 2019 reveals a persistent failure to generate value above the cost of capital. Throughout the five-year period, economic profit remained consistently negative, indicating that the returns on invested capital were insufficient to cover the company's financing costs. Despite fluctuations in operating performance and a steady decline in the cost of capital, the entity operated in a state of continuous value destruction.

Net Operating Profit After Taxes (NOPAT)

Operating performance exhibited significant volatility. NOPAT grew steadily from 1,418 million US$ in 2015 to a peak of 5,287 million US$ in 2017. However, a severe reversal occurred in 2018, where NOPAT plummeted to negative 11,194 million US$, suggesting substantial non-recurring charges or operational failures. A partial recovery was observed in 2019, with NOPAT returning to a positive 2,719 million US$, although this remained well below the 2017 peak.

Cost of Capital

A consistent downward trend is observed in the cost of capital, which decreased from 14.62% in 2015 to 11.48% in 2019. This gradual reduction lowered the hurdle rate required to achieve a positive economic profit, effectively reducing the financial threshold for value creation over the analyzed period.

Invested Capital

The capital base expanded slightly between 2015 and 2017, reaching a maximum of 112,007 million US$. Following this peak, a contraction occurred, with invested capital falling to 94,307 million US$ by 2019. This decrease in the capital base, particularly the sharp drop between 2017 and 2018, coincides with the period of most significant operational volatility.

Economic Profit Trends

Economic profit remained negative across all years, highlighting a chronic inability to achieve a positive spread over the cost of capital. The deficit narrowed slightly between 2015 and 2017, moving from negative 13,952 million US$ to negative 10,291 million US$. The value destruction peaked in 2018, reaching negative 22,592 million US$, driven primarily by the collapse in NOPAT. By 2019, the economic profit improved to negative 8,103 million US$, the lowest deficit in the five-year series, though the company remained unable to create economic value.

Net Income (Loss) Attributable to Kraft Heinz

The net income showed significant volatility over the five-year period. Starting at $634 million in 2015, it experienced a substantial increase to $3,632 million in 2016 and peaked at $10,999 million in 2017. However, this trend reversed sharply in 2018, resulting in a significant net loss of $10,192 million. The company partially recovered in 2019, reporting net income of $1,935 million. This pattern suggests the company faced exceptional events or impairments in 2018 that drastically affected profitability.

Net Operating Profit After Taxes (NOPAT)

The NOPAT followed a similar trajectory to net income, indicating alignment between operating performance and net profitability. NOPAT increased from $1,418 million in 2015 to $4,237 million in 2016 and further to $5,287 million in 2017, reflecting improving operational efficiency or profitability. The figure then dropped markedly to a negative $11,194 million in 2018, consistent with the reported net loss. In 2019, NOPAT rebounded to $2,719 million, indicating a recovery in operating profit after taxes but remaining below the peak levels observed in 2017. This pattern underscores a volatile period with a significant downturn followed by a partial recovery.

Summary of Trends

Overall, both net income and NOPAT exhibited growth from 2015 to 2017, followed by a substantial deterioration in 2018, which indicates major adverse developments during that year. The recovery in 2019 points to improvement but not a full restoration to prior peak levels. Such fluctuations suggest the presence of extraordinary losses or impairments in 2018, impacting both reported net income and operating profit after taxes.

The financial data reveals notable fluctuations in the provision for (benefit from) income taxes over the five-year period. Initially, the provision increased significantly from 366 million US dollars in 2015 to 1381 million US dollars in 2016. Subsequently, there was a sharp reversal, with the provision moving into a substantial benefit position, showing -5460 million US dollars in 2017 and a continued benefit of -1067 million US dollars in 2018. In 2019, the provision returned to a positive value of 728 million US dollars, indicating a reversion to a tax expense position.

In contrast, cash operating taxes exhibited a different pattern, showing more stability and less volatility. The amount rose from 1157 million US dollars in 2015 to a peak of 1815 million US dollars in 2016, followed by a decline to 1448 million US dollars in 2017. Afterward, cash operating taxes decreased further to 1177 million US dollars in 2018 but increased again to 1312 million US dollars in 2019. Overall, cash operating taxes remained within a narrower range compared to the provision for income taxes, reflecting relatively steadier tax cash payments despite fluctuations in tax provisions.

The divergence between the provision for income taxes and cash operating taxes suggests that significant non-cash tax items affected the income tax provision, particularly in 2017 and 2018. These years experienced considerable tax benefits recorded in the provision, which could be linked to one-time adjustments, changes in tax laws, or deferred tax asset/liability movements. Meanwhile, cash taxes paid remained consistently positive and relatively stable, highlighting the difference between accounting tax expenses and actual cash outflows related to taxes.

Total Reported Debt & Leases

The total reported debt and leases increased significantly from 25,825 million USD in 2015 to a peak of 32,787 million USD in 2016. After reaching this peak, the amount decreased slightly over the next three years, ending at 29,845 million USD in 2019. This indicates an overall rise in leverage in 2016, followed by some reduction, although debt levels remained higher than in 2015.

Shareholders’ Equity

Shareholders’ equity showed variability during the period. It was relatively stable between 2015 (57,685 million USD) and 2016 (57,358 million USD), then increased notably to 66,034 million USD in 2017. After this peak, equity declined sharply in 2018 to 51,657 million USD and remained nearly constant through 2019 at 51,623 million USD. This pattern suggests a significant equity event or adjustment between 2017 and 2018, followed by stabilization at a lower level.

Invested Capital

The invested capital gradually increased from 105,133 million USD in 2015 to a peak of 112,007 million USD in 2017. However, this was followed by a marked decline over the next two years, reaching 94,307 million USD by 2019. This trajectory shows an initial expansion of capital investment, succeeded by a contraction, which aligns with the observed reductions in debt and equity during the latter years.

The analysis of financial performance from 2015 to 2019 reveals a persistent failure to generate positive economic value. Throughout the observed period, economic profit remained consistently negative, indicating that the returns generated on invested capital were insufficient to cover the cost of that capital.

Economic Spread Ratio Trends

The economic spread ratio exhibited a gradual improvement from -13.27% in 2015 to -9.19% by 2017. This positive trajectory was abruptly reversed in 2018, with the ratio deteriorating sharply to -23.40%, representing the most significant erosion of value during the period. A strong recovery occurred in 2019, with the ratio reaching -8.59%, the least negative value in the five-year sequence.

Economic Profit Volatility

Economic profit showed a narrowing deficit between 2015 and 2017, moving from -13,952 million USD to -10,291 million USD. A severe spike in economic losses was recorded in 2018, where the deficit expanded to -22,592 million USD. By 2019, there was a substantial reduction in losses to -8,103 million USD, suggesting a significant improvement in operational efficiency or a reduction in the capital charge.

Invested Capital Dynamics

Invested capital increased steadily from 105,133 million USD in 2015 to a peak of 112,007 million USD in 2017. Following this peak, a downward trend is observed, with capital levels contracting to 96,541 million USD in 2018 and further to 94,307 million USD in 2019. The reduction in the capital base in the final two years coincides with the eventual recovery of the economic spread ratio in 2019.

The financial performance from 2015 to 2019 is characterized by consistent economic value destruction, as indicated by negative economic profit and negative economic profit margins throughout the entire five-year period. While there were periods of relative improvement, the company failed to generate returns exceeding its cost of capital.

Economic Profit Trends

Economic profit remained negative for the duration of the analyzed period. A gradual improvement was observed between 2015 and 2017, with losses narrowing from -13,952 million USD to -10,291 million USD. However, this trend reversed sharply in 2018, when economic profit plummeted to its lowest point of -22,592 million USD. A significant recovery occurred in 2019, with losses reducing to -8,103 million USD, the lowest absolute loss in the five-year sequence.

Net Sales Performance

A substantial increase in net sales occurred between 2015 and 2016, rising from 18,338 million USD to 26,487 million USD. Following this surge, sales levels remained relatively stagnant, fluctuating slightly around the 26 billion USD mark between 2016 and 2018, before experiencing a moderate decline to 24,977 million USD by the end of 2019.

Economic Profit Margin Analysis

The economic profit margin mirrored the volatility of the absolute economic profit. The margin improved from -76.08% in 2015 to -39.23% in 2017. Similar to the absolute profit figures, 2018 represented a severe deterioration in value creation, with the margin dropping to -86.01%. By 2019, the margin reached its most favorable position of the period at -32.44%, suggesting a reduction in the cost of capital relative to sales or an improvement in operational efficiency, although the company still failed to achieve a positive economic profit.