Kraft Heinz Co. (NASDAQ:KHC)

An analysis of economic value added reveals a consistent failure to generate positive economic profit between 2015 and 2019. Despite fluctuations in operating performance and a steady decline in the cost of capital, the organization consistently destroyed shareholder value, as the net operating profit after taxes remained insufficient to cover the imputed cost of the invested capital.

Net Operating Profit After Taxes (NOPAT) Trends

NOPAT exhibited extreme volatility during the period. An initial growth phase was observed from 2015 to 2017, with profits rising from 1,418 million to 5,287 million. This trend was abruptly reversed in 2018, where NOPAT collapsed to a deficit of 11,194 million. A partial recovery occurred in 2019, returning to a positive 2,719 million, although this remained significantly lower than the 2017 peak.

Capital Structure and Cost of Capital

The cost of capital followed a consistent downward trajectory, decreasing from 14.69% in 2015 to 11.52% in 2019. Invested capital showed a slight increase during the first three years, peaking at 112,007 million in 2017, before trending downward to 94,307 million by 2019. This reduction in the capital base in the final two years suggests potential asset impairments or a strategic reduction in deployed capital.

Economic Profit and Value Destruction

Economic profit remained negative for all five years analyzed, confirming that the company failed to meet its minimum required return. The magnitude of value destruction reached its zenith in 2018, with an economic loss of 22,637 million, directly correlating with the sharp decline in NOPAT. By 2019, the economic profit improved to negative 8,144 million, representing the smallest deficit in the series, supported by the recovery in operating profit and the lowest recorded cost of capital.

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 the company's economic performance from 2015 to 2019 reveals a consistent inability to generate positive economic value, as evidenced by negative economic profit and negative economic spread ratios throughout the entire period. While there were periods of gradual improvement, the financial results were marked by significant volatility, particularly in 2018.

Economic Profit Trends

Economic profit remained negative for five consecutive years, indicating that the company did not generate returns exceeding its cost of capital. A modest recovery trend was observed between 2015 and 2017, with losses narrowing from -14,024 million USD to -10,362 million USD. This progress was sharply reversed in 2018, when economic profit fell to a period low of -22,637 million USD. However, a strong recovery followed in 2019, with the deficit reducing to -8,144 million USD, the most favorable result in the analyzed timeframe.

Invested Capital Movements

Invested capital showed an initial growth phase, increasing from 105,133 million USD in 2015 to a peak of 112,007 million USD in 2017. Following this peak, the company entered a period of capital reduction, with invested capital declining to 96,541 million USD in 2018 and further decreasing to 94,307 million USD by the end of 2019.

Economic Spread Ratio Analysis

The economic spread ratio mirrored the trajectory of economic profit, remaining consistently negative. The ratio improved from -13.34% in 2015 to -9.25% in 2017, before deteriorating significantly to -23.45% in 2018. By 2019, the ratio reached -8.64%, representing the narrowest gap between the return on invested capital and the cost of capital over the five-year period. This pattern suggests that while the company consistently destroyed economic value, the magnitude of this destruction reached its peak in 2018 before trending toward a relative minimum in 2019.

The financial analysis reveals a consistent pattern of negative economic value addition from 2015 through 2019. Throughout this five-year period, the organization failed to generate returns that exceeded its cost of capital, resulting in a persistent negative economic profit. However, the trajectory of this deficit was characterized by significant volatility rather than a linear trend.

Economic Profit Trends

Economic profit demonstrated a gradual improvement between 2015 and 2017, narrowing from -14,024 million to -10,362 million. This upward trend was abruptly reversed in 2018, when economic profit experienced a sharp decline to -22,637 million. A substantial recovery followed in 2019, with the deficit reducing to -8,144 million, the lowest negative value recorded during the analyzed period.

Net Sales Performance

A significant expansion in net sales was observed between 2015 and 2016, increasing from 18,338 million to 26,487 million. Following this growth, revenue levels remained relatively stable through 2018, with figures hovering around 26,200 million. A slight contraction occurred in 2019, with net sales declining to 24,977 million.

Economic Profit Margin Volatility

The economic profit margin mirrored the instability seen in absolute economic profit. The margin improved from -76.47% in 2015 to -39.50% in 2017. A severe deterioration occurred in 2018, with the margin dropping to -86.18%, indicating a period of extreme capital inefficiency. By 2019, the margin recovered to -32.61%, marking the most favorable efficiency level within the five-year window, despite remaining negative.