Microchip Technology Inc. (NASDAQ:MCHP)

The analysis reveals a complex pattern in economic profit over the observed period. While net operating profit after taxes (NOPAT) demonstrates significant fluctuation, economic profit consistently remains negative, though with notable changes in magnitude. The cost of capital exhibits relative stability, while invested capital undergoes substantial shifts.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced substantial growth from 2017 to 2019, increasing from US$180,568 thousand to US$695,844 thousand. A significant decline occurred in 2020, falling to US$455,414 thousand, followed by a modest increase in 2021 to US$488,868 thousand. The most substantial increase occurred in 2022, reaching US$1,620,172 thousand. This indicates considerable volatility in core operational profitability.

Cost of Capital

The cost of capital remained relatively stable between 2017 and 2019, fluctuating between 16.45% and 19.93%. It then increased to 20.01% in 2021 and further to 20.55% in 2022. This suggests a rising cost of funding over the latter part of the period, potentially due to macroeconomic factors or changes in the company’s risk profile.

Invested Capital

Invested capital demonstrated a decrease from 2017 to 2018, moving from US$6,087,016 thousand to US$5,149,468 thousand. A dramatic increase occurred in 2019, reaching US$14,715,398 thousand, followed by declines in both 2020 and 2021 to US$13,725,600 thousand and US$12,643,700 thousand respectively. A further decrease was observed in 2022, settling at US$11,963,600 thousand. These fluctuations suggest significant capital allocation and reallocation activities.

Economic Profit

Economic profit was negative throughout the entire period. The largest negative economic profit occurred in 2019, at -US$1,724,204 thousand, and 2021, at -US$2,041,509 thousand. While negative, the magnitude of the economic loss decreased substantially in 2022 to -US$838,051 thousand, despite the increase in NOPAT. This suggests that while operational profitability improved significantly in 2022, it was not sufficient to offset the cost of capital applied to the invested capital base, but the gap narrowed considerably. The earlier years (2017 and 2018) also exhibited substantial negative economic profit, though less pronounced than in 2019-2021.

In summary, the company consistently destroyed economic value over the analyzed timeframe. While NOPAT experienced considerable growth in the most recent year, the negative economic profit indicates that returns generated were insufficient to cover the cost of capital. The substantial fluctuations in invested capital warrant further investigation to understand the underlying drivers of these changes and their impact on overall value creation.

Net Income Trend

The net income demonstrated a generally upward trajectory over the analyzed periods, beginning at 164,639 thousand US dollars in 2017. A significant rise is observed in 2018 and 2019, reaching 255,400 and 355,900 thousand US dollars respectively. The upward trend continues sharply in 2020, peaking at 570,600 thousand US dollars. There is a decline in 2021 to 349,400 thousand US dollars, followed by a substantial increase in 2022, culminating at 1,285,500 thousand US dollars. This pattern indicates volatility but overall strong growth, with the most notable surge occurring in the latest year observed.

Net Operating Profit After Taxes (NOPAT) Trend

NOPAT experienced substantial growth from 2017 through 2019, starting at 180,568 thousand US dollars and peaking at 695,844 thousand US dollars in 2019. However, a notable decrease occurred in 2020, dropping to 455,414 thousand US dollars. Subsequently, there is a modest recovery in 2021 to 488,868 thousand US dollars before a dramatic increase in 2022, reaching 1,620,172 thousand US dollars. The pattern highlights a peak in 2019, a decline amid challenging circumstances possibly in 2020, followed by remarkable recovery and growth in the most recent period.

Comparative Insights

Both net income and NOPAT demonstrate corresponding overall trends with initial growth, a dip around 2020, and a strong rebound by 2022. The magnitude of increase in 2022 is particularly pronounced for both metrics, suggesting enhanced operational efficiency and profitability. The divergence in the rates of increase across years reveals the company’s sensitivity to economic or operational factors but an overall ability to recover and expand profitability substantially.

Income Tax Provision (Benefit) Trend

The income tax provision displayed considerable volatility over the six-year period. A negative provision (benefit) was recorded in 2017 at -80,805 thousand USD, indicating a tax benefit rather than an expense. This shifted drastically to a positive tax provision of 481,900 thousand USD in 2018, suggesting a significant tax expense that year. A subsequent return to a tax benefit occurred in 2019 and 2020 with -151,400 and -420,200 thousand USD respectively. These years indicate substantial tax recoveries or credits. In 2021, the provision nearly neutralized with a small negative amount of -9,900 thousand USD, followed by an increase to a substantial tax expense of 197,000 thousand USD in 2022. Overall, the pattern reflects considerable fluctuations in taxable income, tax planning activities, or tax law impacts affecting the tax responsibility.

Cash Operating Taxes Trend

Cash operating taxes increased steadily during the period analyzed, showing a general upward trend. Beginning at 98,396 thousand USD in 2017, cash taxes paid more than quintupled by 2018 to 492,538 thousand USD, which may point to increased taxable profitability or changes in tax payment timing. However, 2019 shows a sharp drop to 17,593 thousand USD, representing a significant decrease in actual tax cash outflows. The subsequent years demonstrate recovery and growth in cash taxes paid, with amounts rising to 175,290 in 2020, then further to 205,150 in 2021, and reaching 244,410 thousand USD in 2022. This progressive increase suggests stronger cash tax payments, potentially aligned with growing earnings or changes in tax management strategies.

Comparative Insights Between Income Tax Provision and Cash Taxes

The divergence between income tax provision and cash operating taxes is notable. While provisions fluctuate between benefits and expenses, cash taxes exhibit a more consistent upward trend after 2019. The discrepancies likely reflect timing differences between accounting tax expenses and actual cash payments, deferred tax assets or liabilities, or adjustments related to tax credits or incentives. The years with tax benefits in provisions often correspond with lower cash taxes, highlighting the complexity of the tax position and cash flow impacts. The overall data suggests the company navigates fluctuating taxable income levels and tax obligations, influencing both reported tax expenses and actual cash tax payments distinctly over the period.

Total reported debt & leases

The reported debt and lease obligations exhibit a significant fluctuation over the analyzed periods. From March 2017 to March 2018, debt slightly increased from approximately 3.03 billion to 3.13 billion US dollars. This was followed by a sharp escalation in March 2019, where debt surged to nearly 10.45 billion, representing a more than threefold increase compared to the previous year. Subsequently, the total debt began a steady decline, reducing to approximately 9.62 billion in 2020, then to 9.07 billion in 2021, and further down to about 7.85 billion by March 2022. Overall, while there was a remarkable spike in debt in 2019, the trend after that showed a consistent effort toward debt reduction.

Stockholders’ equity

Stockholders’ equity showed a general upward trend with some modest fluctuations. Starting at around 3.27 billion in 2017, it remained relatively stable in 2018. In 2019, equity rose considerably to approximately 5.29 billion, continuing to increase slightly to about 5.59 billion in 2020. However, in 2021 equity decreased marginally to about 5.34 billion, before rising again to roughly 5.89 billion by 2022. This pattern suggests a broadly positive movement in equity with minor year-to-year variability.

Invested capital

Invested capital showed dynamic changes across the years analyzed. The figure decreased from approximately 6.09 billion in 2017 to around 5.15 billion in 2018. Then, a sharp increase occurred in 2019, where invested capital grew to nearly 14.72 billion, closely aligned with the spike seen in total debt and leases, possibly indicating increased borrowing or capital infusion. Following this peak, invested capital declined steadily over the next three years, dropping to about 13.73 billion in 2020, 12.64 billion in 2021, and further down to approximately 11.96 billion in 2022. This gradual reduction after the 2019 peak may reflect strategic asset sales, debt repayment, or operational adjustments.

The economic spread ratio exhibited considerable fluctuation over the observed period. Initially negative, the ratio demonstrated some improvement before declining again, ultimately showing a notable positive shift in the most recent year.

Economic Spread Ratio Trend

The economic spread ratio began at -16.88% in 2017 and improved to -11.60% in 2018. A slight deterioration followed in 2019, with the ratio at -11.72%. The ratio then decreased more substantially to -14.38% in 2020 and further to -16.15% in 2021, representing the lowest point in the observed period. A significant positive change occurred in 2022, with the ratio increasing to -7.01%.

Economic profit consistently remained negative throughout the period, although the magnitude of the loss varied. Invested capital experienced a substantial increase between 2017 and 2019, followed by a decline in subsequent years.

Relationship between Economic Profit and Invested Capital

Despite the increase in invested capital from 2017 to 2019, economic profit became more negative during that timeframe. This suggests that the returns generated from the increased capital were insufficient to offset the cost of that capital. The subsequent decrease in invested capital from 2019 to 2022 coincided with a lessening of the economic loss, culminating in a significantly reduced negative economic profit in 2022. This indicates a potential improvement in capital efficiency or profitability.

The substantial improvement in the economic spread ratio in 2022, coupled with the reduced negative economic profit, suggests a positive trend in the company’s ability to generate returns exceeding its cost of capital, although it still remains below zero.

Overall Performance

The observed pattern indicates a period of underperformance, as reflected in the consistently negative economic profit. However, the recent trend suggests a potential shift towards improved financial performance, warranting further investigation into the factors driving the changes in both economic profit and invested capital.

The economic profit margin demonstrates a consistently negative trend over the observed period, indicating the company consistently generated economic losses. While fluctuations occur, the overall pattern reveals a concerning performance regarding value creation for investors.

Economic Profit Margin Trend

The economic profit margin began at -30.14% in 2017. A notable improvement was seen in 2018, increasing to -15.01%. However, this improvement was short-lived, as the margin deteriorated significantly in subsequent years, reaching -32.23% in 2019, -37.41% in 2020, and -37.54% in 2021. A substantial positive shift occurred in 2022, with the margin improving to -12.08%, representing the highest value within the analyzed timeframe.

The fluctuations in economic profit margin correlate with changes in economic profit and adjusted net sales. The most substantial decline in the margin occurred between 2018 and 2020, coinciding with a period where economic profit worsened considerably. The improvement in 2022 is linked to both a reduction in economic loss and a significant increase in adjusted net sales.

Relationship with Adjusted Net Sales

Adjusted net sales generally increased over the period, moving from US$3,407,807 thousand in 2017 to US$6,938,500 thousand in 2022. Despite this revenue growth, the consistently negative economic profit suggests that the cost of capital consistently exceeded the returns generated from sales. The 2022 improvement in economic profit margin is partially attributable to the largest increase in adjusted net sales during the analyzed period.

Economic Profit

Economic profit itself exhibited a volatile pattern. While the magnitude of the loss decreased in 2018 compared to 2017, it subsequently increased through 2021, reaching its highest negative value. The substantial reduction in economic loss observed in 2022, to -US$838,051 thousand, is a key driver of the improved economic profit margin.

In conclusion, the company experienced consistent economic losses throughout the period, as evidenced by the negative economic profit margin. While there was a marked improvement in 2022, driven by increased sales and a reduced economic loss, the overall trend indicates a struggle to generate returns exceeding the cost of capital.