PayPal Holdings Inc. (NASDAQ:PYPL)

Net Operating Profit After Taxes (NOPAT)

The net operating profit after taxes exhibits a fluctuating trend over the analyzed periods. Starting from $1,833 million in 2018, it increased to $2,151 million in 2019 and then saw a significant rise to $4,527 million in 2020. However, this was followed by a decline in 2021 to $3,793 million, and a more pronounced decrease in 2022 to $1,747 million. This pattern indicates volatility in operational profitability, with peak performance in 2020 and a substantial drop thereafter.

Cost of Capital

The cost of capital demonstrates a gradual downward trend throughout the time frame. It decreased from 17.37% in 2018 to 16.14% in 2022, suggesting a modest reduction in the required return rate on invested capital over the years.

Invested Capital

Invested capital shows a steady upward trend over the periods. It started at $17,780 million in 2018 and increased consistently year-over-year, reaching $31,496 million by 2022. This reflects ongoing investment and capital deployment by the company over time.

Economic Profit

Economic profit remains negative across all periods, indicating that the company's return does not cover its cost of capital. The deficit worsened from -$1,256 million in 2018 to -$1,669 million in 2019, then improved somewhat in 2020 to -$685 million. However, it deteriorated again in 2021 to -$1,437 million and plunged further to -$3,336 million in 2022. The increase in negative economic profit alongside rising invested capital and declining NOPAT in recent years suggests diminishing value creation relative to capital cost.

Net Income

The net income displayed an overall increasing trend from 2018 through 2020, rising from 2,057 million USD to a peak of 4,202 million USD. In 2021, the net income slightly decreased to 4,169 million USD but remained close to the previous year's high. However, in 2022, net income experienced a significant decline to 2,419 million USD, nearly reverting to the level recorded in 2019.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar pattern to net income, increasing steadily from 1,833 million USD in 2018 to reach a maximum of 4,527 million USD in 2020. In 2021, a notable decrease occurred, with NOPAT falling to 3,793 million USD. The downward trend continued more sharply in 2022, with NOPAT dropping to 1,747 million USD, marking the lowest figure within the period analyzed and significantly below the 2018 starting point.

Overall Observations

Both net income and NOPAT demonstrated strong growth leading up to 2020, indicating a period of robust profitability. However, the years following 2020 show a reversal with considerable declines in profitability metrics. The drop in 2022 is particularly pronounced, suggesting challenges or changes in operational performance affecting the company's ability to generate profit after taxes. This downward shift merits further investigation into contributing factors such as revenue changes, cost structures, or external economic conditions affecting the company.

Income tax expense (benefit)

The income tax expense exhibited notable fluctuations over the examined period. Starting at $319 million at the end of 2018, it increased substantially to $539 million in 2019 and further to $863 million in 2020. However, there was a significant reversal in 2021, with the tax expense shifting to a benefit of $70 million, indicating a tax credit or reduction in tax liabilities for that year. This benefit sharply reversed to a substantial expense of $947 million by the end of 2022, suggesting either a change in profitability or tax strategy that led to increased tax obligations.

Cash operating taxes

Cash operating taxes followed a broadly variable trend. Beginning at $475 million in 2018, these taxes rose to $796 million in 2019, indicating an increased cash tax outflow. The figure then declined to $728 million in 2020 and further decreased to $454 million in 2021. This downward trend was reversed in 2022 with a marked increase to $1,790 million, more than tripling the cash operating taxes compared to the previous year. This sharp increase in 2022 signals a significant rise in actual cash taxes paid, which may reflect changes in profitability, tax rates, or deferred tax payments being settled.

Overall analysis

The data illustrates considerable volatility in both reported income tax expense and cash taxes paid over these years. The discrepancy between income tax expense turning into a benefit in 2021 while cash operating taxes decreased suggests timing differences or tax planning effects. The pronounced spike in both income tax expense and cash taxes in 2022 implies a substantial change in the company's tax situation or profitability, warranting further investigation into underlying operational or tax law changes affecting this period.

The financial data indicate noteworthy trends in the company's capital structure and financing over the observed period from 2018 to 2022.

Total reported debt & leases

The company’s total reported debt and leases showed a significant increase throughout the period. Starting at $2,584 million in 2018, the debt nearly doubled by 2019 to $5,472 million. This upward trend continued sharply in 2020, reaching $9,725 million, with a slower but steady rise in 2021 at $9,810 million, and further increase to $11,555 million in 2022. This pattern suggests an expanding use of debt financing or lease obligations over the years.

Total PayPal stockholders’ equity

Stockholders' equity also increased overall but at a more moderate pace compared to debt. Beginning at $15,386 million in 2018, equity rose consistently each year, peaking at $21,727 million in 2021 before slightly declining to $20,274 million in 2022. This trend implies retention of earnings and possible capital infusions, though the 2022 dip may indicate distributions, losses, or other equity reductions in that year.

Invested capital

Invested capital showed a steady growth trend across the period. From $17,780 million in 2018, it increased annually, reaching $31,496 million by 2022. This steady increase reflects the company’s growing asset base financed by both debt and equity, with the notable acceleration seen from 2019 onwards.

In summary, the data reveal an overall expansion in the company’s financial base, with a more pronounced rise in leverage compared to equity. The increased debt levels might indicate strategic investments funded through borrowing, while the equity growth confirms continued shareholder value enhancement until 2021, followed by a slight equity contraction in 2022.

Economic Profit

The economic profit exhibited a fluctuating yet predominantly negative trend over the observed periods. Starting at a loss of $1,256 million in 2018, the deficit widened to $1,669 million in 2019, then improved significantly to a loss of $685 million in 2020. However, in the subsequent years, the economic profit deteriorated again, increasing the loss to $1,437 million in 2021 and further to $3,336 million in 2022. This pattern indicates recurring challenges in generating economic profit, with the most substantial loss recorded in 2022.

Invested Capital

Invested capital demonstrated a consistent upward trend across the five years. The value increased from $17,780 million in 2018 to $31,496 million in 2022. The growth was most pronounced between 2019 and 2020, with an increase of approximately $7,984 million, followed by more moderate growth rates in subsequent years. This steady increase suggests ongoing capital investment or asset accumulation over the period.

Economic Spread Ratio

The economic spread ratio remained negative throughout all years, indicating that the company's return on invested capital was below its cost of capital. The ratio worsened from -7.07% in 2018 to -7.49% in 2019, then improved to -2.26% in 2020. Nevertheless, the spread reverted to a more negative position thereafter, reaching -4.59% in 2021 and deteriorating sharply to -10.59% in 2022. The lowest point recorded in 2022 highlights significant inefficiency in generating returns above capital costs.

Overall Insights

The data reveals a company facing persistent challenges in achieving positive economic profit and generating adequate returns on its invested capital. Despite increasing its invested capital substantially, the economic spread ratio’s consistent negativity and the volatile economic profit indicate a struggle to translate investment into profitable returns. The marked decline in 2022 across both economic profit and economic spread ratio may signal worsening operational efficiency or increased cost of capital pressures during that period.

Net Revenues

The net revenues of the company have exhibited a consistent upward trajectory across the analyzed period. Beginning at $15,451 million in 2018, revenues rose steadily each year, reaching $27,518 million by the end of 2022. This reflects a substantial growth in top-line performance over the five-year span.

Economic Profit

Despite increasing revenues, economic profit figures indicate a persistent challenge in achieving profitability from an economic value-added perspective. The company experienced negative economic profits throughout the period, with values ranging from -$1,256 million in 2018 to a nadir of -$3,336 million in 2022. Notably, the economic profit improved temporarily in 2020 to -$685 million compared to the prior year, but deteriorated again sharply in 2021 and 2022.

Economic Profit Margin

Reflecting the economic profit trend, the economic profit margin remained negative for all years considered, underscoring an inability to generate economic profit relative to revenue. Margins worsened from -8.13% in 2018 to -12.12% in 2022, with a modest improvement observed in 2020 (-3.19%) before declining again. The margin's volatility suggests fluctuating efficiency or shifts in capital costs over time.

Overall Analysis

While revenue growth is a positive indicator of sales expansion or increased market penetration, the persistent and worsening negative economic profits and margins highlight substantial issues with value creation beyond accounting profits. This may point to high capital charges, operational inefficiencies, or investments that have not yet yielded corresponding economic returns. The temporary improvement in 2020 could be attributed to specific one-time factors or cost management efforts, but subsequent declines suggest these were not sustained or outweighed by other adverse developments.