PayPal Holdings Inc. (NASDAQ:PYPL)

The period under review demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) and invested capital generally increased between 2018 and 2020, economic profit remained negative throughout the entire period, and worsened significantly in 2022.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,833 million in 2018 to US$4,527 million in 2020, representing substantial growth. However, NOPAT decreased significantly in 2021 to US$3,793 million and continued to decline in 2022, reaching US$1,747 million. This recent decline suggests potential operational challenges or increased competitive pressures.

Cost of Capital

The cost of capital exhibited relative stability, fluctuating between 18.98% and 20.47% over the five-year period. A slight downward trend is observable, decreasing from 20.47% in 2018 to 18.98% in 2022. This suggests a potentially decreasing risk profile or improved market conditions for capital.

Invested Capital

Invested capital increased steadily from US$17,780 million in 2018 to US$31,496 million in 2022. This indicates continued investment in the business, potentially through acquisitions, capital expenditures, or working capital increases. The consistent growth in invested capital, however, did not translate into positive economic profit.

Economic Profit

Economic profit remained negative throughout the period, ranging from a low of US$-4,230 million in 2022 to a high of US$-1,614 million in 2020. The magnitude of the negative economic profit increased substantially in 2022, indicating that the return generated from invested capital was significantly lower than the cost of that capital. The trend suggests that despite increases in NOPAT and invested capital in earlier years, the business consistently failed to generate returns exceeding its cost of capital. The worsening economic profit in 2021 and 2022 warrants further investigation.

In summary, the organization experienced consistent negative economic profit despite growth in NOPAT and invested capital, particularly between 2018 and 2020. The substantial decline in NOPAT and the significant increase in negative economic profit in 2022 are concerning and suggest a growing disparity between returns generated and the cost of capital employed.

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.

The economic spread ratio demonstrates a consistently negative trend over the observed five-year period. While remaining negative throughout, the ratio’s magnitude has fluctuated, indicating changes in the relationship between economic profit and invested capital.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -10.16%. This value decreased to -10.55% in 2019, suggesting a worsening of economic returns relative to capital employed. A notable improvement occurred in 2020, with the ratio increasing to -5.34%, indicating a reduced, though still negative, spread. However, this improvement was short-lived, as the ratio deteriorated to -7.55% in 2021 and further to -13.43% in 2022. The 2022 value represents the most substantial negative spread observed within the analyzed timeframe.

The economic spread ratio’s movement correlates with changes in economic profit and invested capital. While invested capital generally increased over the period, economic profit remained negative and, in fact, worsened significantly in 2022. This suggests that the growth in invested capital did not translate into corresponding economic gains, contributing to the increasingly negative economic spread.

Relationship to Economic Profit

Economic profit consistently registered as negative across all five years. The magnitude of the negative economic profit increased from US$1,807 million in 2018 to US$4,230 million in 2022. This increasing deficit in economic profit directly contributed to the declining economic spread ratio, particularly in the later years of the period.

Relationship to Invested Capital

Invested capital increased from US$17,780 million in 2018 to US$31,496 million in 2022. Despite this growth, the inability of the business to generate positive economic profit, coupled with the increasing absolute value of the economic loss, resulted in a widening negative economic spread. The increasing invested capital base, without a corresponding improvement in profitability, exacerbated the negative impact on the ratio.

The consistent negative economic spread ratio indicates that the business is not generating returns on its invested capital that exceed its cost of capital. The worsening trend, particularly evident in 2022, suggests a growing disparity between capital employed and the economic value created.

The economic profit margin exhibited a generally worsening trend over the five-year period. While fluctuations occurred, the overall movement indicates a decline in the company’s ability to generate economic profit relative to its net revenues.

Economic Profit

Economic profit consistently remained negative throughout the observed period. The magnitude of the negative economic profit increased from US$1,807 million in 2018 to US$4,230 million in 2022. A slight improvement was noted between 2018 and 2020, but subsequent years demonstrate increasing losses from an economic value perspective.

Net Revenues

Net revenues demonstrated consistent growth annually, increasing from US$15,451 million in 2018 to US$27,518 million in 2022. This growth in revenue did not translate into positive economic profit, suggesting that the cost of capital consistently exceeded the returns generated by revenue.

Economic Profit Margin

The economic profit margin began at -11.70% in 2018 and deteriorated to -15.37% in 2022. The margin experienced a temporary improvement to -7.53% in 2020, but this was followed by a return to a worsening trend. The increasing negative margin indicates that a larger proportion of each revenue dollar is failing to cover the cost of capital. The most significant decline occurred between 2021 (-9.32%) and 2022 (-15.37%).

In summary, despite consistent growth in net revenues, the company’s economic profit margin has worsened over the period, indicating a growing disparity between revenue generation and the cost of capital. The increasing negative economic profit suggests a decline in value creation.