Roper Technologies Inc. (NASDAQ:ROP)

The period between 2018 and 2022 demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) fluctuated, it was consistently insufficient to cover the cost of capital employed. Invested capital increased over the five-year period, contributing to the widening gap between capital costs and returns.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased significantly from 2018 to 2019, rising from US$1,152,486 thousand to US$1,986,174 thousand. However, this was followed by a substantial decrease in 2020 to US$1,253,044 thousand. A modest recovery occurred in 2021, reaching US$1,343,194 thousand, but NOPAT declined again in 2022 to US$1,275,289 thousand. Despite the initial increase, NOPAT remained below the 2019 peak for the latter three years of the observed period.

Cost of Capital

The cost of capital exhibited relative stability between 2018 and 2022, fluctuating between 14.78% and 16.17%. A slight decrease was observed from 16.02% in 2018 to 16.00% in 2019, followed by a more noticeable decline to 14.78% in 2020. The cost of capital then increased in 2021 to 15.63% and further to 16.17% in 2022, reaching its highest point in the observed period.

Invested Capital

Invested capital showed a consistent upward trend throughout the period. It increased from US$14,785,177 thousand in 2018 to US$17,154,600 thousand in 2019. A significant jump occurred in 2020, reaching US$23,002,900 thousand, before decreasing slightly to US$22,504,600 thousand in 2021. The trend resumed in 2022, with invested capital reaching US$26,216,800 thousand, representing the highest level observed.

Economic Profit

Economic profit remained negative throughout the entire period. The initial negative economic profit of US$-1,215,905 thousand in 2018 worsened to US$-2,963,259 thousand in 2022. The magnitude of the loss increased year-over-year, indicating a growing disparity between the returns generated and the cost of capital. The largest negative economic profit occurred in 2022.

The increasing invested capital, coupled with a consistently negative economic profit, suggests that the company’s investments are not generating returns sufficient to cover their cost. The fluctuations in NOPAT do not appear to be enough to offset the increasing capital base and associated costs, resulting in a widening economic loss.

Net Earnings

Net earnings exhibited considerable fluctuation over the analyzed period. Beginning at approximately $944 million in 2018, earnings nearly doubled to about $1.77 billion in 2019. However, there was a notable decline to roughly $950 million in 2020, followed by a moderate increase to approximately $1.15 billion in 2021. The most significant change occurred in 2022, when net earnings surged sharply to approximately $4.54 billion, representing the highest value in the time series by a wide margin. This pattern indicates substantial volatility, with a pronounced financial performance improvement in the latest year.

Net Operating Profit After Taxes (NOPAT)

NOPAT showed a relatively more stable trajectory compared to net earnings. Starting at about $1.15 billion in 2018, NOPAT increased substantially to nearly $2.0 billion in 2019. After this peak, it declined to roughly $1.25 billion in 2020 but experienced a slight recovery in 2021 with a value of approximately $1.34 billion. In 2022, NOPAT decreased marginally to about $1.28 billion. Despite some fluctuations, the variations in NOPAT were less extreme, suggesting consistent operating profitability even during periods of net earnings volatility.

Comparative Insights

When comparing net earnings and NOPAT trends, it is evident that while both metrics showed increases in 2019, net earnings were subject to greater volatility in the subsequent years. The sharp rise in net earnings in 2022 was not paralleled to the same extent by NOPAT, which remained relatively stable. This may indicate that extraordinary or non-operational factors significantly influenced net earnings in that year. Overall, operating profitability remained relatively steady throughout the period, despite fluctuations in reported net income.

Income Tax Expense

The income tax expense shows a notable increase from 254,000 thousand US dollars in 2018 to a peak of 459,500 thousand US dollars in 2019. Following this peak, there is a sharp decline to 259,600 thousand US dollars in 2020, indicating a significant fluctuation. The values then exhibit a gradual increase in the subsequent years, rising to 288,400 thousand US dollars in 2021 and slightly further to 296,400 thousand US dollars in 2022. Overall, the tax expense demonstrates volatility over the five-year period while maintaining a level in the upper 200,000s to near 300,000 thousand US dollars range in the latest years.

Cash Operating Taxes

Cash operating taxes also exhibit a fluctuating pattern. Starting at 356,809 thousand US dollars in 2018, the figure grows substantially to 590,630 thousand US dollars in 2019, nearly a 65% increase. This is followed by a considerable reduction to 364,900 thousand US dollars in 2020. Subsequently, the cash operating taxes decline slightly in 2021 to 332,378 thousand US dollars, before escalating again sharply in 2022 to 511,065 thousand US dollars. Despite the fluctuations, the overall trend indicates significant variability with the cash operating taxes generally remaining above 300,000 thousand US dollars except for the exceptional peak and trough years.

Comparison and Insights

Both income tax expense and cash operating taxes experience their highest values in 2019, succeeded by a sharp decrease in 2020. The income tax expense shows more stability from 2020 onwards relative to cash operating taxes, which remains more volatile, especially with the substantial increase in 2022. This variance between income tax expense and cash operating taxes could suggest changes in tax payment timings or strategies impacting cash flow versus accounting recognition. The patterns imply that while accounting tax expenses are somewhat steady post-2020, actual cash tax payments are subject to larger swings.

Total Reported Debt & Leases

The total reported debt and leases increased significantly from 2018 to 2020, rising from approximately $5.19 billion to $9.85 billion. However, in the following years, debt decreased, falling to about $8.15 billion in 2021 and further to $6.87 billion by the end of 2022. This trend indicates an initial period of increased leverage followed by a reduction in debt obligations over the last two years of the period analyzed.

Stockholders’ Equity

Stockholders’ equity showed consistent growth throughout the entire time frame. Starting at around $7.74 billion in 2018, equity increased steadily each year, reaching approximately $16.04 billion by the end of 2022. The growth became more pronounced from 2021 to 2022, suggesting a strong strengthening of the company's capital base during the most recent year.

Invested Capital

Invested capital mirrored the trends observed in equity and debt, rising from about $14.79 billion in 2018 to a peak of $23 billion in 2020. A slight decrease occurred in 2021 to roughly $22.5 billion, followed by a rebound to approximately $26.2 billion in 2022. This reflects overall growth in the capital deployed by the company with some variability corresponding to changes in debt and equity levels.

The economic spread ratio demonstrates a consistent decline over the five-year period. Simultaneously, economic profit remains negative throughout the observed timeframe and exhibits an increasing negative trend. Invested capital generally increases year-over-year, though a slight decrease is noted between 2020 and 2021.

Economic Spread Ratio

The economic spread ratio, expressed as a percentage, decreased from -8.22% in 2018 to -11.30% in 2022. This indicates a widening gap between the company’s return on invested capital and its weighted average cost of capital. The ratio’s consistent negative value suggests the company is consistently destroying economic value.

Economic Profit

Economic profit, measured in US$ thousands, is negative for each year presented. The magnitude of the loss increased from -1,215,905 in 2018 to -2,963,259 in 2022. This escalating negative economic profit reinforces the conclusion that the company’s investments are not generating sufficient returns to cover the cost of capital.

Invested Capital

Invested capital increased from 14,785,177 in 2018 to 26,216,800 in 2022, indicating a growing capital base. However, the decrease from 23,002,900 in 2020 to 22,504,600 in 2021 is a notable deviation from the overall upward trend. Despite the increase in invested capital, the company’s inability to generate positive economic profit suggests that additional capital deployment is not improving value creation.

The combined trends suggest that while the company continues to invest capital, it is doing so at a rate that does not yield returns exceeding the cost of that capital. The worsening economic spread ratio and increasing negative economic profit highlight a concerning trend in value creation.

The economic profit margin demonstrates a consistently negative trend over the five-year period. Economic profit itself is negative throughout the observed timeframe, indicating the company’s returns are insufficient to cover its cost of capital. The economic profit margin, calculated as economic profit divided by adjusted net revenues, reveals the extent of this underperformance relative to revenue generation.

Economic Profit Margin Trend

The economic profit margin deteriorated significantly from -22.94% in 2018 to -52.19% in 2022. This represents a substantial decline in profitability when considering the cost of capital. The margin experienced its largest single-year decrease between 2020 and 2022.

Adjusted net revenues exhibited an initial increase from 2018 to 2021, growing from US$5,300.7 million to US$5,950.4 million. However, revenues decreased in 2022 to US$5,677.8 million. Despite the revenue growth in the earlier years, it was not enough to offset the increasing negative economic profit, contributing to the worsening economic profit margin.

Relationship between Revenue and Economic Profit Margin

While adjusted net revenues increased between 2018 and 2021, the economic profit margin became more negative during that same period. This suggests that the cost of capital is increasing at a faster rate than revenue growth, or that operational inefficiencies are eroding profitability. The revenue decline in 2022 coincided with a further substantial deterioration in the economic profit margin, reinforcing this observation.

The consistently negative and declining economic profit margin indicates a growing disparity between the company’s returns and its cost of capital. This trend warrants further investigation into the factors driving the increasing cost of capital and the company’s ability to generate sufficient returns to cover those costs.