SolarEdge Technologies Inc. (NASDAQ:SEDG)

The financial performance, as measured by economic profit, exhibits a notable shift over the observed period. Initially positive, economic profit transitions to negative values, indicating a decline in value creation for investors. This analysis details the trends in net operating profit after taxes, cost of capital, and invested capital, and their combined impact on economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$203.92 million in 2018 to US$278.99 million in 2019, representing a substantial gain. However, 2020 saw a significant decrease to US$154.60 million. A recovery occurred in 2021, with NOPAT reaching US$253.51 million, followed by a slight decrease to US$249.86 million in 2022. While NOPAT remained positive throughout the period, its volatility impacted overall economic profit.

Cost of Capital

The cost of capital remained relatively stable, fluctuating between 20.02% and 21.24% over the five-year period. A slight downward trend is observable from 2018 to 2021, followed by a minor increase in 2022. The consistency in the cost of capital suggests that external factors influencing funding costs did not dramatically change during this timeframe.

Invested Capital

Invested capital demonstrated a consistent upward trend. It more than tripled from US$559.31 million in 2018 to US$1,734.65 million in 2020. Growth continued, reaching US$2,608.92 million in 2022. This substantial increase in invested capital, while potentially indicative of growth initiatives, contributed to the declining economic profit.

Economic Profit

Economic profit was positive in 2018 and 2019, at US$85.39 million and US$85.71 million respectively, indicating value creation exceeding the cost of capital. However, economic profit turned negative in 2020, reaching -US$197.82 million. This negative trend continued in 2021 (-US$86.96 million) and worsened in 2022 (-US$278.77 million). The increasing invested capital, coupled with fluctuations in NOPAT and a relatively stable cost of capital, drove this decline. The magnitude of the negative economic profit in 2022 is considerably larger than in previous years.

In summary, while the company experienced growth in net operating profit after taxes and significant expansion of invested capital, the increasing capital base ultimately outpaced profit generation, resulting in a sustained period of negative economic profit. The trend suggests a diminishing return on invested capital and a potential need to reassess capital allocation strategies.

Net income attributable to SolarEdge Technologies, Inc.

The net income exhibited growth from 2018 to 2019, increasing from approximately $128.8 million to $146.5 million. However, in 2020, net income slightly declined to about $140.3 million, indicating a minor setback. The figure rebounded in 2021 to reach a peak of approximately $169.2 million, representing the highest value in the five-year span. In contrast, 2022 saw a significant drop to around $93.8 million, a sharp decrease compared to the preceding year, signaling a potential issue or challenge impacting profitability in the most recent period.

Net operating profit after taxes (NOPAT)

NOPAT showed notable volatility over the five years. Initially, it rose significantly from about $203.9 million in 2018 to nearly $279.0 million in 2019, demonstrating strong operational performance improvement. A substantial decline occurred in 2020, with NOPAT decreasing to approximately $154.6 million, indicating operational difficulties or increased expenses. Recovery was observed in 2021, with NOPAT climbing back to approximately $253.5 million, nearing prior peak levels. In 2022, NOPAT remained relatively stable, slightly decreasing to about $249.9 million, suggesting that operational efficiency was maintained despite fluctuations in net income.

Income Taxes, Net

The net income taxes exhibit a fluctuating trend over the five-year period. Beginning at 9,077 thousand US dollars in 2018, there was a significant increase to 33,646 thousand US dollars in 2019. This was followed by a decline to 23,344 thousand US dollars in 2020 and a further decrease to 18,054 thousand US dollars in 2021. However, the figure surged noticeably in 2022 to 83,376 thousand US dollars, indicating a substantial rise compared to prior years.

Cash Operating Taxes

The cash operating taxes also show variability with a generally increasing trend. Starting at 15,810 thousand US dollars in 2018, the amount more than doubled to 40,084 thousand US dollars in 2019. There was a decrease to 28,279 thousand US dollars in 2020, followed by a slight increase to 31,486 thousand US dollars in 2021. In 2022, cash operating taxes rose sharply to 95,076 thousand US dollars, marking the highest value within the observed period.

Overall Insights

Both income taxes, net and cash operating taxes demonstrate significant volatility but ultimately culminate in marked increases in 2022. The spike in tax figures during 2022 could suggest improved profitability, changes in tax regulations, or accumulation of deferred tax liabilities. The patterns also indicate that cash operating taxes consistently remain higher than net income taxes, reflecting differences potentially due to timing and tax accounting adjustments.

Total reported debt & leases

The total reported debt and leases exhibit a significant upward trend over the analyzed period. Starting from approximately 19.8 million in 2018, the figure more than doubles to around 42.4 million in 2019. This upward trajectory accelerates sharply in 2020, reaching approximately 647.4 million, followed by continued increases in 2021 and 2022 to roughly 715.6 million and 735.5 million, respectively. This pattern indicates an aggressive increase in debt and lease obligations, particularly notable between 2019 and 2020.

Total SolarEdge Technologies, Inc. stockholders’ equity

Stockholders’ equity demonstrates consistent and robust growth throughout the period. It starts at approximately 562.4 million in 2018 and grows steadily year-over-year, reaching about 811.7 million in 2019 and 1.09 billion in 2020. The growth continues to strengthen, with equity reaching around 1.31 billion in 2021 and showing a substantial increase to approximately 2.18 billion in 2022. This indicates a strengthening equity base, which may reflect retained earnings growth, capital contributions, or a combination thereof.

Invested capital

Invested capital displays a marked upward movement over the observed years. Beginning at approximately 559.3 million in 2018, it rises sharply to about 909.8 million in 2019. The growth is especially pronounced in 2020, reaching approximately 1.73 billion. This figure remains relatively stable in 2021 at roughly 1.70 billion before surging again to approximately 2.61 billion in 2022. The overall increase in invested capital aligns with the increases observed in both debt and equity, suggesting expansion in the company’s capital base.

Summary of Trends

The data reveal a pattern of significant financial growth and expansion over the five-year period. Both debt and equity have increased substantially, with debt experiencing a very sharp rise from 2019 onwards. The growth in stockholders’ equity is steady and strong, culminating in a considerable increase in 2022. Correspondingly, invested capital has also significantly increased, reflecting the combined effects of higher equity and debt. The company appears to be leveraging additional debt alongside equity financing to support its investment growth, which may indicate strategic expansion efforts or increased operational scale.

The economic spread ratio exhibited a declining trend over the observed period. Initially positive, the ratio transitioned to negative values, indicating a diminishing ability to generate returns exceeding the cost of capital.

Economic Spread Ratio

In 2018, the economic spread ratio stood at 15.27%, representing a substantial margin between returns generated and the cost of capital. This ratio decreased to 9.42% in 2019, suggesting a narrowing of this margin. A significant shift occurred in 2020, with the ratio becoming negative at -11.40%, and this negative trend continued in subsequent years, reaching -5.11% in 2021 and further declining to -10.69% in 2022. This consistent negativity suggests that invested capital is yielding returns below the company’s cost of capital.

The economic profit, while positive in 2018 and 2019, became negative starting in 2020, aligning with the decline in the economic spread ratio. This suggests a correlation between the two metrics, where a decreasing spread directly impacts the absolute economic profit generated.

Invested Capital

Invested capital increased substantially from 2018 to 2020, rising from US$559,312 thousand to US$1,734,649 thousand. While there was a slight decrease in 2021 to US$1,700,638 thousand, it continued to rise in 2022 to US$2,608,920 thousand. The increasing invested capital, coupled with declining economic profit, likely contributed to the worsening economic spread ratio.

The observed trend indicates a weakening of the company’s ability to effectively deploy capital and generate returns that cover its cost. The increasing invested capital without a corresponding increase in economic profit has exacerbated this issue, resulting in a progressively lower economic spread ratio.

The economic profit margin exhibited a clear downward trend over the observed five-year period. Initially positive, the margin transitioned to negative values and continued to decline in magnitude.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at 8.73%. This figure decreased to 5.67% in 2019, indicating a reduction in the rate at which the company generated economic profit relative to its adjusted revenues. A significant shift occurred in 2020, with the margin becoming negative at -13.75%. This negative trend persisted in subsequent years, with the margin reaching -4.36% in 2021 and further declining to -8.84% in 2022. The increasing negative values suggest a growing disparity between the company’s cost of capital and the economic profit it generates.

The economic profit itself mirrors this trend. While positive and relatively stable between 2018 and 2019, it became substantially negative in 2020 and continued to decrease in absolute value through 2022.

Relationship between Economic Profit and Margin

The decline in economic profit margin is directly correlated with the decreasing economic profit and the simultaneous increase in adjusted revenues. While adjusted revenues increased significantly from 2018 to 2022, the economic profit failed to keep pace, resulting in the observed margin compression. The substantial revenue growth did not translate into a proportional increase in economic profit, suggesting potential issues with cost management, capital efficiency, or pricing strategies.

The consistent decline in the economic profit margin warrants further investigation into the underlying factors contributing to this trend. A detailed analysis of the components of economic profit, including net operating profit after tax and the cost of capital, is recommended to identify the specific drivers of the observed performance.