Steel Dynamics Inc. (NASDAQ:STLD)

The period under review demonstrates significant fluctuations in economic profit. Initial observations reveal a substantial improvement followed by declines, culminating in a marked increase in the most recent year. Net operating profit after taxes (NOPAT) and invested capital both generally increased over the period, though NOPAT experienced considerable volatility. The cost of capital remained relatively stable, fluctuating within a range of approximately three percentage points.

Economic Profit Trend

Economic profit began at a negative value in 2017, at -427,046 US$ in thousands, indicating the company’s returns were insufficient to cover its cost of capital. A positive shift occurred in 2018, with economic profit reaching 193,036 US$ in thousands. However, this positive trend was short-lived, as economic profit turned negative again in 2019 (-305,018 US$ in thousands) and continued to decline in 2020 (-512,355 US$ in thousands). A dramatic increase is then observed in 2021, with economic profit reaching 1,958,230 US$ in thousands, representing a substantial improvement in value creation.

NOPAT Analysis

Net operating profit after taxes exhibited considerable variability. It nearly doubled from 2017 to 2018, increasing from 755,373 US$ in thousands to 1,420,457 US$ in thousands. A significant decrease followed in 2019, dropping to 827,375 US$ in thousands, and a further decline occurred in 2020, reaching 696,079 US$ in thousands. The most substantial increase occurred between 2020 and 2021, with NOPAT rising to 3,611,424 US$ in thousands.

Invested Capital Trend

Invested capital generally increased throughout the period. From 2017 to 2021, it rose from 5,964,900 US$ in thousands to 8,550,168 US$ in thousands. The rate of increase was not consistent year-over-year, with smaller increases observed between 2019 and 2020 compared to other periods. This suggests varying levels of investment activity.

Cost of Capital Fluctuation

The cost of capital experienced moderate fluctuations. It began at 19.82% in 2017, decreased to 19.17% in 2018, and then declined further to 16.85% in 2019. A slight increase was observed in 2020 (17.82%), followed by a rise to 19.34% in 2021. These changes, while present, were less pronounced than the changes observed in NOPAT and economic profit.

The substantial increase in economic profit in 2021 appears to be driven primarily by the significant growth in NOPAT, coupled with a relatively stable cost of capital and continued investment. The earlier periods demonstrate that strong NOPAT is not always sufficient to generate positive economic profit, highlighting the importance of returns exceeding the cost of capital.

Net income attributable to Steel Dynamics, Inc.

The net income shows a volatile trend over the period analyzed. It increased significantly from 812,741 thousand USD in 2017 to a peak of 1,258,379 thousand USD in 2018. However, this was followed by a sharp decline to 671,103 thousand USD in 2019 and a further decrease to 550,822 thousand USD in 2020. In 2021, net income experienced a remarkable surge, reaching 3,214,066 thousand USD, the highest level in the five-year span.

Net operating profit after taxes (NOPAT)

The NOPAT values exhibit a similar pattern to net income, indicating operational profitability dynamics. Starting at 755,373 thousand USD in 2017, NOPAT rose substantially to 1,420,457 thousand USD in 2018. Subsequently, it experienced a decline, reaching 827,375 thousand USD in 2019 and decreasing slightly to 696,079 thousand USD in 2020. In 2021, NOPAT showed a significant increase to 3,611,424 thousand USD, surpassing prior years and indicating improved operational efficiency or favorable business conditions.

Insights

Both net income and NOPAT demonstrate a pattern of considerable increase in 2018, followed by a decline over the next two years, and then a substantial recovery in 2021. The pronounced increases in 2021 suggest that the company may have benefited from external or internal factors that significantly enhanced profitability. However, the volatility in prior years highlights potential operational challenges or market fluctuations impacting earnings. The alignment between net income and NOPAT trends suggests that both operational performance and overall profitability were similarly affected throughout the period.

Income tax expense

The income tax expense exhibited significant fluctuation over the five-year period. Starting at approximately $129 million in 2017, it sharply increased to nearly $364 million in 2018. This was followed by a marked reduction to about $197 million in 2019 and further declined to approximately $135 million in 2020. However, in 2021, there was a dramatic spike to over $962 million, representing the highest value in the observed timeframe.

Cash operating taxes

Cash operating taxes showed a different pattern compared to the income tax expense. Initially, there was a moderate rise from roughly $317 million in 2017 to $332 million in 2018. This was succeeded by a substantial decrease to about $176 million in 2019, continuing downward to $110 million in 2020. In 2021, cash operating taxes reversed the downward trend, surging significantly to around $656 million, though still below the 2017 and 2018 levels.

Comparison and analysis

Both income tax expense and cash operating taxes experienced fluctuations with a notable peak in 2021. Income tax expense showed more volatility with its lowest value in 2017 and highest in 2021, while cash operating taxes maintained a relatively higher baseline in the earlier years before a marked decline and subsequent increase in 2021. The considerable rise in both metrics in 2021 might indicate higher taxable income or changes in tax policy or company financial structure. The differing trajectories from 2017 to 2020 between the two measures suggest variations in timing or recognition of tax-related cash flows versus accrued tax expenses.

Total reported debt & leases

The total reported debt and leases show a generally increasing trend over the analyzed period. Starting at approximately 2.43 billion USD in 2017, the figure rose steadily each year up to around 3.21 billion USD by the end of 2021. This indicates a growing leverage or financing through debt and lease obligations over time.

Total Steel Dynamics, Inc. equity

Equity values exhibit consistent growth throughout the five-year span. Beginning at approximately 3.35 billion USD in 2017, equity increased to about 6.30 billion USD by 2021, with a notable acceleration between 2020 and 2021. This substantial rise in equity suggests significant retained earnings, capital infusions, or revaluation impacts that strengthened the company’s equity base.

Invested capital

Invested capital experienced steady growth from 5.96 billion USD in 2017 to 8.55 billion USD in 2021. The increase is somewhat consistent year over year, with a marked jump in the final year analyzed. This growth reflects an expansion in the total capital allocated in the business, combining both debt and equity financing sources, which supports the company’s operational capacity and potential for value creation.

Overall trend and insights

The data reveals a balanced expansion financed through both higher liabilities and substantially increased equity, leading to larger invested capital over the five years. The proportionally higher increase in equity compared to debt may indicate a strategic emphasis on strengthening the financial position and reducing financial risk. The rising invested capital underscores ongoing investments in operational assets or business growth initiatives. Such trends typically reflect robust financial health and an upward trajectory in the company’s scale and capital structure sophistication.

The economic spread ratio exhibited significant fluctuations between 2017 and 2021. Initially negative, the ratio demonstrated improvement in 2018 before declining again in subsequent years, culminating in a substantial increase in 2021.

Economic Spread Ratio

In 2017, the economic spread ratio was -7.16%, indicating that the company’s return on invested capital was less than its cost of capital. A positive shift occurred in 2018, with the ratio reaching 3.01%, suggesting the company generated returns exceeding its cost of capital. However, this positive trend was short-lived, as the ratio decreased to -4.54% in 2019 and further to -7.56% in 2020. A dramatic improvement was observed in 2021, with the economic spread ratio surging to 22.90%, signifying a substantial outperformance of returns relative to the cost of capital.

The economic spread ratio’s movement closely mirrors the fluctuations in economic profit. Years with negative economic profit, such as 2017, 2019, and 2020, corresponded with negative economic spread ratios. Conversely, positive economic profit in 2018 and, notably, in 2021, aligned with positive and significantly elevated economic spread ratios, respectively.

Invested Capital

Invested capital consistently increased from 2017 to 2021, rising from US$5,964,900 thousand to US$8,550,168 thousand. This growth in invested capital occurred alongside the varying economic spread ratios, suggesting that the efficiency with which capital was deployed, rather than the absolute amount of capital employed, was the primary driver of the observed changes in economic spread.

The substantial increase in the economic spread ratio in 2021 warrants further investigation to understand the factors contributing to this significant improvement in profitability relative to invested capital. The preceding years demonstrate a volatile performance, highlighting the sensitivity of the economic spread ratio to changes in economic profit.

The economic profit margin exhibited significant fluctuation between 2017 and 2021. Initial observations reveal a period of negative economic profit followed by positive performance, then a return to negative values before culminating in substantial positive economic profit in the most recent year.

Economic Profit Margin Trend

In 2017, the economic profit margin was negative at -4.48%. This indicates that the company’s economic profit, considering the cost of capital, was less than zero. A substantial improvement was observed in 2018, with the margin turning positive at 1.63%, suggesting improved profitability relative to the capital employed.

However, the economic profit margin declined again in 2019 to -2.91%, signaling a weakening in economic profitability. This negative trend continued into 2020, with the margin reaching -5.34%, representing the lowest point within the observed period.

A dramatic shift occurred in 2021, as the economic profit margin surged to 10.64%. This represents a significant increase in economic profitability, indicating that the company generated substantial economic profit relative to its net sales and cost of capital.

The corresponding net sales figures show an overall upward trend, although not consistently year-over-year. Net sales increased from US$9,538,797 thousand in 2017 to US$18,408,850 thousand in 2021. The largest single-year increase in net sales occurred between 2020 and 2021. The substantial increase in economic profit margin in 2021 occurred alongside this significant growth in net sales, suggesting a strong correlation between revenue generation and economic profitability.

Relationship between Net Sales and Economic Profit Margin

The negative economic profit margins in 2017, 2019, and 2020 coincided with periods of relatively lower net sales compared to the peak in 2018 and especially 2021. The positive economic profit margins in 2018 and 2021 were associated with higher net sales figures. This suggests that revenue growth is a key driver of economic profitability.

The volatility in the economic profit margin highlights the sensitivity of the company’s economic performance to underlying business conditions and capital allocation efficiency. The substantial improvement in 2021 warrants further investigation to understand the specific factors contributing to this positive outcome.