Synopsys Inc. (NASDAQ:SNPS)

The period under review demonstrates fluctuating performance in return on invested capital (ROIC). Net operating profit after taxes (NOPAT) and invested capital both generally increased over the observed timeframe, but the ROIC exhibited a more complex pattern.

Overall ROIC Trend

The ROIC initially increased from 11.63% in 2020 to a peak of 17.54% in 2022. Following this peak, a noticeable decline is observed, with the ROIC decreasing to 11.03% in 2023 and further to 10.31% in 2024. The most significant decrease occurs between 2024 and 2025, with the ROIC falling to 4.23%.

NOPAT Analysis

NOPAT increased from US$774.053 million in 2020 to US$800.432 million in 2021, representing modest growth. A substantial increase is then seen in 2022, reaching US$1,357.350 million. However, NOPAT decreased to US$891.268 million in 2023 before recovering to US$1,062.721 million in 2024. A significant jump to US$1,962.565 million is observed in 2025.

Invested Capital Analysis

Invested capital consistently increased from US$6,656.460 million in 2020 to US$10,307.049 million in 2024, demonstrating a steady expansion of the capital base. A dramatic increase is then observed in 2025, with invested capital reaching US$46,390.870 million. This substantial rise in invested capital appears to be the primary driver of the ROIC decline in 2025.

ROIC Drivers

The initial increase in ROIC between 2020 and 2022 was likely driven by a combination of NOPAT growth and relatively controlled increases in invested capital. The subsequent decline in ROIC, particularly in 2025, appears to be largely attributable to the disproportionately large increase in invested capital relative to the increase in NOPAT. While NOPAT increased in 2025, the expansion of the capital base outpaced this growth, resulting in a lower overall return.

The observed trends suggest that while the company has been able to grow its NOPAT, its efficiency in utilizing invested capital has decreased, especially in the most recent year examined.

The period under review demonstrates fluctuating performance in key profitability and efficiency metrics. Return on Invested Capital (ROIC) exhibits considerable variability, influenced by changes in operating profit margin, capital turnover, and the impact of taxes. A detailed examination of these components reveals underlying trends.

Operating Profit Margin (OPM)

The Operating Profit Margin initially increased from 22.28% in 2020 to 27.91% in 2022, indicating improved operational efficiency and pricing power. However, a decline to 20.63% was observed in 2023, followed by a recovery to 24.97% in 2024. The most recent year, 2025, shows a substantial increase to 31.74%, suggesting a renewed strengthening of profitability. This metric demonstrates the most significant fluctuation across the observed period.

Turnover of Capital (TO)

The Turnover of Capital generally increased from 0.58 in 2020 to 0.71 in 2022, signifying improved asset utilization. This trend plateaued in 2023, remaining at 0.71. A notable decrease to 0.60 is seen in 2024, and a dramatic reduction to 0.17 in 2025 indicates a significant decline in the efficiency of capital use. This sharp drop in capital turnover is a key driver of the overall ROIC decline in the latest year.

Effective Cash Tax Rate Adjustment (1 – CTR)

The adjustment for the effective cash tax rate remained relatively high, ranging between 81.61% and 89.64% from 2020 to 2023. A decrease to 69.20% in 2024 and a subsequent rise to 77.77% in 2025 are observed. While fluctuations exist, the impact of this factor on ROIC appears less pronounced than that of the operating profit margin and capital turnover.

Return on Invested Capital (ROIC)

ROIC peaked at 17.54% in 2022, aligning with the highest Operating Profit Margin and increased Capital Turnover. The subsequent years show a declining trend, falling to 11.03% in 2023, 10.31% in 2024, and a substantial decrease to 4.23% in 2025. This decline in ROIC is primarily attributable to the combined effect of a decreasing capital turnover and, to a lesser extent, fluctuations in the operating profit margin and the effective cash tax rate adjustment. The significant drop in 2025 warrants further investigation.

In summary, while the operating profit margin demonstrates periods of strength, the overall ROIC performance is heavily influenced by the efficiency with which capital is utilized. The dramatic decline in capital turnover in 2025 is a critical factor contributing to the substantial reduction in ROIC during that year.

The operating profit margin (OPM) demonstrates a generally positive trend over the observed period, though with some fluctuation. Net operating profit before taxes (NOPBT) also exhibits growth, contributing to the OPM movements. Adjusted revenue consistently increased throughout the period, providing the denominator for the OPM calculation.

Operating Profit Margin (OPM) - Overall Trend

The OPM began at 22.28% in 2020 and generally increased to 31.74% in 2025. This indicates improving profitability relative to revenue. However, there was a notable decrease in 2023 before a subsequent recovery.

OPM - Year-over-Year Changes

From 2020 to 2021, the OPM experienced a slight increase, moving from 22.28% to 22.47%. A more substantial increase occurred between 2021 and 2022, with the OPM rising to 27.91%. The largest single-year decrease was observed from 2022 to 2023, with the OPM falling to 20.63%. The OPM then rebounded in 2024 to 24.97% and continued its upward trajectory, reaching 31.74% in 2025.

Relationship between NOPBT and OPM

The decrease in OPM from 2022 to 2023 coincided with a decrease in NOPBT, from US$1,532,826 thousand to US$1,182,032 thousand. Conversely, the increases in OPM in 2024 and 2025 were accompanied by increases in NOPBT, reaching US$2,523,591 thousand in 2025. This suggests a strong correlation between absolute profitability and the margin.

Revenue Impact

Adjusted revenue consistently increased throughout the period, from US$3,875,816 thousand in 2020 to US$7,950,128 thousand in 2025. While revenue growth contributed to the overall increase in NOPBT, the fluctuations in OPM were primarily driven by changes in NOPBT, as the revenue increases were consistent.

The turnover of capital demonstrates a fluctuating pattern over the observed period. Initially, an increasing trend is evident, followed by a decline and a substantial drop in the most recent year.

Overall Trend

From 2020 to 2022, the turnover of capital increased from 0.58 to 0.71, indicating improving efficiency in generating revenue from invested capital. This positive trend plateaued in 2023, remaining at 0.71. However, a significant decrease is observed in 2024, falling to 0.60, and a dramatic reduction to 0.17 in 2025.

Revenue Growth & Capital Turnover (2020-2023)

Between 2020 and 2023, adjusted revenue consistently increased. The turnover of capital mirrored this growth until 2023, suggesting that increases in revenue were initially accompanied by efficient utilization of invested capital. The consistent turnover ratio in 2022 and 2023 suggests that revenue growth was achieved without a corresponding increase in the efficiency of capital use.

Decline in Capital Turnover (2024-2025)

The decline in the turnover of capital in 2024 and, particularly, in 2025 warrants attention. While revenue continued to increase in 2024, the decrease in the ratio indicates that more capital was required to generate each dollar of revenue. The substantial drop in 2025, coinciding with a significant increase in invested capital, suggests a considerable decrease in capital efficiency. This could be due to several factors, including substantial investments in long-term assets, acquisitions, or a slowdown in revenue generation relative to capital employed.

Invested Capital Impact

Invested capital increased steadily from 2020 to 2024. The dramatic increase in invested capital in 2025, coupled with the low turnover ratio, suggests a potential misallocation of capital or a significant shift in the company’s investment strategy. Further investigation is needed to understand the nature of these investments and their expected returns.

The effective cash tax rate exhibited considerable fluctuation over the observed period. Cash operating taxes increased consistently, though not uniformly, while net operating profit before taxes experienced both growth and contraction. This interplay resulted in a dynamic CTR.

Overall Trend

The effective cash tax rate began at 10.36% in 2020 and demonstrated an initial increase to 18.39% in 2021. It then decreased to 11.45% in 2022 before rising significantly to 24.60% in 2023 and peaking at 30.80% in 2024. A subsequent decline to 22.23% was observed in 2025.

Cash Operating Taxes

Cash operating taxes showed a consistent upward trend throughout the period, increasing from US$89,449 thousand in 2020 to US$561,026 thousand in 2025. The largest absolute increase occurred between 2023 and 2024, with an addition of US$182,251 thousand.

Net Operating Profit Before Taxes (NOPBT)

Net operating profit before taxes increased from US$863,502 thousand in 2020 to US$980,756 thousand in 2021, then experienced substantial growth to US$1,532,826 thousand in 2022. A decrease to US$1,182,032 thousand occurred in 2023, followed by a recovery to US$1,535,736 thousand in 2024 and a further increase to US$2,523,591 thousand in 2025. This volatility in NOPBT significantly influenced the CTR.

CTR Fluctuations

The increase in CTR from 2020 to 2021 coincided with a rise in both cash operating taxes and NOPBT, but the proportional increase in taxes was greater. The decrease in 2022 was driven by a larger increase in NOPBT relative to cash operating taxes. The substantial increases in CTR in 2023 and 2024 were primarily attributable to significant increases in cash operating taxes, coupled with a temporary decrease in NOPBT in 2023. The slight decrease in CTR in 2025 occurred as NOPBT increased at a faster rate than cash operating taxes.

The observed fluctuations in the effective cash tax rate suggest a sensitivity to changes in both taxable income and the actual cash taxes paid. Further investigation into the specific factors driving these changes, such as tax planning strategies or changes in tax legislation, may be warranted.