Twenty-First Century Fox Inc. (NASDAQ:FOX)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, while the cost of capital generally decreased before increasing in the final year. Invested capital showed an overall increasing trend, though not consistently. These factors combined to produce a varied economic profit performance.

Economic Profit Trend

Economic profit began at US$544 million in 2013, then experienced a substantial decline to a loss of US$3,322 million in 2014. A recovery was observed in 2015, with economic profit reaching US$2,423 million. However, this was followed by another decline, resulting in a loss of US$2,223 million in 2016, a loss of US$2,451 million in 2017, and a further decline to a loss of US$3,246 million in 2018. This indicates a pattern of inconsistent value creation.

NOPAT Performance

NOPAT decreased significantly from US$7,896 million in 2013 to US$4,517 million in 2014. It then increased substantially to US$9,417 million in 2015, before falling to US$4,025 million in 2016. NOPAT remained relatively stable at US$4,273 million in 2017 and increased slightly to US$4,669 million in 2018. The volatility in NOPAT appears to be a key driver of the fluctuations in economic profit.

Cost of Capital

The cost of capital decreased from 16.55% in 2013 to 14.71% in 2016, suggesting a decreasing risk profile or improved financing conditions. However, it increased to 16.74% in 2018. While generally decreasing, the final year’s increase in the cost of capital contributed to the negative economic profit.

Invested Capital

Invested capital increased from US$44,434 million in 2013 to US$48,265 million in 2014, then decreased to US$44,315 million in 2015. It continued to decrease to US$42,462 million in 2016 before increasing to US$45,055 million in 2017 and finally reaching US$47,272 million in 2018. The overall upward trend in invested capital, despite some interim declines, suggests continued investment in the business.

The negative economic profit reported in 2014, 2016, 2017, and 2018 indicates that the returns generated from invested capital were insufficient to cover the cost of that capital during those periods. The largest negative economic profit occurred in 2014, coinciding with the largest decrease in NOPAT. The interplay between NOPAT, cost of capital, and invested capital significantly influenced the company’s ability to generate economic profit.

Net Income Attributable to Stockholders

The net income showed notable fluctuations over the analyzed periods. It started at 7,097 million USD in 2013, then declined significantly to 4,514 million USD in 2014. In 2015, there was a strong rebound with net income increasing to 8,306 million USD, marking the highest value in the timeframe. Afterward, net income dropped sharply to 2,755 million USD in 2016 and remained relatively low in 2017, with a slight increase to 2,952 million USD. In 2018, net income rose again to 4,464 million USD, indicating partial recovery but still below the earlier peak.

Net Operating Profit After Taxes (NOPAT)

The net operating profit after taxes demonstrated a pattern similar to net income but with somewhat less pronounced variation. Starting at 7,896 million USD in 2013, it decreased substantially to 4,517 million USD in 2014. NOPAT peaked at 9,417 million USD in 2015, exceeding the initial period's value. Following this peak, it declined sharply to 4,025 million USD in 2016. The next two years showed moderate growth, with NOPAT increasing to 4,273 million USD in 2017 and 4,669 million USD in 2018.

Overall Trend Analysis

Both net income and NOPAT experienced significant volatility throughout the six years. The years 2014 and 2016 are characterized by marked downturns in profitability metrics. The year 2015 stands out as a peak period for both measures, reflecting a temporary strong financial performance. After 2016, there is evidence of gradual operational improvement through 2018, though neither net income nor NOPAT returned to their earlier peak levels by the end of the period. The data suggests a cycle of recovery following considerable profit contractions, warranting further examination of underlying causes during downturn years.

Provision for income taxes from continuing operations

The provision for income taxes generally declined from 2013 to 2016, starting at 1,690 million US dollars in 2013 and decreasing steadily to 1,130 million in 2016. In 2017, there was a notable increase to 1,419 million, followed by a significant drop to a negative figure of -364 million in 2018, which may indicate a tax benefit or a reversal of previous tax provisions.

Cash operating taxes

Cash operating taxes fluctuated over the period. Beginning at 1,612 million US dollars in 2013, the figure increased to 1,707 million in 2014, then decreased to 1,504 million in 2015. A more marked decline occurred in 2016 with taxes dropping to 1,095 million. Subsequently, there was a sharp rise to 1,781 million in 2017 before falling significantly to 904 million in 2018. The fluctuations suggest variability in cash tax payments potentially linked to changing profitability or tax planning strategies.

Total reported debt & leases

The total reported debt and leases displayed fluctuations over the six-year period. Starting at $19,912 million in 2013, the debt increased to a peak of $22,748 million in 2014. Following this peak, there was a general decline in debt, descending to $20,609 million in 2015 and remaining relatively stable through 2016 and 2017, with slight increases and decreases respectively. By 2018, the debt had further decreased to $21,076 million. Overall, the debt levels demonstrate initial growth followed by a slight reduction and stabilization trend.

Total Twenty-First Century Fox, Inc. stockholders’ equity

Stockholders' equity showed an overall increasing trend despite some variability. Beginning at $16,998 million in 2013, there was a moderate increase to $17,418 million in 2014, followed by a small decrease to $17,220 million in 2015. A notable decline occurred in 2016, when equity dropped sharply to $13,661 million. After this decline, equity rebounded, increasing to $15,722 million in 2017 and further to $19,564 million in 2018, marking the highest equity value in the period.

Invested capital

Invested capital demonstrated a fluctuating but generally downward trend in the earlier years, followed by recovery in later years. It began at $44,434 million in 2013, increased to $48,265 million in 2014, then decreased significantly to $44,315 million in 2015 and further declined to $42,462 million in 2016. From 2016 onwards, invested capital increased, reaching $45,055 million in 2017 and $47,272 million in 2018, though it did not quite return to the previous peak observed in 2014.

The economic spread ratio exhibited considerable fluctuation between 2013 and 2018. Initial positive performance gave way to a period of sustained negative spreads, indicating diminishing returns on invested capital. A review of the underlying economic profit and invested capital figures reveals the drivers of these changes.

Economic Spread Ratio

The economic spread ratio began at 1.22% in 2013, representing a positive spread. This indicates that the company generated returns exceeding its cost of capital. However, the ratio declined sharply to -6.88% in 2014, signaling a substantial underperformance relative to the cost of capital. A recovery was observed in 2015, with the ratio reaching 5.47%, but this was short-lived. The ratio subsequently remained negative for the following three years, ending at -6.87% in 2018. This consistent negativity suggests a persistent inability to generate returns sufficient to cover the cost of invested capital during this period.

The economic spread ratio’s movement closely mirrors that of economic profit. The significant drop in the ratio from 2013 to 2014 corresponds with a dramatic shift from a positive economic profit of US$544 million to a loss of US$3,322 million. While economic profit recovered somewhat in 2015, the subsequent declines in economic profit from 2015 through 2018 directly correlate with the continued negative economic spread ratios.

Invested Capital

Invested capital generally increased over the period, rising from US$44,434 million in 2013 to US$47,272 million in 2018. This increase occurred despite the negative economic profit experienced in most years. The increase in invested capital, coupled with the negative economic profit, likely contributed to the worsening economic spread ratio, as more capital was deployed with diminishing returns.

The trend suggests a growing disconnect between capital allocation and value creation. While the company continued to invest capital, its ability to generate returns on that capital consistently fell short of expectations, as evidenced by the predominantly negative economic spread ratio. Further investigation into the factors driving the decline in economic profit is warranted.

The economic profit margin exhibited significant fluctuation between 2013 and 2018. Initial profitability, as measured by economic profit, transitioned to substantial losses before showing a recovery, followed by a return to negative economic profit. This pattern is reflected in the economic profit margin, which demonstrates a volatile performance over the analyzed period.

Economic Profit Margin Trend

In 2013, the economic profit margin stood at 1.98%. This positive margin decreased dramatically in 2014, becoming negative at -10.42%. A substantial recovery occurred in 2015, with the margin rising to 8.43%. However, this improvement was short-lived, as the margin declined to -8.12% in 2016 and further to -8.58% in 2017. The most recent year observed, 2018, showed a continued decline, reaching -10.64%, representing the lowest margin within the period.

The economic profit margin’s movement closely mirrors the changes in economic profit. The negative margins in 2014, 2016, 2017, and 2018 indicate that the company’s returns, after accounting for the cost of capital, were insufficient to generate value for its investors during those years. The peak in 2015 suggests a period of value creation, but this was not sustained.

Revenue Relationship

Adjusted revenues generally increased over the period, moving from US$27,472 million in 2013 to US$30,498 million in 2018. Despite this revenue growth, the economic profit margin did not consistently improve, suggesting that revenue increases were not translating into proportional increases in economic profit. The widening negative margins in the later years, despite rising revenues, indicate increasing inefficiencies or a higher cost of capital relative to returns.

The observed trend suggests a potential disconnect between revenue generation and profitability, as measured by economic profit. Further investigation into the factors influencing the cost of capital and operational efficiency would be necessary to understand the underlying drivers of these fluctuations in economic profit margin.