Walgreens Boots Alliance Inc. (NASDAQ:WBA)

The analysis of economic profit from 2014 to 2019 reveals a period of consistent value destruction, as economic profit remained negative throughout the entire duration. However, a clear trajectory of recovery is evident from 2017 onwards, characterized by a significant reduction in the annual economic deficit.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited a sharp increase between 2014 and 2015, rising from 3,086 million to 5,501 million. Following this surge, operating profits remained relatively stable, peaking at 5,934 million in 2018 before a slight decline to 5,719 million in 2019. This trend indicates a substantial improvement in the capacity to generate operating earnings compared to the 2014 baseline.

Invested Capital and Cost of Capital

A significant expansion of the capital base occurred between 2014 and 2016, with invested capital increasing from 55,001 million to a peak of 85,356 million. Subsequently, the capital base contracted and stabilized within the 76,000 to 77,000 million range from 2017 to 2019. The cost of capital remained largely consistent, fluctuating between 11.28% and 11.82% for the majority of the period, before decreasing to 10.07% in 2019.

Economic Profit Performance

Economic profit reached its lowest point in 2016 at -4,938 million, a result of peak invested capital coupled with a high cost of capital. From 2017 through 2019, a steady recovery is observed, with the economic loss narrowing to -2,077 million by the end of the period. This improvement was driven by a combination of stabilized invested capital, sustained NOPAT levels, and a reduction in the weighted average cost of capital in the final year.

Net earnings attributable to Walgreens Boots Alliance, Inc.

The net earnings exhibit volatility over the six-year period. Starting at 1,932 million USD in 2014, there is a significant increase to 4,220 million USD in 2015. This level is mostly sustained through 2016 and 2017, with values of 4,173 and 4,078 million USD respectively. In 2018, net earnings peak at 5,024 million USD, marking the highest point in the period analyzed. However, a decline occurs in 2019, where earnings fall to 3,982 million USD, indicating a downward shift after the 2018 peak.

Net operating profit after taxes (NOPAT)

The NOPAT shows an overall upward trend with some fluctuations. Beginning at 3,086 million USD in 2014, it rises sharply to 5,501 million USD in 2015. After this peak, it dips to 4,855 million USD in 2016, before increasing again in 2017 and 2018 to 5,246 and 5,934 million USD respectively. The highest NOPAT value is recorded in 2018. In 2019, NOPAT slightly decreases to 5,719 million USD but remains close to the peak level, indicating relatively stable operating profitability in recent years compared to net earnings.

Income Tax Provision

The income tax provision exhibited a general downward trend from 2014 to 2019. Beginning at $1,526 million in 2014, the figure decreased steadily through subsequent years, reaching $588 million in 2019. Notably, the most significant decline occurred between 2017 and 2019.

Cash Operating Taxes

Cash operating taxes remained relatively stable between 2014 and 2018, fluctuating within a narrow range from $1,667 million to $1,856 million. However, in 2019, there was a sharp decrease to $831 million, which represents a substantial reduction compared to the previous years.

Overall Observations

Both income tax provision and cash operating taxes showed significant declines by 2019 compared to earlier periods. While income tax provision steadily decreased over the years, cash operating taxes were stable for several years before dropping markedly in the last year observed. These trends may reflect changes in tax policies, operational adjustments, or shifts in taxable income and cash tax payments.

The financial data reveals several notable trends concerning the company's capital structure and invested capital over the six-year period ending in 2019.

Total reported debt & leases

This figure shows an overall increasing trend from 31,909 million USD in 2014 to 43,464 million USD in 2019, with a peak at 46,508 million USD in 2016. After reaching this peak, there is a decline in 2017 to 39,129 million USD, followed by a gradual increase again through 2018 and 2019. This pattern suggests a significant increase in leveraging activities up to 2016, some deleveraging or repayment in 2017, and subsequent additional borrowings or lease liabilities through 2019.

Total shareholders’ equity

Shareholders' equity exhibits a declining trend over the period. Starting at 20,457 million USD in 2014, the equity rose sharply to 30,861 million USD in 2015 but then continuously decreased each year thereafter to 23,512 million USD by 2019. This reduction over time indicates a depletion of equity capital, which could be attributed to factors such as sustained net losses, dividend distributions exceeding net income, share repurchases, or other equity-reducing activities.

Invested capital

The invested capital closely aligns with the combined effect of debt and equity, representing the total capital used in operations. It increased substantially from 55,001 million USD in 2014 to a peak of 85,356 million USD in 2016. Following this peak, invested capital decreased to 76,485 million USD in 2017 and remained relatively stable, with a slight increase, reaching 77,429 million USD by 2019. This behavior suggests expansion or acquisition activity up to 2016, followed by a period of consolidation or capital optimization in subsequent years.

In summary, the company experienced considerable growth in debt financing and invested capital until 2016, accompanied by an initial rise and then a steady decline in shareholders' equity. The data implies a strategic shift post-2016, characterized by deleveraging and stabilization of invested capital, while equity erosion continued, highlighting potential risks related to capital structure and financial sustainability.

The financial trajectory from 2014 to 2019 demonstrates a period of economic value destruction, characterized by consistently negative economic profit and economic spread ratios. However, the data reveals a distinct inflection point in 2016, after which the organization began to reduce its economic losses and improve its spread ratio.

Economic Profit Trends

Economic profit remained negative throughout the analyzed period. Losses widened from -3,152 million US dollars in 2014 to a peak deficit of -4,938 million US dollars in 2016. Following this trough, a steady recovery occurred, with the economic loss narrowing to -2,077 million US dollars by August 31, 2019, representing a significant reduction in the magnitude of value destruction.

Invested Capital Dynamics

A substantial increase in invested capital was observed between 2014 and 2016, rising from 55,001 million US dollars to 85,356 million US dollars. This expansion was followed by a correction in 2017 and subsequent stabilization, with capital levels fluctuating slightly between 76,286 million and 77,429 million US dollars from 2017 through 2019.

Economic Spread Ratio Analysis

The economic spread ratio remained negative, indicating that the return on invested capital did not exceed the cost of capital. The ratio reached its lowest point of -5.78% in 2016. From 2017 onward, a consistent upward trend is observed, with the ratio improving to -4.54% in 2017, -3.51% in 2018, and -2.68% in 2019. This positive trajectory suggests an improving efficiency in capital utilization and a reduction in the gap between the cost of capital and the actual return.

Between fiscal years 2014 and 2019, the financial performance regarding economic value creation exhibited a trend of initial decline followed by a consistent recovery. Although the company maintained negative economic profit throughout the entire period, the magnitude of these losses decreased significantly in the latter years despite substantial growth in top-line revenue.

Revenue Growth

Sales demonstrated a steady upward trajectory, increasing from 76,392 million USD in 2014 to 136,866 million USD by 2019. This represents a significant expansion in scale over the six-year period.

Economic Profit Trajectory

Economic profit remained negative throughout the analyzed timeframe, indicating that the company did not generate returns exceeding its cost of capital. Losses widened from 3,152 million USD in 2014 to a peak deficit of 4,938 million USD in 2016. However, a reversal occurred after 2016, with economic losses narrowing to 2,077 million USD by 2019.

Economic Profit Margin Analysis

The economic profit margin mirrored the trend of the absolute economic profit. After reaching a low of -4.21% in 2016, the margin improved steadily each year, reaching -1.52% by August 31, 2019. This suggests an improvement in the efficiency of capital utilization and a reduction in the gap between actual returns and the required cost of capital relative to sales.

In summary, while the company failed to achieve positive economic value added during this period, the narrowing of the economic profit margin from -4.13% in 2014 to -1.52% in 2019 indicates a positive trend toward economic profitability, supported by consistent revenue growth.