Walgreens Boots Alliance Inc. (NASDAQ:WBA)

The period under review demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) fluctuates, it does not generate sufficient returns to cover the cost of invested capital, resulting in economic losses each year.

NOPAT Trend

Net operating profit after taxes increased significantly from 2014 to 2015, rising from US$3,086 million to US$5,501 million. Subsequent years show more moderate fluctuations, with a decrease in 2016 to US$4,855 million, a slight increase in 2017 to US$5,246 million, a further increase to US$5,934 million in 2018, and a minor decline to US$5,719 million in 2019. Despite these variations, NOPAT remains above the 2014 level throughout the period.

Cost of Capital Trend

The cost of capital remained relatively stable between 2014 and 2018, fluctuating between 11.19% and 11.71%. A notable decrease occurred in 2019, with the cost of capital falling to 9.98%. This reduction in the cost of capital is the most significant change observed in this metric over the analyzed timeframe.

Invested Capital Trend

Invested capital increased substantially from 2014 to 2015, moving from US$55,001 million to US$80,730 million. It continued to rise in 2016 to US$85,356 million, before decreasing to US$76,485 million in 2017. The level of invested capital remained relatively consistent between 2017 and 2019, fluctuating between US$76,286 million and US$77,429 million.

Economic Profit Analysis

Economic profit remained negative throughout the period, ranging from -US$2,012 million to -US$4,849 million. The magnitude of the economic loss decreased each year, from -US$3,096 million in 2014 to -US$2,012 million in 2019. This reduction in economic loss correlates with both the fluctuations in NOPAT and the decrease in the cost of capital, particularly in the final year. Despite the improvement, the company consistently failed to generate returns exceeding its cost of capital.

The decreasing trend in economic loss suggests some improvement in value creation, but the continued negative economic profit indicates that the business is not yet generating returns sufficient to satisfy investor expectations given the level of capital employed. The reduction in the cost of capital in 2019 contributed to the smallest economic loss observed during the period.

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 period between August 31, 2014, and August 31, 2019, demonstrates a consistent pattern of negative economic profit. While the magnitude of the economic loss fluctuates, the company did not generate positive economic profit during this timeframe.

Invested Capital

Invested capital increased significantly from 2014 to 2015, rising from US$55,001 million to US$80,730 million. Following this substantial increase, invested capital remained relatively stable, fluctuating between US$76,286 million and US$85,356 million for the subsequent years. A slight upward trend is observable in invested capital from 2018 to 2019.

Economic Profit

Economic profit exhibited a worsening trend from 2014 to 2016, declining from a loss of US$3,096 million to a loss of US$4,849 million. A reduction in the economic loss was noted in 2017, improving to US$3,396 million. This improvement continued through 2019, with the economic loss decreasing to US$2,012 million. Despite this improvement, economic profit remained negative throughout the analyzed period.

Economic Spread Ratio

The economic spread ratio consistently registered negative values throughout the period, indicating that the company’s return on invested capital was less than its cost of capital. The ratio demonstrated a general improvement from -5.63% in 2014 to -2.60% in 2019. The most substantial improvement occurred between 2018 and 2019, with the ratio increasing from -3.41% to -2.60%. The ratio experienced its most negative value in 2016 at -5.68%.

The observed trend in the economic spread ratio suggests a gradual narrowing of the gap between the company’s return on invested capital and its cost of capital. However, the continued negative economic profit and economic spread ratio indicate that value creation for investors remained a challenge during this period.

The economic profit margin exhibited a fluctuating, yet generally improving, trend over the observed period. While consistently negative, the magnitude of the economic loss decreased from 2014 to 2019. This suggests a gradual improvement in the company’s ability to generate returns exceeding its cost of capital, although profitability relative to sales remained a concern throughout the period.

Economic Profit Margin

The economic profit margin began at -4.05% in 2014 and decreased to -3.82% in 2015. A subsequent increase to -4.13% occurred in 2016, representing the lowest point in the observed period. From 2016 onward, the margin demonstrated a consistent improvement, reaching -2.87% in 2017, -1.98% in 2018, and finally -1.47% in 2019. This indicates a progressive reduction in the percentage of sales consumed by economic losses.

Sales experienced substantial growth throughout the period. Sales increased from US$76,392 million in 2014 to US$136,866 million in 2019. This growth did not fully offset the economic losses, but the improving economic profit margin suggests that the company became more efficient in converting sales into economic profit as sales volume increased.

Relationship between Sales and Economic Profit

Despite the consistent negative economic profit, the increasing sales figures contributed to a lessening of the absolute economic loss. The economic profit moved from a loss of US$3,096 million in 2014 to a loss of US$2,012 million in 2019. The improvement in the economic profit margin alongside increasing sales suggests potential operating efficiencies or changes in capital structure that positively impacted economic profitability.

The trend suggests that while the company consistently destroyed economic value during this period, the rate of destruction diminished over time. Continued monitoring of these metrics is recommended to assess whether this trend continues and to identify the underlying drivers of the improvement.