Workday Inc. (NASDAQ:WDAY)

The analysis reveals a consistent pattern of negative economic profit over the observed period. While net operating profit after taxes (NOPAT) demonstrates considerable fluctuation, it has not been sufficient to overcome the cost of capital when considering the invested capital base.

NOPAT Trend

Net operating profit after taxes began at US$84 million in 2021, decreased significantly to US$506 million in 2022, then declined to US$102 million in 2023. A substantial recovery occurred in 2024, reaching US$673 million, followed by further increases to US$860 million in 2025 and US$1,270 million in 2026. Despite this growth in recent years, NOPAT remains volatile.

Cost of Capital Trend

The cost of capital remained relatively stable between 2021 and 2025, fluctuating between 20.65% and 20.98%. A slight decrease is observed in 2026, falling to 20.14%. This suggests a minimal change in the risk profile or financing structure of the entity during the period.

Invested Capital Trend

Invested capital exhibited a consistent upward trend throughout the period. Starting at US$6,061 million in 2021, it increased to US$7,706 million in 2022, US$8,178 million in 2023, and US$8,631 million in 2024. The rate of increase accelerated in the later years, reaching US$9,420 million in 2025 and US$12,129 million in 2026. This indicates ongoing investment in the business.

Economic Profit Trend

Economic profit remained negative across all years examined. Initial values were US$-1,181 million in 2021 and US$-1,096 million in 2022. The deficit widened to US$-1,586 million in 2023 before improving to US$-1,137 million in 2024. It remained negative in 2025 (US$-1,109 million) and 2026 (US$-1,173 million). The persistent negative economic profit suggests that the returns generated by the invested capital are consistently below the cost of that capital.

The increasing invested capital, coupled with a relatively stable cost of capital, appears to be the primary driver of the consistently negative economic profit. While NOPAT has shown improvement in recent years, it has not been sufficient to offset the increasing capital base and associated cost.

Net operating profit after taxes (NOPAT) demonstrates a fluctuating pattern over the observed period. While net income experienced significant volatility, NOPAT presents a generally positive trajectory, albeit with intermediate setbacks.

Overall Trend

NOPAT generally increased from 2021 to 2026. Beginning at US$84 million in 2021, it rose substantially to US$506 million in 2022. A subsequent decline was noted in 2023, falling to US$102 million, before recovering and continuing an upward trend through 2026, reaching US$1,270 million.

Year-over-Year Changes

The largest year-over-year increase in NOPAT occurred between 2021 and 2022, with an increase of US$422 million. The most significant decrease was observed between 2022 and 2023, representing a reduction of US$404 million. From 2023 to 2024, NOPAT increased by US$571 million, and continued to grow by US$187 million and US$310 million in 2025 and 2026 respectively.

Relationship to Net Income

A divergence between NOPAT and net income is apparent. While net income fluctuated significantly, including substantial losses in 2021 and 2023, NOPAT remained positive throughout the period, suggesting that core operating profitability was maintained even during years with large non-operating expenses or losses. The substantial increase in net income from 2023 to 2024 did not mirror a similar magnitude of increase in NOPAT, indicating that factors beyond core operations contributed significantly to the net income improvement.

The observed pattern in NOPAT suggests a business capable of generating operating profits, but subject to variability potentially influenced by factors outside of its primary business activities. The growth in NOPAT from 2024 to 2026 indicates strengthening core operational performance.

The provision for (benefit from) income taxes and cash operating taxes exhibit considerable fluctuation over the observed period. A notable divergence exists between the two metrics, suggesting timing differences related to tax recognition and actual cash outflows.

Provision for (benefit from) income taxes

The provision for income taxes began at US$7 million in 2021, decreased significantly to a benefit of US$13 million in 2022, then increased substantially to US$107 million in 2023. A large negative value of negative US$1,025 million was recorded in 2024, followed by a return to a positive provision of US$112 million in 2025, and a further increase to US$316 million in 2026. This pattern indicates significant volatility in taxable income or changes in deferred tax assets and liabilities.

Cash operating taxes

Cash operating taxes started at US$20 million in 2021, decreased to US$4 million in 2022, and then rose to US$118 million in 2023. A minimal outflow of US$3 million was observed in 2024, increasing to US$34 million in 2025 and US$67 million in 2026. While also fluctuating, the magnitude of change in cash taxes is less extreme than that of the income tax provision.

Relationship between Provision and Cash Taxes

In 2021 and 2023, cash operating taxes were lower than the provision for income taxes, potentially due to timing differences such as prepaid taxes or deferred tax liabilities. However, in 2022, the provision was a benefit while cash taxes were an outflow, and in 2024, the provision was a large expense while cash taxes were minimal. These discrepancies suggest substantial differences between book and tax accounting treatments, potentially related to stock-based compensation, research and development credits, or other non-cash items impacting the income tax provision. The increasing positive difference between the two metrics in 2025 and 2026 may indicate a normalization of tax payments relative to reported income.

The substantial fluctuations in both metrics warrant further investigation to understand the underlying drivers and potential impacts on future cash flows and financial performance. The significant negative provision in 2024, coupled with minimal cash taxes, requires particular scrutiny.

The invested capital of the company demonstrates a consistent upward trajectory over the observed period. This growth is supported by increases in both total reported debt & leases and stockholders’ equity, though the relative contributions of each component have shifted over time.

Total Reported Debt & Leases

Total reported debt & leases experienced a slight decrease from 2021 to 2022, falling from US$2,238 million to US$2,103 million. However, beginning in 2022, a clear upward trend is evident, with values reaching US$3,296 million by 2024 and projected to reach US$3,821 million by 2026. This indicates an increasing reliance on debt financing.

Stockholders’ Equity

Stockholders’ equity exhibited substantial growth between 2021 and 2024, increasing from US$3,278 million to US$8,082 million. This growth rate slowed between 2024 and 2025, reaching US$9,034 million, before experiencing a decrease to US$7,805 million in 2026. The 2026 decrease warrants further investigation to determine its underlying causes.

Invested Capital

Invested capital, calculated as the sum of total reported debt & leases and stockholders’ equity, increased from US$6,061 million in 2021 to US$12,129 million in 2026. The rate of increase accelerated between 2024 and 2026, suggesting a more aggressive investment strategy or significant acquisitions during that period. The growth in invested capital was most pronounced between 2025 and 2026, driven by the continued increase in debt despite a concurrent decrease in stockholders’ equity.

The composition of invested capital has shifted over the period. While stockholders’ equity initially drove a significant portion of the growth, debt financing became a more prominent contributor in later years. The decline in stockholders’ equity in 2026, coupled with continued debt increases, suggests a potential change in the company’s capital structure and risk profile.

The analysis reveals a consistent pattern of negative economic profit over the observed period, ranging from 2021 to 2026. While invested capital has generally increased, the economic spread ratio demonstrates a fluctuating, yet overall improving, trend.

Economic Profit

Economic profit consistently registers as negative throughout the period, indicating that the company’s returns are not exceeding its cost of capital. The magnitude of the loss fluctuates, with the largest negative economic profit recorded in 2023 at -1,586 US$ millions. A slight improvement is observed in 2024 and 2025, but the negative trend reasserts itself in 2026, though at a less severe level than in 2023.

Invested Capital

Invested capital exhibits a clear upward trend over the six-year period. Starting at 6,061 US$ millions in 2021, it increases to 12,129 US$ millions by 2026. This growth suggests continued investment in the business, despite the consistent negative economic profit. The rate of increase appears to accelerate in the later years, particularly between 2025 and 2026.

Economic Spread Ratio

The economic spread ratio, expressed as a percentage, reflects the difference between the company’s return on invested capital and its cost of capital. The ratio is consistently negative, aligning with the negative economic profit. However, the ratio demonstrates a gradual improvement. It moves from -19.48% in 2021 to -9.67% in 2026. This suggests that while returns are still below the cost of capital, the gap is narrowing over time. Fluctuations are present, with a notable increase in the negative spread in 2023, corresponding to the largest economic loss, followed by improvements in 2024 and 2025 before stabilizing in 2026.

In summary, the company consistently generates negative economic profit despite increasing its invested capital. The economic spread ratio indicates a gradual, though uneven, improvement in the relationship between returns and the cost of capital, suggesting potential for future profitability if this trend continues.

The analysis reveals a consistent pattern of negative economic profit over the observed period, alongside increasing adjusted revenues. While economic profit remains negative across all years, the economic profit margin demonstrates a fluctuating, yet generally improving, trend.

Economic Profit

Economic profit exhibits negative values throughout the period from 2021 to 2026. The magnitude of the loss fluctuates, with the largest negative economic profit recorded in 2023 at -1,586 US$ millions. A relative decrease in the magnitude of the loss is observed in 2022 and 2024, followed by a slight increase in 2025 and again in 2026. Overall, the company consistently destroys economic value based on this metric.

Adjusted Revenues

Adjusted revenues demonstrate a consistent upward trend throughout the period. Revenues increased from 4,646 US$ millions in 2021 to 10,086 US$ millions in 2026. This represents a substantial growth rate over the six-year period, indicating increasing sales or pricing power. The year-over-year growth appears relatively consistent, though the absolute increase in revenue grows larger each year.

Economic Profit Margin

The economic profit margin, calculated as a percentage, is negative for each year, reflecting the negative economic profit. The margin improves from -25.42% in 2021 to -11.63% in 2026. This improvement suggests that while the company is still destroying economic value, it is doing so at a decreasing rate relative to its adjusted revenues. The largest improvement in the margin occurred between 2023 and 2024, moving from -23.79% to -14.67%. Fluctuations are present, with a slight worsening in the margin from 2024 to 2025, before continuing the overall improvement in 2026.

In summary, despite substantial revenue growth, the company has not yet achieved positive economic profit. However, the improving economic profit margin suggests a potential trend towards greater efficiency or improved capital allocation, though continued negative economic profit indicates that the cost of capital is not yet being fully covered by returns generated from revenue.