AbbVie Inc. (NYSE:ABBV)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) exhibited a substantial increase from 2020 to 2021, followed by a decline in subsequent years, with a partial recovery in the most recent period. Simultaneously, the cost of capital consistently increased throughout the observed timeframe. Invested capital generally decreased, although a slight increase is noted between 2023 and 2024.

NOPAT Trend

NOPAT increased dramatically from US$4,455 million in 2020 to US$12,362 million in 2021. This was followed by a decrease to US$11,543 million in 2022, and a more substantial decline to US$3,292 million in 2023. A modest recovery to US$4,563 million occurred in 2024, remaining near the level observed in 2020.

Cost of Capital Trend

The cost of capital experienced a steady upward trend, increasing from 8.86% in 2020 to 10.83% in 2024. This consistent rise suggests increasing financing costs or perceived risk over the period.

Invested Capital Trend

Invested capital decreased from US$103,725 million in 2020 to US$68,204 million in 2023, indicating a reduction in the capital employed by the business. A slight increase to US$69,263 million was observed in 2024, potentially signaling a stabilization or minor reinvestment.

Economic Profit Trend

Economic profit was negative in 2020 at US$-4,732 million. It turned positive in 2021 and 2022, reaching US$2,942 million and US$2,892 million respectively. However, it became negative again in 2023 (US$-4,063 million) and remained negative in 2024 (US$-2,936 million). The negative economic profit in 2020, 2023, and 2024 indicates that the business was not generating returns exceeding its cost of capital in those years.

The interplay between NOPAT, cost of capital, and invested capital significantly impacted economic profit. The initial increase in NOPAT in 2021, coupled with a relatively lower cost of capital, drove positive economic profit. However, the subsequent decline in NOPAT and the concurrent increase in the cost of capital led to a return to negative economic profit in later years. The decrease in invested capital may have partially offset the impact of declining NOPAT, but was insufficient to maintain positive economic profit.

The financial data reveals significant fluctuations in key profitability metrics over the five-year period from 2020 to 2024. Net earnings attributable to the company show a marked increase between 2020 and 2021, more than doubling from 4,616 million USD to 11,542 million USD. This upward trend continued slightly into 2022, reaching 11,836 million USD. However, a sharp decline is observed in 2023, where net earnings drop to 4,863 million USD, followed by a further decrease in 2024 to 4,278 million USD.

Similarly, net operating profit after taxes (NOPAT) exhibits a strong growth trajectory in the initial years, rising from 4,455 million USD in 2020 to 12,362 million USD in 2021, before slightly decreasing to 11,543 million USD in 2022. In contrast to the early upward momentum, NOPAT experiences a significant fall in 2023 to 3,292 million USD, although it recovers somewhat in 2024 to 4,563 million USD.

Net Earnings Attributable to the Company

Demonstrated substantial growth in the first two years, peaking in 2022.

Experienced a pronounced decline in the subsequent years, reaching the lowest point in 2024 within the presented timeframe.

Net Operating Profit After Taxes (NOPAT)

Followed a similar pattern to net earnings, with rapid growth through 2021, slight reduction in 2022.

Showed a sharp decline beginning in 2023, with modest recovery in 2024 albeit remaining well below earlier peak levels.

Overall, the data points toward a period of strong profitability gains up to 2022, followed by notable erosion in both net earnings and NOPAT over the last two years. The decline in profitability metrics during 2023 and 2024 suggests the presence of operational challenges or market conditions adversely impacting financial performance. The partial resurgence of NOPAT in 2024 hints at potential stabilization or early signs of financial recovery.

Income Tax Expense (Benefit) Trend

The income tax expense exhibited significant volatility over the analyzed period. It began with a notable benefit of -$1,224 million at the end of 2020, indicating a tax gain or credit that reduced tax burden during that year. This reversed sharply in 2021 to a tax expense of $1,440 million, then further increased to $1,632 million in 2022. In 2023, it slightly decreased but remained high at $1,377 million. However, in 2024, the income tax expense again turned negative, showing a benefit of -$570 million. This pattern suggests fluctuating tax positions or adjustments possibly due to changes in tax regulations, earnings variations, or deferred tax accounting impacts.

Cash Operating Taxes Trend

The cash operating taxes consistently increased from 2020 through 2023, indicating increasing cash payments for taxes despite fluctuations in reported income tax expense. In 2020, cash taxes were $1,585 million, which rose significantly each year to reach $4,625 million in 2023. However, in 2024, there was a notable decline in cash operating taxes to $1,339 million, which is substantially lower than the prior years. This decline could suggest a one-time tax payment adjustment, changes in taxable income, tax credits utilization, or other operational tax strategies impacting cash outflows.

General Observations

While reported income tax expenses fluctuated between benefits and expenses, cash taxes paid showed a general increasing trend until a sharp drop in 2024. The divergence between income tax expense and cash operating taxes through the years implies differences between accounting recognition of tax expenses and actual tax payments, which is common in companies with complex tax structures. The decline in both income tax expense and cash operating taxes in 2024 may indicate significant tax planning outcomes or shifts in profitability affecting tax liabilities.

The financial data over the provided periods reveal several significant trends related to debt, equity, and capital structure.

Total reported debt & leases

The total reported debt and leases exhibit a decreasing trend from 87,063 million USD at the end of 2020 to 60,286 million USD by the end of 2023, reflecting a substantial reduction in leverage over the first four years. However, in 2024, there is a noticeable increase to 68,019 million USD, indicating a reversal of the prior downward trend in debt levels.

Stockholders’ equity

Stockholders' equity initially increases from 13,076 million USD in 2020 to a peak of 17,254 million USD in 2022. Subsequently, it declines sharply to 10,360 million USD in 2023 and continues to deteriorate significantly in 2024, dropping to 3,325 million USD. This steep decrease in equity over the last two years suggests increased challenges with retained earnings or potential capital losses.

Invested capital

Invested capital shows a consistent downward trajectory, reducing from 103,725 million USD in 2020 to 68,204 million USD in 2023. Unlike other trends, invested capital appears to stabilize in 2024 with a slight increase to 69,263 million USD, signaling a possible floor or minor recovery in invested assets or operational capital use.

Overall, the data suggest a focused effort on debt reduction from 2020 to 2023 accompanied by increasing equity till 2022. However, the last two years highlight financial stress with declining equity and rising debt, raising concerns about the company’s capital structure stability and financial leverage. The decline and subsequent stabilization in invested capital corroborate a contraction phase followed by an attempt to maintain or increment operational investment.

The economic spread ratio exhibited considerable fluctuation between 2020 and 2024. Initially negative in 2020, it turned positive in the subsequent two years before reverting to negative values in 2023 and 2024. This pattern suggests a dynamic relationship between the company’s economic profit and its invested capital.

Economic Spread Ratio Trend

In 2020, the economic spread ratio was -4.56%, indicating that the company’s return on invested capital was less than its cost of capital. A substantial improvement occurred in 2021, with the ratio rising to 3.07%, signifying that the company generated returns exceeding its cost of capital. This positive trend continued into 2022, reaching 3.52%, representing a further increase in value creation. However, the ratio declined sharply to -5.96% in 2023, and continued to -4.24% in 2024, demonstrating a renewed shortfall in returns relative to the cost of capital.

The economic spread ratio’s movement closely mirrors the fluctuations in economic profit. The negative economic profit in 2020 and 2023-2024 directly contributed to the negative economic spread ratios during those periods. Conversely, positive economic profit in 2021 and 2022 resulted in positive economic spread ratios.

Relationship with Invested Capital

Invested capital decreased consistently from 2020 to 2023, falling from US$103,725 million to US$68,204 million. While invested capital saw a slight increase in 2024 to US$69,263 million, it remained significantly lower than the 2020 level. The declining invested capital base, coupled with the fluctuating economic profit, significantly impacted the economic spread ratio. The ratio’s volatility suggests that changes in economic profit had a disproportionate effect as the invested capital base shrank.

The observed trend indicates a potential challenge in consistently generating returns that exceed the cost of capital. The recent negative economic spread ratios warrant further investigation to identify the underlying factors contributing to this performance and to assess the sustainability of value creation.

The economic profit margin exhibited considerable fluctuation between 2020 and 2024. Initial observations reveal a shift from negative economic profit to positive economic profit, followed by a return to negative values. A detailed examination of the economic profit margin and its underlying components provides further insight into these trends.

Economic Profit Margin

In 2020, the economic profit margin stood at -10.33%. This indicates that the company’s return on capital employed was less than its cost of capital, resulting in value destruction. A substantial improvement was observed in 2021, with the margin increasing to 5.24%, signifying value creation. This positive trend continued modestly into 2022, reaching 4.98%. However, the margin declined sharply in 2023 to -7.48%, and continued to decrease in 2024, reaching -5.21%. This suggests a weakening ability to generate returns exceeding the cost of capital in recent periods.

The economic profit margin’s movement closely mirrors that of the economic profit itself. The negative economic profit in 2020 and 2023-2024 directly translates to negative margins. The positive economic profit in 2021 and 2022 corresponds to positive margins. The magnitude of the fluctuations in economic profit appears to be the primary driver of the changes in the economic profit margin.

Net Revenues

Net revenues increased from US$45,804 million in 2020 to US$56,197 million in 2021, representing a significant growth rate. Further growth was seen in 2022, reaching US$58,054 million. However, revenues decreased to US$54,318 million in 2023 before partially recovering to US$56,334 million in 2024. While revenue growth was present over the period, it does not appear to be consistently translating into improved economic profitability, particularly in the later years.

The divergence between revenue trends and economic profit margin trends suggests that factors beyond revenue generation, such as cost of capital or operational efficiency, are significantly impacting the company’s ability to create economic value. The decline in the economic profit margin despite revenue increases in 2024 warrants further investigation into potential cost increases or changes in capital structure.