Air Products & Chemicals Inc. (NYSE:APD)

Analysis of the financial period from 2015 to 2020 reveals a consistent inability to generate positive economic profit. Throughout the six-year duration, the cost of capital associated with the invested base systematically exceeded the net operating profit after taxes (NOPAT), resulting in continuous value destruction from an economic value added perspective.

Net Operating Profit After Taxes (NOPAT)

A general upward trend is observed in operating profitability, with NOPAT increasing from US$ 1,418,609 thousand in 2015 to US$ 2,189,491 thousand in 2020. Despite a notable contraction in 2017, where profit fell to US$ 1,274,219 thousand, the subsequent years showed strong recovery and acceleration, particularly between 2018 and 2020.

Invested Capital and Cost of Capital

The capital base expanded steadily from US$ 14,344,261 thousand in 2015 to US$ 20,884,500 thousand in 2020. A significant surge in invested capital occurred in the final year of the analysis. Concurrently, the cost of capital remained relatively high, fluctuating between a low of 13.25% in 2015 and a peak of 14.93% in 2019, before adjusting to 14.01% in 2020.

Economic Profit Dynamics

Economic profit remained negative for the entire period, indicating that the returns on invested capital were insufficient to cover the weighted average cost of capital. The most significant economic losses occurred in 2017 and 2018, with deficits of US$ 967,188 thousand and US$ 930,501 thousand, respectively. Although 2019 showed a narrowing of the deficit to US$ 486,193 thousand, the substantial increase in invested capital in 2020 offset the gains in NOPAT, causing the economic profit to decline again to -US$ 736,546 thousand.

The divergence between the growth in NOPAT and the growth in invested capital suggests that the scale of investment has outpaced the company's ability to generate proportional operating returns. The persistent negative economic profit underscores a systemic gap between the actual return on capital and the required return demanded by the cost of capital.

Net Income Attributable to Air Products

The net income exhibited notable volatility over the analyzed periods. There was a significant decline from 1,277,900 thousand US dollars in 2015 to 631,100 thousand US dollars in 2016, marking a substantial reduction. This was followed by a remarkable recovery in 2017, where net income more than quadrupled to 3,000,400 thousand US dollars. Subsequently, net income decreased considerably to 1,497,800 thousand US dollars in 2018 before gradually increasing again in 2019 and 2020 to 1,760,000 and 1,886,700 thousand US dollars respectively. Overall, the data reflect episodic fluctuations with a general upward trend in the last two years.

Net Operating Profit After Taxes (NOPAT)

The NOPAT showed a more consistent pattern compared to net income. It increased from 1,418,609 thousand US dollars in 2015 to 1,657,195 thousand US dollars in 2016, demonstrating growth. However, in 2017, NOPAT decreased to 1,274,219 thousand US dollars, representing a decline after the previous growth. From 2017 onwards, NOPAT exhibited an upward trajectory, reaching 1,476,037 thousand US dollars in 2018, and significantly increasing to 2,040,608 thousand US dollars in 2019, followed by further improvement to 2,189,491 thousand US dollars in 2020. This reflects an overall positive trend in operating profitability in the later years.

Comparative Analysis

While net income showed substantial volatility with marked peaks and troughs, NOPAT reflected a steadier and more consistent increase over time. The sharp fluctuations in net income could indicate the impact of non-operational factors such as extraordinary items, taxes, or accounting adjustments. In contrast, the rising NOPAT suggests improving operational efficiency and profitability from core business activities, particularly evident in the substantial growth from 2018 through 2020.

Income Tax Provision

The income tax provision showed a fluctuating trend over the analyzed periods. Starting at 415,900 thousand US dollars in 2015, it increased significantly to 586,500 thousand in 2016. In 2017, there was a notable decline to 260,900 thousand, followed by a recovery to 524,300 thousand in 2018. The provision then slightly decreased to 480,100 thousand in 2019 and remained almost stable at 478,400 thousand in 2020. This pattern indicates variability in income tax obligation, with a peak in 2016, a trough in 2017, and relative stabilization in the latest years.

Cash Operating Taxes

Cash operating taxes demonstrated a generally decreasing trend after 2016. Initially, there was an increase from 451,612 thousand US dollars in 2015 to 577,067 thousand in 2016. However, subsequent years saw a decline to 350,387 thousand in 2017, followed by a transient increase to 617,809 thousand in 2018, the highest in the analyzed range. The values then dropped substantially to 457,325 thousand in 2019 and further to 338,146 thousand in 2020. This suggests a reduction in the cash outflow related to operating taxes in recent years, despite some volatility earlier in the period.

The analyzed financial data reveals several notable trends in the company's capital structure over the six-year period ending September 30, 2020.

Total reported debt & leases

The total debt and leases experienced variability during the period. From 2015 to 2016, debt slightly increased, reaching around 6.42 billion USD. However, a significant reduction followed in the subsequent years, with debt levels decreasing markedly to approximately 3.59 billion USD by 2019. In 2020, there was a sharp increase to over 8.31 billion USD, representing the highest debt level in the period under review. This pattern suggests potentially strategic borrowing or financing activities, with a conservative approach in the middle years and a notable spike in the latest year.

Total Air Products shareholders’ equity

Shareholders’ equity showed a generally increasing trend throughout the period. Starting at about 7.25 billion USD in 2015, it experienced a slight decline in 2016 but then consistently grew each year, reaching approximately 12.08 billion USD by 2020. This steady growth in equity indicates strengthening capitalization and possibly accumulated earnings or capital injections supporting the company's financial position.

Invested capital

Invested capital, reflecting the total funds used for operational assets, showed a continuous upward trend from around 14.34 billion USD in 2015 to over 20.88 billion USD in 2020. The increase was gradual from 2015 through 2019, with a more pronounced escalation in 2020. The upward movement suggests ongoing investment in company assets, which may align with growth initiatives or strategic expansion.

Overall, the data indicates the company maintained a robust equity base while managing its debt levels with some fluctuation, culminating in a significant rise in debt in 2020. Concurrently, continued investment in capital assets is evident, possibly reflecting growth or modernization efforts. The combination of higher equity and invested capital alongside increased debt in the latest year could imply a leveraged approach to fund expansion or other financial strategies.

The financial performance from 2015 to 2020 is characterized by a consistent failure to generate positive economic value, as evidenced by negative economic profit and a negative economic spread ratio throughout the entire period. This indicates that the returns on invested capital remained below the company's cost of capital, resulting in continuous economic value destruction.

Economic Profit Trends

Economic profit remained negative for all six years analyzed. The most significant deterioration occurred in 2017, where losses widened to -967.19 million USD. A period of recovery was observed between 2018 and 2019, with the deficit narrowing to -486.19 million USD by September 30, 2019. However, this recovery was reversed in 2020, with economic profit declining again to -736.55 million USD.

Invested Capital Expansion

A consistent upward trajectory in invested capital is observed, growing from 14.34 billion USD in 2015 to 20.88 billion USD in 2020. This represents a substantial increase in the capital base over the six-year window, with the most pronounced growth occurring between 2019 and 2020, where invested capital rose by approximately 3.96 billion USD.

Economic Spread Ratio Analysis

The economic spread ratio remained in negative territory, reflecting the inefficiency of the capital employed relative to its cost. The ratio reached its lowest point in 2017 at -6.18%, coinciding with the peak in economic losses. While the ratio improved to -2.87% in 2019, the combination of increased invested capital and declining economic profit in 2020 led to a further degradation of the spread ratio to -3.53%.

Overall, the data reveals a trend where the expansion of the invested capital base has not been accompanied by a corresponding increase in economic profitability. The volatility in the economic spread ratio suggests periodic fluctuations in operational efficiency or cost of capital, yet the company was unable to achieve a positive spread within the observed timeframe.

An analysis of the financial performance from 2015 to 2020 reveals a consistent inability to generate positive economic profit, indicating that the returns on invested capital remained below the company's cost of capital throughout the entire six-year period.

Economic Profit Trends

Economic profit remained negative for all reported years, exhibiting significant volatility. After a slight improvement in 2016, where losses narrowed to -367.9 million US$, a sharp decline occurred in 2017, reaching a peak deficit of -967.2 million US$. While a recovery was observed in 2019 with losses reducing to -486.2 million US$, the trend reversed in 2020, with economic profit falling again to -736.5 million US$.

Sales Performance

Revenue demonstrated a fluctuating trajectory, starting at 9.89 billion US$ in 2015 and reaching a low of 8.19 billion US$ in 2017. Following this contraction, sales stabilized between 8.86 billion and 8.93 billion US$ from 2018 through 2020. The correlation between the revenue trough in 2017 and the peak economic loss suggests a sensitivity to sales volume in relation to capital costs.

Economic Profit Margin Analysis

The economic profit margin followed the trajectory of the absolute economic profit, remaining negative across the period. The margin deteriorated from -4.87% in 2015 to its lowest point of -11.81% in 2017. A partial recovery occurred by 2019, where the margin improved to -5.45%, before widening again to -8.32% in 2020. This instability indicates a persistent gap between operational earnings and the required return on the capital employed.