Air Products & Chemicals Inc. (NYSE:APD)

The period between September 30, 2015, and September 30, 2020, demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) fluctuates, it does not consistently exceed the cost of capital applied to the invested capital, resulting in value destruction over the observed timeframe.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,418,609 thousand in 2015 to US$1,657,195 thousand in 2016, representing a notable improvement. However, it subsequently decreased to US$1,274,219 thousand in 2017 before recovering to US$1,476,037 thousand in 2018. A significant increase is then observed in 2019, reaching US$2,040,608 thousand, and further growth to US$2,189,491 thousand in 2020. Despite these increases, NOPAT alone does not indicate value creation.

Cost of Capital

The cost of capital generally increased from 13.25% in 2015 to 14.94% in 2019. A slight decrease to 14.01% is observed in 2020. This upward trend in the cost of capital contributes to the consistent negative economic profit.

Invested Capital

Invested capital steadily increased throughout the period, rising from US$14,344,261 thousand in 2015 to US$20,884,500 thousand in 2020. This growth in invested capital, coupled with the cost of capital, exacerbates the negative economic profit.

Economic Profit

Economic profit remained negative across all years examined. The most substantial negative economic profit occurred in 2017, at US$-967,749 thousand. While the negative economic profit lessened in 2016 compared to 2015 (from US$-482,599 thousand to US$-368,402 thousand), it subsequently worsened. The economic profit in 2020, at US$-737,278 thousand, represents a substantial decrease from the relatively better result in 2019 (US$-486,828 thousand), despite the increase in NOPAT. This suggests that the increase in invested capital outweighed the gains in operating profit.

In summary, the organization consistently failed to generate returns exceeding its cost of capital during the analyzed period. The increasing invested capital and generally rising cost of capital appear to be primary drivers of this outcome, despite fluctuations and overall growth in NOPAT.

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 economic spread ratio exhibited fluctuations over the observed period, consistently remaining negative. This indicates that the company’s return on invested capital was less than its cost of capital throughout the timeframe. The period began with a ratio of -3.36% in 2015 and decreased to -6.18% in 2017, representing the most significant negative spread. A subsequent improvement was noted in 2019, with the ratio reaching -2.88%, though it deteriorated again to -3.53% in 2020.

Economic Spread Ratio Trend

The economic spread ratio demonstrates a generally unfavorable trend. While there was a temporary improvement in 2019, the overall pattern suggests a struggle to generate returns exceeding the cost of capital. The most substantial negative spread occurred in 2017, followed by consistently negative values in subsequent years.

Economic profit remained negative across all years examined, aligning with the negative economic spread ratios. The magnitude of the economic profit loss varied, with the largest losses occurring in 2015 and 2017. Invested capital generally increased throughout the period, rising from US$14,344,261 thousand in 2015 to US$20,884,500 thousand in 2020. This increase in invested capital, coupled with consistently negative economic profit, contributed to the sustained negative economic spread ratio.

Relationship between Invested Capital and Economic Profit

The increasing invested capital, in conjunction with negative economic profit, suggests that the company continued to deploy capital despite not generating sufficient returns to cover its cost. This pattern warrants further investigation to determine the underlying reasons for the persistent shortfall in profitability relative to capital employed.

The fluctuation in the economic spread ratio, particularly the worsening in 2020 after a brief improvement in 2019, suggests potential sensitivity to external factors or internal operational changes. Further analysis would be required to pinpoint the specific drivers behind these changes and assess their implications for future performance.

The economic profit margin exhibited considerable fluctuation between 2015 and 2020. A consistent pattern of negative economic profit is present throughout the period, indicating that the company’s returns are not exceeding its cost of capital.

Economic Profit Margin Trend

The economic profit margin began at -4.88% in 2015 and decreased to -3.87% in 2016, representing a slight improvement. However, a substantial decline followed, with the margin reaching -11.82% in 2017. A partial recovery occurred in 2018, with the margin improving to -10.43%, but this was short-lived. Further deterioration was observed in 2019, falling to -5.46%, before reaching -8.32% in 2020.

The most significant decrease in economic profit margin occurred between 2016 and 2017. This period coincided with a decrease in sales, suggesting a potential correlation between revenue generation and the ability to cover the cost of capital. While sales experienced a moderate increase between 2017 and 2018, the economic profit margin did not improve proportionally, indicating that factors beyond revenue, such as cost structure or capital efficiency, may have been influencing performance.

Relationship to Sales

Sales decreased from 9,894,900 to 8,187,600 between 2015 and 2017, coinciding with the largest drop in economic profit margin. Sales recovered somewhat in subsequent years, remaining relatively stable between 8,856,300 and 9,524,400 from 2018 to 2020. However, the economic profit margin did not return to levels observed in 2015 and 2016, suggesting that sales alone are not the primary driver of economic profit.

The consistent negative economic profit throughout the analyzed period warrants further investigation into the underlying causes. A comprehensive review of the cost of capital, operational efficiency, and asset utilization would be necessary to identify areas for improvement and strategies to generate returns exceeding the cost of capital.