Air Products & Chemicals Inc. (NYSE:APD)

The financial performance from 2015 to 2020 is characterized by a consistent inability to generate positive economic profit, indicating that the returns on invested capital remained below the weighted average cost of capital throughout the analyzed period.

Net Operating Profit After Taxes (NOPAT)

A general upward trajectory is observed in NOPAT, which grew from 1,418,609 thousand US$ in 2015 to 2,189,491 thousand US$ in 2020. Although a notable contraction occurred in 2017, the subsequent recovery and growth through 2020 demonstrate an improvement in the scale of operational profitability.

Cost of Capital

The cost of capital exhibited relative stability with a gradual increase from 13.35% in 2015 to a peak of 15.04% in 2019, before moderating to 14.12% in 2020. This upward pressure on the required rate of return increased the threshold for achieving positive economic value added.

Invested Capital

Invested capital showed a continuous increase over the six-year period, rising from 14,344,261 thousand US$ in 2015 to 20,884,500 thousand US$ in 2020. A significant acceleration in capital deployment is evident in 2020, where invested capital increased by approximately 3.96 billion US$ compared to the previous year.

Economic Profit Analysis

Economic profit remained negative throughout the entire period, signifying a persistent destruction of shareholder value. The most significant deficits were recorded in 2017 and 2018, with losses exceeding 900 million US$. Despite the growth in NOPAT, the substantial expansion of the invested capital base in 2020 contributed to a widening of the economic profit deficit to 758,539 thousand US$, suggesting that the returns generated from the increased capital investment were insufficient to cover the associated 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 data from 2015 to 2020 indicates a consistent period of value destruction, as economic profit remained negative throughout the entire six-year duration. Despite a steady increase in the capital base, the company failed to generate returns exceeding its cost of capital, resulting in a persistently negative economic spread ratio.

Economic Profit

Economic profit was consistently negative, reflecting a failure to create economic value. The most significant loss occurred in 2017, reaching negative 984.05 million USD. While there was a notable recovery in 2019, where the loss narrowed to negative 505.25 million USD, the trend reversed in 2020 with the loss widening again to negative 758.54 million USD.

Invested Capital

A consistent upward trend is observed in invested capital, which grew from 14.34 billion USD in 2015 to 20.88 billion USD in 2020. This steady expansion of the capital base suggests ongoing investment in assets or operations; however, this growth did not translate into positive economic profit.

Economic Spread Ratio

The economic spread ratio remained in negative territory for the entire period, confirming that the return on invested capital stayed below the weighted average cost of capital. The ratio reached its lowest point in 2017 at negative 6.28%, representing the peak of value erosion. A relative improvement was noted in 2016 and 2019, with the ratio rising to negative 2.52% and negative 2.99%, respectively, before declining again to negative 3.63% by 2020.

The analysis of economic value added metrics from 2015 to 2020 reveals a consistent failure to generate positive economic profit, indicating that returns remained below the cost of capital throughout the entire observed period.

Economic Profit Performance

Economic profit remained negative for all six years, characterized by significant volatility. After a slight improvement in 2016, a substantial decline occurred in 2017, reaching a peak deficit of 984,048 thousand USD. Although a recovery trend was evident through 2019, where losses narrowed to 505,251 thousand USD, the deficit widened again in 2020 to 758,539 thousand USD.

Sales Trajectory

Revenue showed a general downward trend, decreasing from 9,894,900 thousand USD in 2015 to 8,856,300 thousand USD in 2020. A sharp contraction was observed in 2017, with sales falling to 8,187,600 thousand USD, which correlates with the period of highest economic loss. Sales subsequently stabilized between 2018 and 2020, fluctuating within a narrow range around 8.9 billion USD.

Economic Profit Margin Analysis

The economic profit margin remained consistently negative, reflecting a persistent inability to create economic value relative to sales. The margin reached its most critical point in 2017 at -12.02%, representing the lowest efficiency in the period. The best performance was recorded in 2016 with a margin of -4.02%. The period concluded with a margin of -8.56% in 2020, suggesting that the volatility in economic profit was driven more by costs or capital charges than by fluctuations in sales volume.