Air Products & Chemicals Inc. (NYSE:APD)

The financial performance over the six-year period from 2015 to 2020 is characterized by a sustained failure to generate positive economic profit, despite a general upward trajectory in net operating profit after taxes. While operational earnings grew, they remained insufficient to cover the cost of the capital employed in the business, resulting in consistent economic value destruction.

Net Operating Profit After Taxes (NOPAT)

A general growth trend is observed in NOPAT, which increased from 1,418,609 thousand US$ in 2015 to 2,189,491 thousand US$ in 2020. This growth was non-linear, with a notable contraction in 2017 where profit fell to 1,274,219 thousand US$, followed by a recovery and a significant surge between 2018 and 2020.

Invested Capital Expansion

Invested capital grew steadily throughout the period, rising from 14,344,261 thousand US$ in 2015 to 20,884,500 thousand US$ in 2020. A substantial acceleration in capital investment occurred between 2019 and 2020, where invested capital increased by approximately 3.96 billion US$, indicating significant asset expansion or acquisition activity.

Cost of Capital Dynamics

The cost of capital remained relatively stable, fluctuating within a narrow band between 13.26% and 14.94%. A gradual increase was observed from 2015 through 2019, peaking at 14.94% before moderating slightly to 14.02% in 2020.

Economic Profit Analysis

Economic profit remained negative for every year analyzed, indicating that the return on invested capital did not exceed the weighted average cost of capital. The most significant deficit occurred in 2017, reaching negative 968,222 thousand US$. Despite the increase in NOPAT in 2020, the simultaneous sharp increase in invested capital led to a widening of the economic loss from negative 487,362 thousand US$ in 2019 to negative 737,895 thousand US$ in 2020.

In summary, the expansion of the capital base has outpaced the growth in operating profits. The inability to translate increased NOPAT into positive economic profit suggests that the additional capital invested during this period has not yet yielded returns that exceed the company's 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 indicates a consistent inability to generate positive economic value, as evidenced by negative economic profit and a negative economic spread ratio throughout the period. This suggests that the return on invested capital remained below the required cost of capital for six consecutive years.

Economic Profit Analysis

Economic profit remained negative throughout the observed period, exhibiting significant volatility. An initial improvement was noted in 2016, with losses narrowing to -368,825 thousand USD, before a sharp decline in 2017 to -968,222 thousand USD. Although a recovery trend emerged in 2019, reaching -487,362 thousand USD, the figure deteriorated again in 2020 to -737,895 thousand USD.

Invested Capital Trends

A consistent upward trajectory in invested capital is observed, growing from 14,344,261 thousand USD in 2015 to 20,884,500 thousand USD in 2020. The most substantial increase occurred between 2019 and 2020, indicating a significant expansion of the capital base during the final year of the period.

Economic Spread Ratio Interpretation

The economic spread ratio remained negative, reflecting the deficit between the internal rate of return and the cost of capital. The ratio reached its most critical low in 2017 at -6.18%, marking the period of lowest economic efficiency. The most favorable result occurred in 2019 at -2.88%, though this improvement was not sustained, as the ratio widened to -3.53% by September 30, 2020.

Between fiscal years 2015 and 2020, the company consistently recorded negative economic profit, indicating that the entity did not generate returns in excess of its cost of capital throughout the observed period.

Economic Profit Trends

Absolute economic profit exhibited significant volatility, starting at -482,998 thousand US dollars in 2015 and reaching its lowest point in 2017 at -968,222 thousand US dollars. A notable recovery occurred in 2019, with the loss narrowing to -487,362 thousand US dollars, before deteriorating again in 2020 to -737,895 thousand US dollars.

Revenue Performance

Sales followed a general downward trajectory, decreasing from 9,894,900 thousand US dollars in 2015 to 8,856,300 thousand US dollars by 2020. A significant contraction was observed in 2017, when revenue dipped to 8,187,600 thousand US dollars, followed by a period of relative stability between 8.8 and 8.9 billion US dollars from 2018 through 2020.

Economic Profit Margin Analysis

The economic profit margin remained negative across the entire six-year window, signifying persistent value destruction. The margin peaked in negativity in 2017 at -11.83%, coinciding with the period of lowest sales and highest economic loss. Despite intermittent improvements, such as the -3.87% margin in 2016 and -5.46% in 2019, the margin ended the period at -8.33% in 2020, illustrating a failure to achieve a positive return on capital relative to sales.