Boston Scientific Corp. (NYSE:BSX)

The analysis covers the annual financial performance with a focus on net operating profit after taxes (NOPAT), cost of capital, invested capital, and economic profit over a five-year period.

Net Operating Profit After Taxes (NOPAT)

The NOPAT shows significant volatility during the period. It begins at 1711 million USD in 2018, then sharply declines to 829 million USD in 2019, followed by a further steep decrease to 153 million USD in 2020. Subsequently, there is a recovery phase as NOPAT increases to 1270 million USD in 2021 but slightly decreases again to 1099 million USD in 2022. This pattern suggests an initial disruption or operational challenge followed by a partial rebound, although the profit level in 2022 remains below the 2018 peak.

Cost of Capital

The cost of capital remains relatively stable over the five years, fluctuating in a narrow band between 11.16% and 11.83%. This indicates a consistent required return rate on invested capital with no significant swings, which implies stable market or risk perceptions concerning the company’s capital structure or external financial conditions.

Invested Capital

Invested capital shows a steady upward trend throughout the timeline. It increases from 16,047 million USD in 2018 to 22,868 million USD in 2022, marking an approximate 42.5% growth. This steady increase suggests ongoing investment into company assets or operations, possibly indicating expansion or reinvestment strategies.

Economic Profit

The economic profit remains negative throughout the period, signifying that the net operating profit after taxes has not been sufficient to cover the cost of invested capital. Despite fluctuations, economic loss is evident – starting from -188 million USD in 2018 and worsening significantly to -2196 million USD in 2020. Although there is some improvement in 2021 (-1244 million USD), the economic profit deteriorates again in 2022 (-1569 million USD). This persistent negative economic profit indicates that the company has been creating value below its capital costs, flagging concerns about long-term value creation efficiency during these years.

Net Income (Loss)

The net income demonstrates significant volatility over the analyzed periods. It increased markedly from US$1,671 million in 2018 to a peak of US$4,700 million in 2019. However, the year 2020 saw a sharp reversal, with net income turning into a loss of US$82 million. Following this dip, net income recovered to US$1,041 million in 2021 but declined again to US$698 million in 2022. Overall, the trend indicates substantial fluctuations, with the highest profitability recorded in 2019 and a noticeable setback in 2020, followed by a partial recovery and a subsequent decline.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures display a different pattern compared to net income. Beginning at US$1,711 million in 2018, NOPAT fell steadily to US$829 million in 2019 and then to a low of US$153 million in 2020. However, it experienced a strong recovery in the subsequent two years, rising to US$1,270 million in 2021 and slightly decreasing to US$1,099 million in 2022. This implies that while operational profitability was significantly impacted during 2019 and 2020, there was a notable operational improvement in 2021 and 2022, albeit not reaching the levels seen in 2018.

Comparative Insights

The considerable divergence between net income and NOPAT in 2019, where net income peaked but NOPAT decreased, may suggest the influence of non-operating factors such as gains, losses, or tax effects that boosted net income independently from operational performance. The loss in net income in 2020 contrasted with a very low but positive NOPAT indicates operational struggles compounded by additional factors impacting overall profitability negatively. The recovery trend in both metrics in 2021 highlights an improvement phase, although 2022 figures show some erosion in profitability relative to 2021. The continued volatility points to potential underlying operational and external challenges affecting the company’s financial outcomes across the five-year period.

Income Tax Expense (Benefit)

The income tax expense exhibited significant fluctuations over the five-year period. In 2018 and 2019, the company recorded substantial tax benefits of -$249 million and -$4,013 million, respectively. However, the trend reversed in 2020, with a slight positive tax expense of $2 million, followed by a gradual increase to $36 million in 2021 and $443 million in 2022. This shift from large tax benefits to increasing tax expenses suggests a considerable change in tax-related factors affecting the company, possibly reflecting changes in profitability, tax regulations, or deferred tax assets and liabilities.

Cash Operating Taxes

Cash operating taxes showed a consistent upward trend throughout the period analyzed. Starting with a negative value of -$33 million in 2018, cash taxes rose to $377 million in 2019, before experiencing a slight decrease to $165 million in 2020. From 2020 onwards, cash taxes increased steadily to $252 million in 2021 and further to $552 million in 2022. This progression indicates growing cash tax outflows, which may correlate with increasing taxable income, changes in tax strategies, or adjustments in tax payment timings.

Total reported debt & leases

The total reported debt and leases experienced a significant increase from 7,364 million USD in 2018 to 10,351 million USD in 2019. Following this peak, the figure showed a gradual decline over the next three years, decreasing to 9,614 million USD in 2020, 9,525 million USD in 2021, and further to 9,343 million USD by the end of 2022. This pattern indicates a notable rise in leverage in 2019 followed by a steady reduction in debt levels thereafter.

Stockholders’ equity

Stockholders’ equity demonstrated a consistent and substantial upward trend throughout the period. Starting at 8,726 million USD in 2018, equity rose sharply to 13,877 million USD in 2019, and continued to grow annually, reaching 15,326 million USD in 2020, 16,622 million USD in 2021, and 17,573 million USD in 2022. This steady increase reflects a strengthening equity base over the five-year span.

Invested capital

Invested capital showed a pattern of continuous growth, rising from 16,047 million USD in 2018 to 20,389 million USD in 2019. Growth continued but at a slower pace in subsequent years, reaching 21,053 million USD in 2020, 22,038 million USD in 2021, and 22,868 million USD in 2022. The data suggests a deliberate increase in capital investment over time, with the most notable expansion occurring between 2018 and 2019.

Economic Profit

The economic profit demonstrates a consistently negative trend throughout the analyzed periods. Starting at -188 million US dollars in 2018, the negative economic profit sharply increased in magnitude, reaching its peak deficit of -2,196 million US dollars in 2020. Although the loss decreased in 2021 to -1,244 million US dollars, it again expanded to -1,569 million US dollars in 2022. This pattern indicates ongoing challenges in generating value beyond the cost of capital.

Invested Capital

Invested capital shows a steady and continuous increase over the period examined. From 16,047 million US dollars in 2018, the invested capital rose each year, reaching 22,868 million US dollars in 2022. This upward trajectory signifies sustained investment in the company's operations and assets over the five-year span.

Economic Spread Ratio

The economic spread ratio remains negative during all periods, reflecting returns below the cost of capital. Beginning at -1.17% in 2018, the ratio deteriorated significantly, hitting a low of -10.43% in 2020. Despite some improvement in 2021 to -5.65%, the ratio worsened again to -6.86% in 2022. The fluctuations suggest volatility in the efficiency of capital usage, with persistent value destruction indicated by negative spreads.

Overall Analysis

Across the five-year timeframe, the company exhibits increasing invested capital coinciding with sustained negative economic profit and economic spread ratios. This combination highlights a scenario where increased investment has not translated into adequate returns to cover the cost of capital. While there was some relief in economic profit and spread ratios in the early 2021 period, the downward trend resumed in the following year, underlining ongoing operational or strategic challenges. The negative economic spread ratios signal that the company consistently destroys shareholder value, suggesting a need for improved capital allocation or profitability enhancement measures.

Adjusted Net Sales

The adjusted net sales demonstrate a general upward trend over the five-year period. Starting at 9,823 million US$ in 2018, sales increased to 10,762 million US$ in 2019. Although there was a slight decline to 9,908 million US$ in 2020, sales rebounded in 2021, reaching 11,977 million US$, and continued to grow, attaining 12,707 million US$ in 2022. This indicates resilience and recovery in sales after the 2020 dip.

Economic Profit

The economic profit shows consistent negative values throughout the period, indicating that the company has incurred economic losses each year. The largest loss occurred in 2020, with an economic profit of -2,196 million US$. Although there was some recovery in 2021 to -1,244 million US$, the losses increased again in 2022 to -1,569 million US$. Overall, this suggests ongoing challenges in generating economic value despite sales growth.

Economic Profit Margin

The economic profit margin aligns with the economic profit trend, remaining negative across all years. It started at -1.91% in 2018, worsened considerably to -13.68% in 2019, and further deteriorated to -22.16% in 2020. After improving to -10.39% in 2021, the margin declined again to -12.35% in 2022. This pattern points to persistent inefficiencies or cost pressures that have prevented the company from achieving positive economic returns.

Summary Insights

Over the period analyzed, the company experienced growth in adjusted net sales, recovering strongly after a 2020 dip. However, this revenue growth did not translate into economic profitability, as evidenced by continuous economic losses and negative economic profit margins. The fluctuations in economic profit and margin suggest volatility in cost management or capital efficiency, which led to sustained negative economic returns despite increased sales. The improvement in 2021 was temporary, with losses re-intensifying in 2022. These trends highlight the need for enhanced focus on operational efficiency and capital allocation to convert sales growth into economic profit.