Builders FirstSource Inc. (NYSE:BLDR)

The financial performance, as measured by economic profit, exhibited a notable shift over the observed period. Initially, the company experienced negative economic profit, which gradually worsened before ultimately turning positive. This analysis details the trends in net operating profit after taxes, cost of capital, invested capital, and the resulting economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a consistent upward trend throughout the period. Starting at US$352.49 million in 2018, it increased to US$374.66 million in 2019 and US$451.16 million in 2020. A substantial increase was observed in 2021, reaching US$1,833.93 million, followed by a further rise to US$2,864.59 million in 2022. This indicates improving operational profitability.

Cost of Capital

The cost of capital increased from 16.26% in 2018 to 21.03% in 2019 and peaked at 25.08% in 2020. It then decreased slightly to 24.12% in 2021 and remained relatively stable at 24.21% in 2022. The initial increase suggests a rising cost of funding, potentially due to market conditions or changes in the company’s risk profile.

Invested Capital

Invested capital generally increased over the period. From US$2,393.54 million in 2018, it rose to US$2,419.82 million in 2019 and US$3,091.94 million in 2020. A significant jump occurred in 2021, reaching US$8,507.61 million, and continued to US$8,565.90 million in 2022. This expansion in invested capital likely reflects growth initiatives and strategic investments.

Economic Profit

Economic profit was negative from 2018 through 2021. It began at a loss of US$36.63 million in 2018, worsening to a loss of US$134.29 million in 2019 and US$324.30 million in 2020. The loss lessened to US$217.91 million in 2021. However, a substantial turnaround occurred in 2022, with economic profit becoming positive at US$790.84 million. This positive shift indicates that the company generated returns exceeding its cost of capital in the most recent year. The improvement in economic profit is attributable to the substantial increase in NOPAT, which ultimately outweighed the cost of capital applied to the invested capital base.

In summary, while the company initially struggled to generate economic profit, the significant growth in NOPAT, coupled with a stabilization in the cost of capital, resulted in a positive economic profit in 2022. This suggests improved value creation for investors.

Net Income

Net income showed a positive and significant upward trend over the five-year period. Starting at 205,191 thousand US dollars in 2018, the figure increased moderately to 221,809 thousand in 2019 and then experienced a more substantial rise to 313,537 thousand in 2020. A pronounced acceleration occurred in 2021, with net income exceeding 1.7 million thousand US dollars, before reaching nearly 2.75 million thousand US dollars in 2022. This trend indicates strong growth in profitability, particularly in the final two years.

Net Operating Profit After Taxes (NOPAT)

NOPAT also demonstrated steady growth throughout the analyzed period. It began at 352,490 thousand US dollars in 2018 and increased incrementally to 374,658 thousand in 2019, followed by a more notable rise to 451,161 thousand in 2020. Similar to net income, a substantial surge was observed in 2021, with NOPAT exceeding 1.8 million thousand US dollars, and it continued to rise in 2022 to nearly 2.86 million thousand US dollars. This suggests improved operational efficiency and profitability after tax considerations.

Overall Trends and Insights

The financial data indicates a consistent and strong upward trajectory in key profitability metrics over the five-year period. Both net income and NOPAT reflected modest growth in the initial three years, followed by a dramatic increase in the latter two years. This pattern suggests either enhanced operational performance, favorable market conditions, or both, leading to a significant expansion in the company's earnings and operational profit after taxes. The parallel rise in both net income and NOPAT underscores an improvement not only in bottom-line profitability but also in the company’s operational effectiveness, which could be attributed to strategic initiatives or cost management improvements.

The financial data reveals a significant upward trend in both income tax expense and cash operating taxes over the five-year period ending December 31, 2022.

Income Tax Expense

Income tax expense displayed a steady increase from 2018 to 2020, rising from approximately $55.6 million to about $94.6 million. A substantial escalation is observed in 2021, where the expense surged to over $526 million, almost a sixfold increase compared to the prior year. This growth continued into 2022 with the expense reaching approximately $822.5 million, indicating a strong upward trajectory and possibly reflecting higher taxable income or changes in tax rates or provisions.

Cash Operating Taxes

Cash operating taxes similarly showed growth over the period. Starting from about $28.8 million in 2018, the figure steadily rose to approximately $110.2 million in 2020. A marked increase occurred in 2021, with cash operating taxes nearing $594.5 million—a more than fivefold increase relative to 2020. In 2022, this figure further increased to about $962.5 million, closely aligning with the trend observed in income tax expense.

Overall, both income tax expense and cash operating taxes have experienced accelerated growth starting in 2021. This pattern may reflect changes in the company's profitability, tax policy adjustments, or other operational factors leading to higher tax liabilities. The sharp rise suggests increased taxable earnings and/or shifts in tax-related strategies or regulations impacting cash tax payments.

The analysis of the financial data over the five-year period reveals several notable trends in the company's financial structure and capital management.

Total reported debt & leases

The total reported debt and leases demonstrated fluctuations across the years. A decrease is observed from 1,834,584 thousand USD in 2018 to 1,589,874 thousand USD in 2019, followed by an increase to 1,905,104 thousand USD in 2020. A significant rise is evident in 2021, with the figure reaching 3,401,751 thousand USD, and a slight increase to 3,489,418 thousand USD in 2022. This pattern suggests a substantial increase in debt and leasing obligations, particularly in the latest two years.

Stockholders’ equity

Stockholders’ equity showed a consistent upward trend from 596,338 thousand USD in 2018 to 1,152,783 thousand USD in 2020. In 2021, there is a marked surge to 4,802,481 thousand USD, which continues growing modestly to 4,962,566 thousand USD in 2022. This sharp increase in equity in 2021 and 2022 indicates a significant strengthening of the company’s capital base during this period.

Invested capital

Invested capital figures reveal a gradual rise from 2,393,541 thousand USD in 2018 to 3,091,935 thousand USD in 2020. A dramatic escalation occurred in 2021, reaching 8,507,614 thousand USD, with a marginal increase to 8,565,898 thousand USD in 2022. The pattern mirrors the equity and debt trends, suggesting major investments or acquisitions contributing to the surge in invested capital during these years.

Overall, the data indicates that while the company maintained relatively stable levels of debt and equity in the earlier years, a pronounced increase occurred starting in 2021. This shift points to strategic financial decisions involving increased leverage and capital infusion, reflecting potential growth initiatives or restructuring efforts. The concurrent rise in invested capital underscores a period of expansion or significant asset accumulation.

The economic spread ratio exhibited significant fluctuations between 2018 and 2022. Initially negative, the ratio demonstrated a substantial decline before recovering to a positive value in the most recent year. This movement correlates with changes in economic profit and invested capital.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -1.53%. This value deteriorated considerably to -5.55% in 2019, and further to -10.49% in 2020, indicating a widening gap between the cost of capital and returns generated from invested capital. A partial recovery was observed in 2021, with the ratio improving to -2.56%. However, the most significant change occurred in 2022, where the ratio rose sharply to 9.23%, signifying a substantial improvement in value creation.

The economic spread ratio’s movement is closely tied to the evolution of economic profit. The negative ratios from 2018 through 2021 reflect periods where economic profit was negative, meaning the company’s returns were insufficient to cover its cost of capital. The positive ratio in 2022 directly corresponds with the positive economic profit reported for that year.

Invested Capital and Ratio Relationship

Invested capital increased steadily from 2018 to 2020, then experienced a substantial jump in 2021 and a more moderate increase in 2022. While invested capital generally increased, the economic spread ratio did not follow a consistent pattern. The significant increase in invested capital in 2021 did not immediately translate into a higher economic spread ratio, suggesting that the efficiency of capital deployment was a key factor. The substantial improvement in the ratio in 2022 indicates that the increased economic profit outweighed the higher invested capital base.

The substantial shift from negative to positive economic spread in 2022 is a noteworthy development. Further investigation into the drivers of this change, such as revenue growth, cost management, or changes in the cost of capital, would be beneficial to understand the sustainability of this improved performance.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin demonstrated a substantial improvement culminating in a positive value in the most recent year analyzed.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -0.47%. This indicates that the company’s economic profit was 0.47% of net sales below the cost of capital. The margin deteriorated considerably in 2019, reaching -1.84%, and continued to decline in 2020 to -3.79%. This suggests a widening gap between returns generated and the cost of capital during these periods.

A partial recovery was observed in 2021, with the economic profit margin improving to -1.10%. However, the most significant shift occurred in 2022, where the margin turned positive, reaching 3.48%. This represents a substantial increase in economic profitability, indicating that the company generated returns exceeding its cost of capital by 3.48% of net sales.

The movement in economic profit margin closely mirrors the trend in economic profit. The negative economic profit values from 2018 to 2021 correspond with the negative margins, while the positive economic profit in 2022 aligns with the positive margin. The magnitude of the change in the economic profit margin from 2021 to 2022 is particularly noteworthy, suggesting a fundamental shift in the company’s profitability relative to its capital costs.

Net Sales Correlation

Net sales increased significantly from 2020 to 2022, rising from US$8,558,874 thousand to US$22,726,418 thousand. While increased sales generally contribute to improved profitability, the economic profit margin remained negative until 2022. This suggests that factors beyond revenue growth, such as cost management or capital efficiency, played a crucial role in the turnaround observed in the latest year.

The substantial improvement in the economic profit margin in 2022 warrants further investigation to understand the underlying drivers. Potential areas of focus include changes in operational efficiency, capital structure, or the competitive landscape.