Colgate-Palmolive Co. (NYSE:CL)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited initial growth followed by a consistent decline, while invested capital generally increased throughout the period. The cost of capital remained relatively stable. Consequently, economic profit decreased over the five years.

NOPAT Trend

Net operating profit after taxes began at US$2,711 million in 2018, decreased to US$2,572 million in 2019, and then increased to US$2,814 million in 2020. A subsequent decline was observed, with NOPAT falling to US$2,361 million in 2021 and further decreasing to US$2,048 million in 2022. This indicates a weakening ability to generate profit from core operations over the latter part of the analyzed timeframe.

Cost of Capital Stability

The cost of capital remained consistently around 9.1% to 9.3% throughout the period. In 2018 it was 9.29%, decreasing to 9.14% in 2019, 9.12% in 2020, increasing to 9.19% in 2021, and decreasing again to 9.14% in 2022. This relative stability suggests that the company’s risk profile, as perceived by investors, did not undergo significant changes during these years.

Invested Capital Growth

Invested capital showed an overall increasing trend, rising from US$11,791 million in 2018 to US$14,460 million in 2022. There was a substantial increase between 2018 and 2019 (US$2,068 million), followed by more moderate growth in subsequent years. This suggests continued investment in the business, potentially for expansion or maintaining competitive positioning.

Economic Profit Decline

Economic profit, representing the value created above the cost of capital, decreased consistently from US$1,615 million in 2018 to US$727 million in 2022. This decline is attributable to the combination of decreasing NOPAT and increasing invested capital, despite the stable cost of capital. The diminishing economic profit indicates a reduced capacity to generate returns exceeding the expectations of capital providers.

In summary, while the company continued to invest in its operations, its ability to generate economic profit diminished over the analyzed period. The decreasing NOPAT appears to be the primary driver of this trend.

The analysis of financial data over the five-year period reveals several noteworthy trends concerning profitability metrics.

Net Income Attributable to Colgate-Palmolive Company

This metric experienced a slight decline from 2018 to 2019, decreasing from 2400 million USD to 2367 million USD. In 2020, there was a significant increase to 2695 million USD, indicating a strong performance during that year. However, the subsequent years showed a downward trend, with net income falling to 2166 million USD in 2021 and further to 1785 million USD in 2022. This decline over the last two years suggests challenges affecting profitability.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures followed a somewhat similar pattern. Initially, NOPAT decreased from 2711 million USD in 2018 to 2572 million USD in 2019. It then rose to 2814 million USD in 2020, reaching its peak in the observed period. Afterward, there was a decline to 2361 million USD in 2021, followed by a further decrease to 2048 million USD in 2022. While the drop in NOPAT is less steep compared to net income, the downward trajectory indicates a reduction in operating profitability post-2020.

Overall, the data suggests that both net income and net operating profit after taxes peaked in 2020 but have since faced a decline, with 2022 figures lower than those in 2018. The trends could imply external or internal factors negatively impacting earnings and operating efficiency in the latter years.

The financial data indicates a declining trend in the provision for income taxes over the five-year period. Starting at 906 million US dollars in 2018, there is a consistent decrease each year, reaching 693 million US dollars by the end of 2022. This suggests an overall reduction in the income tax obligations recorded, which could be indicative of changes in profitability, tax planning strategies, or tax rates applicable to the company.

Conversely, cash operating taxes show a more fluctuating pattern. From 887 million US dollars in 2018, the figure increases to a peak of 970 million US dollars in 2020, followed by a decline to 812 million US dollars in 2021. In 2022, cash operating taxes rise again to 892 million US dollars. The variation in cash operating tax payments as compared to the steady decline in provision for income taxes suggests differences in timing, tax payments, or adjustments in deferred tax accounts.

Provision for Income Taxes:

Decreased steadily from 906 million in 2018 to 693 million in 2022, indicating a potential decline in taxable income or changes in tax strategy.

Cash Operating Taxes:

Show volatility with a peak in 2020 (970 million), followed by a decline and a subsequent increase in 2022 (892 million), reflecting variability in actual cash tax payments.

Comparison and Implications:

The contrasting trends between provision and cash operating taxes may suggest the presence of timing differences, deferred tax assets or liabilities adjustments, or shifts in tax planning measures affecting reported versus paid taxes.

An analysis of the financial data over the five-year period reveals several notable trends in the company's debt, equity, and invested capital.

Total Reported Debt & Leases

This metric exhibited an overall increasing trend from 2018 to 2022. The reported debt rose from $6,986 million in 2018 to $9,271 million in 2022. Although there was a slight dip in 2020 and 2021, the general direction is upward, suggesting a growing reliance on debt financing over the period.

Total Shareholders’ Equity

This item showed significant volatility with a generally low base and fluctuating values. Starting at a negative value of -$102 million in 2018, equity improved considerably to reach $743 million in 2020, followed by a decline in the subsequent years, falling to $401 million by the end of 2022. This indicates volatility in the company's net assets and potentially some financial or operational challenges affecting retained earnings or other equity components.

Invested Capital

The invested capital demonstrated a steady increase from $11,791 million in 2018 to $14,460 million in 2022. Although minor fluctuations occurred between 2020 and 2021, the trend reflects continued growth in the capital invested in the company's operations, which could be related to expansions, acquisitions, or reinvestment into company assets.

Overall, the company appears to have increased its financial leverage, as evidenced by rising debt levels coupled with relatively stagnant or decreasing equity values. The growth in invested capital suggests ongoing investment in operations despite the fluctuating equity position.

The economic spread ratio exhibited a consistent decline over the five-year period. While economic profit fluctuated, the invested capital generally increased, contributing to the observed trend in the economic spread ratio.

Economic Spread Ratio

The economic spread ratio decreased from 13.70% in 2018 to 5.03% in 2022. This represents a substantial reduction, indicating a diminishing ability to generate returns exceeding the cost of capital. The most significant decline occurred between 2021 and 2022, with a decrease of 3.26 percentage points.

Economic Profit

Economic profit peaked at US$1,615 million in 2018, then decreased to US$1,305 million in 2019. It experienced a recovery to US$1,542 million in 2020, followed by a decline to US$1,120 million in 2021, and further decreased to US$727 million in 2022. This volatility in economic profit, coupled with the increasing invested capital, directly impacted the economic spread ratio.

Invested Capital

Invested capital demonstrated an overall upward trend, increasing from US$11,791 million in 2018 to US$14,460 million in 2022. The largest increase occurred between 2018 and 2019, with an addition of US$2,068 million. While increases in invested capital can support future growth, the concurrent decline in the economic spread ratio suggests that these investments are not generating proportionate returns.

The combination of decreasing economic profit and increasing invested capital resulted in a consistent erosion of the economic spread ratio. This suggests a weakening of the company’s ability to create value for its investors over the analyzed period.

The economic profit margin exhibited a declining trend over the five-year period. While economic profit fluctuated, the margin consistently decreased, indicating a diminishing ability to generate profit relative to net sales.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at 10.39%. This decreased to 8.32% in 2019, representing a contraction of approximately 2.07 percentage points. A partial recovery was observed in 2020, with the margin increasing to 9.36%. However, this was followed by a further decline to 6.43% in 2021 and a more substantial decrease to 4.05% in 2022.

Net sales demonstrated a consistent upward trend throughout the period, increasing from US$15,544 million in 2018 to US$17,967 million in 2022. Despite this growth in sales, the economic profit margin’s decline suggests that the increase in sales was not sufficient to offset rising costs or declining profitability on a relative basis.

Relationship between Economic Profit and Margin

Economic profit itself decreased from US$1,615 million in 2018 to US$727 million in 2022. The decreasing margin reflects this decline in economic profit occurring alongside increasing net sales. The largest absolute decrease in economic profit occurred between 2021 and 2022, coinciding with the most significant drop in the economic profit margin.

The observed trend warrants further investigation into the underlying factors contributing to the decreasing economic profit margin. Potential areas of inquiry include cost of goods sold, operating expenses, and the cost of capital employed.