Edwards Lifesciences Corp. (NYSE:EW)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) generally increased, though with a notable decline in 2020, before recovering strongly in 2021. The cost of capital exhibited a consistent, albeit gradual, increase throughout the period. Invested capital also showed an overall upward trend, peaking in 2020 before decreasing slightly in 2021. These movements collectively influenced the company’s economic profit.

NOPAT Trend

NOPAT increased from US$615.07 million in 2017 to US$704.25 million in 2018, representing a substantial gain. Further growth was observed in 2019, reaching US$1,050.29 million. A significant decrease occurred in 2020, with NOPAT falling to US$768.46 million. However, 2021 saw a strong recovery, with NOPAT reaching US$1,468.25 million, the highest value in the observed period.

Cost of Capital Trend

The cost of capital experienced a steady increase throughout the period, rising from 17.88% in 2017 to 18.35% in 2021. This incremental rise suggests a potentially increasing risk profile or changes in market conditions affecting the company’s funding costs.

Invested Capital Trend

Invested capital generally increased from US$2,855.74 million in 2017 to US$3,937.90 million in 2020. A slight decrease was noted in 2021, with invested capital falling to US$3,791.60 million. This suggests potential capital reallocation or divestitures towards the end of the period.

Economic Profit Trend

Economic profit mirrored the fluctuations in NOPAT. It increased from US$104.36 million in 2017 to US$174.44 million in 2018, and further to US$374.07 million in 2019. A substantial decline was observed in 2020, with economic profit falling to US$47.75 million. The most significant increase occurred in 2021, with economic profit reaching US$772.39 million, indicating a substantial creation of shareholder value in that year.

The interplay between NOPAT, cost of capital, and invested capital resulted in varying levels of economic profit. The strong performance in 2021, despite a rising cost of capital, suggests improved operational efficiency or a favorable shift in the company’s business mix. The decline in 2020 warrants further investigation to understand the underlying causes and their potential impact on future performance.

The financial data indicates variations and notable trends in profitability measures over the five-year period.

Net Income

Net income displayed an overall upward trend from 2017 through 2021. Starting at approximately 583.6 million US dollars in 2017, it increased to 722.2 million in 2018, followed by a significant rise to nearly 1.05 billion in 2019. Although there was a decline in 2020 to 823.4 million, the figure rebounded strongly in 2021, reaching a high of about 1.5 billion US dollars. This pattern suggests a robust profitability growth trajectory with a temporary setback in 2020.

Net Operating Profit After Taxes (NOPAT)

NOPAT also showed a general upward pattern in line with net income, beginning at approximately 615.1 million US dollars in 2017 and increasing to 704.3 million in 2018. It then rose sharply to about 1.05 billion in 2019 before declining to 768.5 million in 2020. Similar to net income, NOPAT recovered in 2021, reaching approximately 1.47 billion US dollars. The fluctuations in NOPAT largely mirror those in net income, indicating consistent operational profitability trends adjusted for taxes.

In summary, both net income and NOPAT experienced significant growth over the period, with a noticeable dip in 2020 likely influenced by external factors affecting profitability that year. The strong recovery in 2021 highlights resilience and an improved operating performance post-2020.

An analysis of the financial data over the five-year period reveals distinct trends in both income tax provision and cash operating taxes.

Income Tax Provision

The income tax provision shows significant fluctuation during the period. Initially, it starts at a relatively high value in 2017, then declines sharply in 2018. This is followed by an increase in 2019, a slight decrease in 2020, and a considerable rise again in 2021. Overall, the income tax provision does not establish a consistent upward or downward trend but rather exhibits volatility with a strong rebound in the final year observed.

Cash Operating Taxes

Cash operating taxes depict a generally increasing trend throughout the period. Starting from a moderate level in 2017, there is a considerable drop in 2018. Following this, a continuous rise is observed through 2019, 2020, and a significant increase in 2021. This pattern indicates growing cash tax outflows, especially pronounced in the latter years, suggesting either higher taxable income or changes in tax payment practices.

Comparative Observations

When comparing the two metrics, cash operating taxes remain consistently below income tax provisions in most years except for 2018 when cash operating taxes are notably higher. This divergence indicates potential differences in timing or recognition between the tax expense reported under accounting standards and the actual cash taxes paid. The growing gap in recent years could imply deferred tax liabilities or other tax-related timing differences.

Total reported debt & leases

The total reported debt and leases demonstrate a significant decrease from 1,103,939 thousand US dollars in 2017 to 676,404 thousand US dollars in 2018. After this sharp reduction, the values remain relatively stable with slight fluctuations, recorded as 678,800 thousand in 2019, 694,900 thousand in 2020, and a minor decrease to 690,300 thousand in 2021. This indicates a strategic reduction in debt levels followed by maintenance of a consistent debt position over the subsequent years.

Stockholders’ equity

Stockholders' equity exhibits a consistent upward trend throughout the observed period. Beginning at 2,956,200 thousand US dollars in 2017, equity grows moderately to 3,140,400 thousand in 2018. Thereafter, a more pronounced increase is observed with figures reaching 4,148,300 thousand in 2019, 4,574,300 thousand in 2020, and a significant rise to 5,835,900 thousand in 2021. This steady increase suggests ongoing equity strengthening, potential reinvestment of earnings, or capital raising activities enhancing the financial base of the entity.

Invested capital

Invested capital shows an initial slight increase from 2,855,739 thousand US dollars in 2017 to 2,904,204 thousand in 2018, followed by a notable increase to 3,697,400 thousand in 2019 and further to 3,937,900 thousand in 2020. However, a decrease is evident in 2021, with invested capital reducing to 3,791,600 thousand. This pattern indicates growing investment in assets or operations until 2020, with a partial reduction or divestment in 2021, reflecting a possible shift in investment strategy or asset base optimization.

The economic spread ratio demonstrates significant fluctuation over the observed five-year period. Initial values indicate a positive trend, followed by a substantial decline, and then a marked recovery. Economic profit also exhibits considerable variability, while invested capital generally increases before experiencing a slight decrease.

Economic Spread Ratio

The economic spread ratio began at 3.65% in 2017 and increased steadily to reach a peak of 10.12% in 2019. This suggests improving profitability relative to the capital employed during those years. However, a dramatic decrease occurred in 2020, with the ratio falling to 1.21%. This indicates a significant reduction in the return generated per unit of invested capital. A strong rebound is then observed in 2021, with the ratio rising sharply to 20.37%, exceeding all prior values. This substantial increase suggests a considerable improvement in the efficiency of capital utilization and profitability in the most recent year.

Economic Profit

Economic profit mirrored the trend of the economic spread ratio, increasing from US$104,358 thousand in 2017 to US$374,070 thousand in 2019. The sharp decline in 2020 saw economic profit fall to US$47,745 thousand. The subsequent increase in 2021 resulted in economic profit reaching US$772,388 thousand, representing the highest value within the observed period.

Invested Capital

Invested capital generally increased from US$2,855,739 thousand in 2017 to US$3,937,900 thousand in 2020. A slight decrease is then noted in 2021, with invested capital falling to US$3,791,600 thousand. This suggests a period of capital expansion followed by a potential recalibration or optimization of the capital base.

The interplay between economic profit, invested capital, and the economic spread ratio indicates a period of strong performance through 2019, a challenging year in 2020, and a substantial recovery in 2021. The significant increase in the economic spread ratio in 2021, despite a slight decrease in invested capital, suggests improved operational efficiency and profitability.

The economic profit margin exhibited significant fluctuation between 2017 and 2021. Initial increases were followed by a substantial decline and subsequent recovery, culminating in a peak in the most recent year observed.

Economic Profit Margin Trend

In 2017, the economic profit margin stood at 3.04%. This value increased to 4.69% in 2018, and continued its upward trajectory, reaching 8.60% in 2019. A considerable decrease was then noted in 2020, with the margin falling to 1.09%. However, a strong recovery occurred in 2021, with the economic profit margin rising sharply to 14.76%.

The economic profit itself mirrored this trend. While economic profit increased from US$104,358 thousand in 2017 to US$374,070 thousand in 2019, it experienced a significant drop to US$47,745 thousand in 2020 before rebounding to US$772,388 thousand in 2021.

Relationship between Net Sales and Economic Profit Margin

Net sales generally increased over the period, moving from US$3,435,300 thousand in 2017 to US$5,232,500 thousand in 2021. The largest increase in net sales occurred between 2020 and 2021. The economic profit margin’s peak in 2021 coincided with the highest level of net sales, suggesting a potential correlation between revenue growth and profitability as measured by this metric.

The substantial decline in the economic profit margin in 2020, despite an increase in net sales, warrants further investigation. This suggests that while revenue increased, the cost of capital or other factors impacting economic profit grew at a faster rate, reducing the margin. The subsequent strong recovery in 2021 indicates a successful reversal of these factors.