Edwards Lifesciences Corp. (NYSE:EW)

The analysis of economic profit between 2017 and 2021 reveals a general upward trajectory in value creation, characterized by a significant contraction in 2020 followed by a robust recovery. Throughout the period, the company consistently maintained a positive economic profit, indicating that net operating profit after taxes (NOPAT) remained above the required return on invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited substantial growth over the five-year period, increasing from 615,066 thousand USD in 2017 to 1,468,252 thousand USD by 2021. A notable decline occurred in 2020, where NOPAT fell to 768,464 thousand USD, but this was followed by a sharp increase in 2021, representing the highest operating performance within the analyzed timeframe.

Invested Capital and Cost of Capital

Invested capital grew steadily from 2017 to 2020, peaking at 3,937,900 thousand USD before experiencing a slight reduction to 3,791,600 thousand USD in 2021. During the same period, the cost of capital remained relatively stable, shifting marginally from 17.87% to 18.34%. The stability of the cost of capital suggests that fluctuations in economic profit were primarily driven by operational performance rather than changes in the cost of funding or risk premiums.

Economic Profit Trends

Economic profit demonstrated significant volatility, rising from 104,818 thousand USD in 2017 to a peak of 374,680 thousand USD in 2019. In 2020, economic profit plummeted to 48,395 thousand USD, a result of the simultaneous decrease in NOPAT and an increase in the capital base. The 2021 fiscal year marked a dramatic recovery, with economic profit surging to 773,016 thousand USD, indicating a substantial increase in the company's ability to generate value in excess of its capital costs.

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 financial trajectory between 2017 and 2021 is characterized by significant volatility in economic value generation, culminating in a substantial peak in the final year of the period. While invested capital showed a general trend of expansion for the majority of the timeframe, the ability to generate economic profit above the cost of capital fluctuated markedly.

Economic Spread Ratio Analysis

The economic spread ratio exhibited a period of steady growth from 2017 to 2019, rising from 3.67% to 10.13%. This indicates an increasing efficiency in generating returns over the cost of invested capital. However, a sharp contraction occurred in 2020, where the ratio dropped to 1.23%, representing the lowest point in the five-year sequence. This downturn was followed by a rapid recovery and expansion in 2021, reaching a period high of 20.39%, which suggests a significant improvement in value creation efficiency.

Economic Profit Trends

Economic profit followed a pattern closely aligned with the spread ratio. Profits increased from 104,818 thousand US$ in 2017 to 374,680 thousand US$ by 2019. A severe decline was noted in 2020, with economic profit falling to 48,395 thousand US$. The subsequent surge in 2021 to 773,016 thousand US$ demonstrates a strong rebound, nearly doubling the previous peak observed in 2019.

Invested Capital Dynamics

Invested capital grew consistently from 2,855,739 thousand US$ in 2017 to a peak of 3,937,900 thousand US$ in 2020. Notably, the most significant decline in economic profit (2020) coincided with the highest level of invested capital, contributing to the compression of the economic spread ratio. In 2021, a slight reduction in invested capital to 3,791,600 thousand US$ occurred simultaneously with the highest recorded economic profit, further amplifying the increase in the economic spread ratio.

The analysis of economic value creation between 2017 and 2021 reveals a period of significant volatility in economic profit despite a consistent upward trajectory in net sales.

Revenue Growth Trends

Net sales demonstrated steady growth throughout the five-year period, increasing from 3,435,300 thousand US$ in 2017 to 5,232,500 thousand US$ by 2021. This represents a consistent expansion of the top-line performance.

Economic Profit Volatility

Economic profit exhibited a non-linear trend. After an initial climb from 104,818 thousand US$ in 2017 to 374,680 thousand US$ in 2019, a sharp contraction occurred in 2020, where profit fell to 48,395 thousand US$. A substantial recovery followed in 2021, with economic profit reaching its highest level in the analyzed period at 773,016 thousand US$.

Economic Profit Margin Fluctuations

The economic profit margin mirrored the volatility of the absolute economic profit. The margin rose from 3.05% in 2017 to 8.62% in 2019, before dropping precipitously to 1.10% in 2020. By the end of 2021, the margin expanded to 14.77%, indicating a significant increase in the efficiency of value creation relative to sales.

The discrepancy between the steady increase in net sales and the volatile nature of the economic profit margin suggests that value creation was heavily impacted by factors other than revenue growth, particularly during the 2020 fiscal year, before achieving a peak in efficiency in 2021.