Fidelity National Information Services Inc. (NYSE:FIS)

The financial performance, as measured by economic profit, demonstrates a consistent decline over the five-year period. Net operating profit after taxes (NOPAT) and invested capital exhibit fluctuating patterns, while the cost of capital generally decreases. However, these movements are overshadowed by the increasingly negative economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT decreased significantly from US$889 million in 2018 to US$578 million in 2019. It continued to decline, reaching US$325 million in 2020, before a modest increase to US$524 million in 2021. A substantial decrease is then observed in 2022, with NOPAT reported as negative US$17,009 million. This final figure represents a dramatic shift and warrants further investigation.

Cost of Capital

The cost of capital began at 12.14% in 2018 and experienced a slight increase to 12.31% in 2019. It then decreased steadily over the subsequent years, reaching 10.60% in 2022. This decreasing trend suggests a potentially lower risk profile or improved financing conditions, although this is not reflected in the economic profit.

Invested Capital

Invested capital increased substantially from US$22,222 million in 2018 to US$75,448 million in 2019. It remained relatively stable between 2019 and 2021, fluctuating around US$75 billion. A significant decrease is observed in 2022, with invested capital falling to US$52,862 million. This reduction could be due to asset sales, write-downs, or changes in operational needs.

Economic Profit

Economic profit was negative throughout the entire period, indicating that the company’s returns are not exceeding its cost of capital. The negative economic profit worsened each year, moving from negative US$1,808 million in 2018 to negative US$22,611 million in 2022. This consistent decline, particularly the sharp deterioration in 2022, suggests a growing disparity between the returns generated and the cost of funding those returns. The magnitude of the loss in 2022 is considerably larger than in previous years.

The combination of decreasing NOPAT and a substantial decrease in invested capital in 2022, alongside a relatively stable cost of capital, resulted in the largest negative economic profit observed during the analyzed period. The trend suggests a weakening ability to generate returns sufficient to cover the cost of invested capital.

Net earnings (loss) attributable to common stockholders

From 2018 through 2021, net earnings displayed a significant downward trend. Beginning at 846 million USD in 2018, earnings decreased sharply to 298 million USD in 2019 and further to 158 million USD in 2020. A partial recovery occurred in 2021, with net earnings increasing to 417 million USD. However, 2022 saw a dramatic reversal, with net earnings recording a substantial loss amounting to -16,720 million USD, indicating a severe deterioration in profitability during that year.

Net operating profit after taxes (NOPAT)

NOPAT followed a pattern similar to net earnings over the same period. Starting at 889 million USD in 2018, NOPAT declined to 578 million USD in 2019 and further to 325 million USD in 2020. An improvement occurred in 2021, with NOPAT rising to 524 million USD. In 2022, NOPAT experienced a significant negative swing, registering a loss of -17,009 million USD, closely mirroring the net earnings loss and highlighting operational challenges impacting the company drastically in that year.

Overall insights

The data reveal a weakening profitability trend from 2018 to 2020, followed by some operational recovery in 2021. The extreme losses recorded in 2022 suggest extraordinary events or impairments that severely affected financial performance. Both net earnings and NOPAT demonstrate a high correlation in their trajectory, underscoring consistent operational and financial difficulties particularly in the final year observed.

Provision for income taxes

The provision for income taxes exhibited a notable fluctuation over the analyzed years. Initially, there was a significant decline from 208 million US dollars in 2018 to 100 million in 2019, followed by a slight decrease to 96 million in 2020. However, from 2020 onwards, the provision increased sharply to 371 million in 2021 and slightly further to 377 million in 2022. This pattern indicates a period of reduced tax obligations or accounting adjustments in the middle years, followed by a substantial rise in tax provisions in the most recent years.

Cash operating taxes

Cash operating taxes demonstrated a variable upward trend with some fluctuations. The amount decreased from 389 million in 2018 to 290 million in 2019, then rebounded to 381 million in 2020. After 2020, there was a significant increase to 508 million in 2021, and this upward trajectory accelerated sharply to 962 million in 2022. This progression suggests increasing cash tax outflows in recent years, which may reflect growing taxable income or changes in tax payment schedules.

Over the observed period, the total reported debt and leases displayed a significant increase from 2018 to 2019, rising from approximately 9.4 billion to 20.8 billion US dollars. This level remained relatively stable through to 2022, fluctuating slightly but staying near the 20.5 billion mark.

The total stockholders’ equity exhibited a sharp growth from 2018 to 2019, more than quadrupling from just over 10.2 billion to nearly 49.4 billion US dollars. However, this equity value began to decline gradually after 2019, decreasing to approximately 47.3 billion in 2021, before falling more substantially to around 27.2 billion by the end of 2022.

Invested capital followed a somewhat similar trend as the debt figures, showing a substantial rise from 22.2 billion in 2018 to a peak of 75.4 billion in 2019. Following that peak, invested capital remained relatively steady around 73.3 to 75.0 billion through 2020 and 2021 but then saw a marked decrease to approximately 52.8 billion in 2022.

Overall, the data suggest a period of significant capital expansion and leverage increase around 2019, followed by a phase of declining equity and invested capital starting in 2021 and continuing through 2022. This pattern may indicate strategic changes in capital structure or operational adjustments during the latter years of the period analyzed.

The period under review demonstrates a consistently negative economic profit, alongside fluctuating invested capital, resulting in a declining economic spread ratio. A clear trend of diminishing financial performance is evident when considering these metrics collectively.

Economic Profit

Economic profit exhibits a negative value throughout the observed timeframe. Initially, the loss was approximately $1.8 billion in 2018. This loss significantly widened to nearly $8.7 billion in 2019 and remained substantial at approximately $8.6 billion in 2020. A slight improvement was noted in 2021, with the loss decreasing to $7.5 billion, but this was followed by a substantial decline in 2022, reaching a loss of $22.6 billion. This indicates a worsening trend in the company’s ability to generate returns exceeding its cost of capital, particularly in the most recent year.

Invested Capital

Invested capital increased dramatically from $22.2 billion in 2018 to $75.4 billion in 2019. It remained relatively stable at approximately $75.0 billion in 2020 and then decreased slightly to $73.3 billion in 2021. A more pronounced decrease occurred in 2022, falling to $52.9 billion. This suggests a period of significant capital deployment followed by a reduction in capital employed, potentially through divestitures or decreased investment.

Economic Spread Ratio

The economic spread ratio, expressed as a percentage, consistently registers negative values, indicating that the company’s return on invested capital is less than its cost of capital. The ratio began at -8.14% in 2018 and deteriorated to -11.55% in 2019 and -11.52% in 2020. A modest improvement to -10.19% was observed in 2021, but the ratio experienced a substantial decline in 2022, reaching -42.77%. This sharp decrease in 2022 aligns with the significant increase in economic loss and the reduction in invested capital, suggesting a substantial erosion in value creation.

The combined effect of increasing economic losses and a declining economic spread ratio points to a concerning trend in the company’s financial performance. While fluctuations in invested capital are present, the overarching narrative is one of diminishing returns and a widening gap between the cost of capital and the returns generated.

The economic profit margin demonstrates a consistently negative trend over the five-year period. Economic profit itself is negative throughout the observed timeframe, indicating the company’s returns are insufficient to cover its cost of capital. The magnitude of the negative economic profit increases substantially over the period, driving a corresponding decline in the economic profit margin.

Economic Profit Margin Trend

The economic profit margin begins at -21.66% in 2018 and exhibits a marked deterioration. It declines to -83.82% in 2019, representing a significant decrease. While the margin improves somewhat in 2020 to -68.48% and again in 2021 to -53.78%, these improvements are relative to the prior year’s substantial decline. The most dramatic decrease occurs in 2022, with the economic profit margin falling to -155.65%.

The increasing negative trend in economic profit margin suggests a widening gap between the company’s operating profits and its cost of capital. This could be attributable to factors such as declining revenue growth relative to capital employed, increasing cost of capital, or a combination of both. The substantial decline in 2022 warrants further investigation to determine the underlying causes and potential mitigating strategies.

Relationship between Economic Profit and Margin

The economic profit margin is directly influenced by the absolute value of economic profit and adjusted revenue. As economic profit becomes more negative while adjusted revenue increases, the economic profit margin correspondingly decreases. The substantial increase in the negative economic profit in 2022, coupled with a relatively smaller increase in adjusted revenue, is the primary driver of the significant decline in the margin during that year.

The consistent negative economic profit margin indicates that the company is destroying economic value for its investors. The accelerating decline in the margin, particularly in the most recent year, suggests that this value destruction is intensifying.