General Mills Inc. (NYSE:GIS)

The analysis of economic profit over the six-year period reveals a consistent failure to generate value above the cost of capital. Despite fluctuations in operating performance, the organization experienced negative economic profit in every fiscal year from 2014 to 2019, indicating that the net operating profit after taxes (NOPAT) was insufficient to cover the capital charges associated with the invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited volatility throughout the period, starting at $2,219.3 million in 2014 and falling to a low of $1,616.8 million in 2015. A recovery trend followed, with profits rising to $2,079.2 million in 2017, a slight dip in 2018, and peaking at $2,274.3 million in 2019. While operating profitability improved toward the end of the period, the gains were inadequate to shift the overall economic profit into positive territory.

Invested Capital and Cost of Capital

Invested capital remained relatively stable between $18.4 billion and $19.4 billion from 2014 through 2017. A substantial increase was observed in 2018, where invested capital jumped to $27.6 billion, remaining at a similar level in 2019. During this time, the cost of capital fluctuated between a high of 12.67% in 2016 and a low of 10.16% in 2018.

Economic Profit Trends

Economic profit remained negative for all six years, signaling continuous value destruction. The most significant deficit occurred in 2018, with an economic loss of $885.7 million, which correlates with the sharp increase in invested capital. This suggests that the expansion of the capital base in 2018 did not yield a proportional increase in NOPAT, thereby widening the gap between actual returns and the required cost of capital. Although the loss decreased to $714.3 million in 2019, the persistence of negative economic profit underscores a systemic inability to exceed the hurdle rate of the invested capital.

The financial data shows the annual performance of the company over a six-year period from 2014 to 2019. Two key metrics are presented: net earnings attributable to the company and net operating profit after taxes (NOPAT).

Net Earnings Attributable to the Company

The net earnings exhibit fluctuations throughout the period. Starting from $1,824,400 thousand in 2014, there is a notable decline to $1,221,300 thousand in 2015. This is followed by a recovery phase where net earnings increase to $1,697,400 thousand in 2016 but then slightly dip to $1,657,500 thousand in 2017. The peak is observed in 2018 at $2,131,000 thousand, representing the highest net earnings in this timeframe. However, the following year, 2019, shows a decline to $1,752,700 thousand, reflecting a decrease of approximately 17.8% from the previous year’s peak.

Net Operating Profit After Taxes (NOPAT)

NOPAT also shows variability but with a generally increasing trend. It begins at $2,219,325 thousand in 2014 and declines in 2015 to $1,616,844 thousand, mirroring the net earnings pattern. Thereafter, NOPAT steadily recovers and increases, reaching $2,029,941 thousand in 2016 and continuing its ascent with minor fluctuation to $2,079,159 thousand in 2017 and $1,920,512 thousand in 2018. The highest value is recorded in 2019 at $2,274,308 thousand, representing a strong recovery and the highest operational efficiency in terms of post-tax profits over the period.

Overall, both net earnings and NOPAT show an initial decline from 2014 to 2015, likely indicating a challenging year or adverse conditions. Despite this, the company demonstrates resilience with a recovery phase from 2016 onward. Net earnings reach their peak in 2018 but experience a downturn in 2019. Conversely, NOPAT recovers more robustly, peaking in 2019 and displaying stronger operational profitability relative to net earnings. This divergence in the final year may suggest changes in non-operating items, tax impacts, or other factors affecting net earnings differently than operating profit.

The financial data reveals a fluctuating trend in the income taxes and cash operating taxes over the six-year period.

Income Taxes

Income taxes decreased significantly from 883,300 thousand US dollars in May 2014 to 586,800 thousand US dollars in May 2015, representing a notable reduction.

Subsequently, there was an increase to 755,200 thousand US dollars in May 2016, followed by a decline to 655,200 thousand US dollars in May 2017.

In May 2018, income taxes declined sharply to 57,300 thousand US dollars, marking the lowest point in the period analyzed, before rising to 367,800 thousand US dollars in May 2019.

Cash Operating Taxes

Cash operating taxes exhibited a more stable but variable trend, starting at 821,360 thousand US dollars in May 2014 and decreasing to 676,323 thousand US dollars in May 2015.

There was a slight increase to 745,707 thousand US dollars in May 2016, followed by a decrease to 579,670 thousand US dollars in May 2017.

The value rose again to 674,791 thousand US dollars in May 2018 before declining sharply to 383,900 thousand US dollars in May 2019.

Overall, both income taxes and cash operating taxes show substantial volatility over the years. Income taxes show a steep decline around 2018, while cash operating taxes, although variable, remain generally higher than income taxes except for 2018. The trends suggest potential changes in tax obligations or tax planning strategies impacting these financial items during the examined period.

Total Reported Debt & Leases

The total reported debt and leases showed a fluctuating trend over the six-year period. Initially, there was a moderate increase from approximately $9.13 billion in 2014 to $9.58 billion in 2015, followed by a decline to about $8.79 billion in 2016. In 2017, the debt level rose again to roughly $9.93 billion. A significant increase occurred in 2018, reaching approximately $16.32 billion, the highest level in the period analyzed. This peak was followed by a slight reduction to $14.93 billion in 2019, indicating a partial deleveraging but maintaining a relatively high debt position compared to earlier years.

Stockholders’ Equity

Stockholders’ equity experienced a downward trajectory between 2014 and 2017, decreasing from approximately $6.53 billion to around $4.33 billion. This decline suggests a reduction in the net value attributable to shareholders during this period. However, equity started to recover in 2018, increasing notably to $6.14 billion, and continued to grow in 2019, reaching about $7.05 billion. The recovery indicates a strengthening of the company’s equity base in the latter years analyzed.

Invested Capital

Invested capital exhibited relative stability from 2014 to 2017, ranging between approximately $18.4 billion and $19.4 billion. In 2018 there was a marked increase to roughly $27.61 billion, which was sustained in 2019 with a slight decrease to $27.38 billion. This sharp increase in invested capital parallels the rise in total reported debt and leases during the same period, suggesting significant capital allocation or asset acquisition financed largely through debt.

Overall Analysis

The financial data indicates that the company increased its leverage significantly in 2018 and maintained a higher debt load in 2019 relative to the earlier years. This period also coincides with a substantial jump in invested capital, signaling possibly intensified investment activity or expansion. Meanwhile, stockholders’ equity contracted from 2014 through 2017 but recovered afterward, possibly reflecting improved profitability or capital injections. The trends suggest a strategic phase of investment funded by increased debt, with signs of balance sheet strengthening towards the end of the period.

The analysis of economic value added from 2014 to 2019 reveals a consistent failure to generate positive economic profit, indicating that the returns on invested capital remained below the company's cost of capital throughout the entire six-year period.

Economic Profit Trends

Economic profit remained negative for the duration of the analyzed period, exhibiting significant volatility. A notable deterioration occurred in 2015, with losses expanding to -696,870 thousand USD. Although a recovery trend was observed through 2017, reaching a period low of -154,191 thousand USD, this progress was reversed in 2018 when losses peaked at -885,720 thousand USD before slightly moderating in 2019.

Invested Capital Dynamics

Invested capital remained relatively stable between 2014 and 2017, fluctuating within a narrow range around 18 to 19 billion USD. A substantial shift occurred in 2018, where invested capital increased sharply to 27,608,082 thousand USD, representing a growth of approximately 45% over the previous year. This capital base remained elevated in 2019 at 27,385,340 thousand USD.

Economic Spread Ratio Analysis

The economic spread ratio maintained a negative trajectory, mirroring the trends seen in economic profit. The ratio reached its most unfavorable level in 2015 at -3.62% and showed signs of improvement toward a break-even point by 2017, reaching -0.81%. However, the substantial increase in invested capital in 2018 coincided with a sharp decline in the spread ratio to -3.21%, suggesting that the additional capital deployed did not yield sufficient returns to offset its cost. The ratio ended the period at -2.61% in 2019.

Overall, the correlation between the increase in invested capital in 2018 and the subsequent widening of the negative economic spread suggests that the capital expansion did not result in immediate economic value creation. The persistent negative spread indicates a systemic inability to exceed the required rate of return during this timeframe.

The analyzed period is characterized by a consistent inability to generate positive economic value, as economic profit remained negative across all six fiscal years. This indicates that the returns generated were insufficient to cover the company's cost of capital, resulting in the continuous destruction of economic value.

Economic Profit Trajectory

Economic profit exhibited significant volatility throughout the period. After a loss of 117.5 million USD in 2014, the deficit widened sharply to 696.9 million USD in 2015. A period of relative recovery followed, with losses narrowing to 302.8 million USD in 2016 and further improving to 154.2 million USD in 2017. This trend reversed abruptly in 2018, which marked the lowest point of the period with a loss of 885.7 million USD, before slightly moderating to 714.3 million USD in 2019.

Net Sales Performance

A general downward trend in net sales was observed from 2014 to 2017, with revenue decreasing from 17.9 billion USD to a low of 15.6 billion USD. A recovery phase began in 2018 and continued into 2019, with sales rising to 16.9 billion USD. Despite this recent growth in top-line revenue, the increase was not sufficient to pivot the company toward positive economic profit.

Economic Profit Margin Analysis

The economic profit margin reflected the volatility of the absolute economic profit, fluctuating between -0.66% in 2014 and -5.63% in 2018. Notably, between 2015 and 2017, the margin improved from -3.95% to -0.99% despite a concurrent decline in net sales, suggesting a temporary improvement in capital efficiency or operational cost management. However, the sharp decline to -5.63% in 2018 represents a significant erosion of value, which only partially recovered to -4.24% by 2019.