Johnson & Johnson (NYSE:JNJ)

The period under review demonstrates fluctuating economic performance. Net operating profit after taxes exhibited initial growth followed by a significant decline and subsequent partial recovery. The cost of capital remained relatively stable, while invested capital showed an increasing trend overall, with a notable peak in 2022 before receding slightly and then increasing again. Consequently, economic profit experienced considerable volatility.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$13,736 million in 2020 to US$18,861 million in 2021, representing substantial growth. However, a decline to US$16,117 million occurred in 2022. A more pronounced decrease was observed in 2023, with NOPAT falling to US$8,905 million. A partial recovery was seen in 2024, with NOPAT reaching US$11,461 million, though still below the 2021 peak.

Cost of Capital

The cost of capital remained consistently around 9.4%, fluctuating between 9.37% and 9.52% throughout the period. This relative stability suggests consistent market expectations regarding the risk profile of the invested capital.

Invested Capital

Invested capital remained relatively stable between 2020 and 2021, with a slight decrease in 2021. A significant increase occurred in 2022, reaching US$113,818 million. It then decreased to US$99,118 million in 2023 before rising again to US$106,513 million in 2024. This suggests periods of capital expansion followed by potential adjustments or divestments.

Economic Profit

Economic profit mirrored the NOPAT trend. It rose from US$4,520 million in 2020 to a peak of US$9,604 million in 2021. It then decreased to US$5,390 million in 2022, and experienced a substantial decline in 2023, resulting in an economic loss of US$531 million. A return to positive economic profit was observed in 2024, reaching US$1,410 million, but remained significantly below the 2021 level. The negative economic profit in 2023 indicates that returns generated were insufficient to cover the cost of capital employed.

The interplay between NOPAT, cost of capital, and invested capital significantly impacted economic profit. The substantial decline in NOPAT in 2023, coupled with a relatively stable cost of capital and a high level of invested capital, resulted in the observed economic loss. The partial recovery in 2024 suggests a positive, but incomplete, correction of this trend.

The financial data reveals significant fluctuations across the analyzed periods in key profitability indicators. Net earnings demonstrated an overall volatile pattern, with a marked increase from 14,714 million US dollars in 2020 to a peak of 35,153 million in 2023, followed by a sharp decline to 14,066 million in 2024. This trend suggests periods of substantial profit growth interrupted by a sudden reduction in the latest year.

Similarly, Net Operating Profit After Taxes (NOPAT) followed a comparable trend but with less pronounced peaks and troughs. Starting at 13,736 million US dollars in 2020, NOPAT increased steadily to 18,861 million in 2021, then decreased to 16,117 million in 2022, sharply dropped to 8,905 million in 2023, and slightly recovered to 11,461 million in 2024. The dip in 2023 is noteworthy, indicating operational challenges or increased costs impacting profitability before partial recovery.

Net Earnings Trend

Initial steady growth followed by a significant peak in 2023 and subsequent sharp decline in 2024.

NOPAT Trend

General growth with moderate fluctuations until 2022, a steep decrease in 2023, and a modest rebound in 2024.

Comparison between Net Earnings and NOPAT

Net earnings portray higher volatility, while NOPAT reflects more stability but still impacted by operational difficulties in 2023.

Implications

The 2023 period represents a critical year where operational profitability suffered a significant setback, potentially due to external factors or internal inefficiencies. The rebound in NOPAT in 2024, although positive, remains below earlier highs, suggesting ongoing challenges.

Provision for taxes on income

The provision for taxes on income demonstrates notable variability over the five-year period. It started at 1,783 million US dollars at the end of 2020, increased moderately to 1,898 million in 2021, and then saw a considerable surge to 3,784 million in 2022. This sharp increase was followed by a significant decline to 1,736 million in 2023. In 2024, it rebounded to 2,621 million, indicating some recovery but remaining below the 2022 peak. This pattern suggests fluctuations in taxable income or changes in tax regulations affecting the provision amounts.

Cash operating taxes

Cash operating taxes show a consistent upward trend from 2020 to 2023, starting at 2,949 million US dollars and rising steadily through the years to reach a peak of 5,700 million in 2023. However, in 2024, cash operating taxes decreased to 4,692 million, representing a reduction compared to the previous year but still above the earlier years. This pattern highlights increasing tax cash outflows over time with a slight moderation in the most recent year, which could reflect changes in cash tax payments or timing differences.

Total reported debt & leases

The total reported debt and leases demonstrated variability over the five-year period. Starting at 36,366 million USD in 2020, the figure decreased moderately to 34,751 million USD in 2021, indicating a reduction in debt obligations. However, a significant increase occurred in 2022, rising sharply to 40,959 million USD. This was followed by a notable reduction to 30,432 million USD in 2023, representing the lowest level in the period observed. In 2024, there was a rebound to 37,834 million USD, suggesting some re-leveraging or new debt acquisitions towards the end of the period.

Shareholders’ equity

Shareholders' equity showed a general upward trend with some fluctuations. It increased substantially from 63,278 million USD in 2020 to 74,023 million USD in 2021. The equity continued to grow but at a slower pace, reaching 76,804 million USD in 2022. In 2023, there was a decline to 68,774 million USD, indicating a possible payout, loss, or other equity-reducing activity during that year. Nevertheless, equity rebounded slightly to 71,490 million USD in 2024, suggesting partial recovery or capital retention.

Invested capital

Invested capital showed mixed trends across the same timeframe. It started at 98,344 million USD in 2020 and remained almost flat in 2021 at 98,066 million USD. In 2022, a significant rise to 113,818 million USD was recorded, representing a peak in capital investment. This was followed by a considerable decrease to 99,118 million USD in 2023, approaching the earlier levels of 2020 and 2021. The invested capital increased again in 2024 to 106,513 million USD, reflecting renewed capital deployment or asset acquisition activities.

Overall Analysis

The financial data reveals a pattern of volatility in debt and invested capital, while equity generally increased but with some retrenchment in the middle of the period. The fluctuations in total reported debt & leases and invested capital suggest dynamic capital structure management and investment strategy adjustments over the five years. The trends imply that the company might have been actively balancing between leveraging for growth and deleveraging to maintain financial stability. The changes in shareholders’ equity reflect underlying operational results and capital transactions during this period, with a temporary decline offset by subsequent recovery.

The economic spread ratio exhibited considerable fluctuation between 2020 and 2024. Initially positive, the ratio experienced growth followed by a significant decline, and then a partial recovery.

Economic Spread Ratio Trend

In 2020, the economic spread ratio stood at 4.60%. This increased substantially to 9.79% in 2021, indicating a widening gap between returns generated and the cost of capital. However, the ratio decreased to 4.74% in 2022, suggesting a narrowing of this gap. A substantial shift occurred in 2023, with the ratio falling to -0.54%, signifying that returns generated were less than the cost of capital employed. The ratio showed some improvement in 2024, rising to 1.32%, but remained below the levels observed in 2020 and 2021.

The economic spread ratio’s movement closely mirrors the changes in economic profit. The peak in the ratio in 2021 corresponds with the highest reported economic profit of US$9,604 million. Conversely, the negative ratio in 2023 aligns with the negative economic profit of US$531 million. The partial recovery in 2024, with a positive economic spread ratio of 1.32%, is consistent with the return to positive economic profit of US$1,410 million.

Invested Capital Relationship

Invested capital generally increased over the period, rising from US$98,344 million in 2020 to US$106,513 million in 2024. While invested capital increased from 2020 to 2022, the economic spread ratio did not consistently increase, indicating that increases in capital deployment did not always translate into proportionally higher returns. The decrease in economic spread in 2023 occurred despite a relatively stable invested capital base, suggesting a significant decline in profitability relative to the capital employed.

The observed volatility in the economic spread ratio warrants further investigation into the underlying drivers of economic profit and the efficiency of capital allocation. The negative spread in 2023 is a particular area of concern, indicating a period where the business did not generate sufficient returns to cover its cost of capital.

The economic profit exhibited significant fluctuation between 2020 and 2024. Initially, economic profit increased substantially before declining and then recovering partially. This pattern is reflected in the economic profit margin, which demonstrates a similar trajectory.

Economic Profit

Economic profit increased from US$4,520 million in 2020 to US$9,604 million in 2021, representing a considerable improvement. It then decreased to US$5,390 million in 2022, followed by a substantial decline resulting in a loss of US$531 million in 2023. A partial recovery was observed in 2024, with economic profit reaching US$1,410 million.

Sales to Customers

Sales to customers increased from US$82,584 million in 2020 to US$93,775 million in 2021 and further to US$94,943 million in 2022. A decrease was noted in 2023, with sales falling to US$85,159 million. Sales experienced a modest increase in 2024, reaching US$88,821 million, but did not return to the levels seen in 2021 and 2022.

Economic Profit Margin

The economic profit margin mirrored the trend in economic profit. It rose from 5.47% in 2020 to 10.24% in 2021, then decreased to 5.68% in 2022. A significant decline occurred in 2023, resulting in a negative margin of -0.62%. The margin partially recovered in 2024, reaching 1.59%, though remaining below the levels observed in 2020 and 2021.

The divergence between sales and economic profit margin in 2023 is notable. While sales decreased, the economic profit margin experienced a substantial negative shift, indicating that the cost of capital, or other factors impacting economic profit, increased disproportionately to the sales decline. The partial recovery in 2024 suggests some improvement in economic profit generation relative to sales, but the margin remains considerably lower than its peak in 2021.