Linde plc (NASDAQ:LIN)

The financial performance, as measured by economic profit, demonstrates a consistent pattern of negative economic value creation over the five-year period. While net operating profit after taxes (NOPAT) increased significantly, it has not been sufficient to overcome the cost of capital applied to the invested capital base.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited a substantial increase from US$2,699 million in 2020 to US$6,814 million in 2024. The most significant jump occurred between 2021 and 2022, followed by continued growth in 2023 and 2024, though at a slower rate. This indicates improving operational profitability.

Cost of Capital

The cost of capital experienced a gradual increase from 14.74% in 2020 to 15.42% in 2023, before decreasing slightly to 15.29% in 2024. This suggests a rising cost of funding the company’s operations, potentially due to changes in market interest rates or perceived risk.

Invested Capital

Invested capital decreased from US$78,771 million in 2020 to US$72,560 million in 2021, then remained relatively stable between US$72,341 million and US$74,884 million for the subsequent years. The initial decrease could be attributed to asset sales or reduced investment, while the subsequent stability suggests a consistent capital deployment strategy.

Economic Profit

Economic profit remained negative throughout the period, ranging from -US$8,914 million in 2020 to -US$4,632 million in 2024. Although the magnitude of the loss decreased over time, coinciding with the increase in NOPAT, the company consistently failed to generate returns exceeding its cost of capital. The reduction in the negative economic profit from 2020 to 2024 indicates an improvement in value creation, but further gains are needed to achieve positive economic profit.

In summary, the company demonstrates improving operational profitability as evidenced by NOPAT growth. However, the cost of capital remains a significant factor, and despite the reduction in the economic loss, the company continues to destroy economic value. Continued monitoring of NOPAT growth relative to the cost of capital and efficient capital allocation will be crucial for future performance.

Net Income Trend

The net income exhibited a consistent upward trajectory across the periods analyzed. Starting at 2,501 million US dollars at the end of 2020, it increased notably to 3,826 million in 2021. The growth trend continued, reaching 4,147 million in 2022. The most substantial rise occurred between 2022 and 2023, with net income climbing sharply to 6,199 million. The upward trend persisted into 2024, culminating in a net income of 6,565 million. This steady increase suggests enhanced profitability and potentially successful operational strategies or favorable market conditions over these years.

Net Operating Profit After Taxes (NOPAT) Trend

Similar to net income, NOPAT showed generally favorable growth during the observed timeframe. Beginning at 2,699 million US dollars at the end of 2020, it rose to 3,800 million in 2021, nearly matching the growth pace of net income during the same period. From 2021 to 2022, growth slowed considerably, with NOPAT increasing marginally to 3,833 million. However, the year 2023 marked a sharp increase to 6,386 million, paralleling the significant jump in net income. The upward momentum continued into 2024, with NOPAT reaching 6,814 million. This pattern reflects improving operating efficiency and effective tax management, particularly highlighted by the strong rebound after 2022.

Comparative Observations

Both net income and NOPAT followed closely aligned trajectories, indicating that earnings growth was supported by operating performance improvements. The substantial increases in both metrics occurring between 2022 and 2023 suggest a pivotal year for operational and profitability enhancement. The consistent growth in both figures over the five-year period indicates stable financial health and profitability expansion.

The financial data showcases two key tax-related metrics for the analyzed periods: provision for income taxes and cash operating taxes, both expressed in millions of US dollars. Over the five-year horizon from the end of 2020 to the end of 2024, both metrics exhibit an upward trajectory indicating increasing tax liabilities and operational tax payments.

Provision for Income Taxes

The provision for income taxes shows a consistent increase each year. Starting at 847 million US dollars at the end of 2020, the figure rises to 1,262 million in 2021, reflecting approximately a 49% increase year over year. Subsequent increases are observed with values reaching 1,434 million in 2022, 1,814 million in 2023, and peaking at 2,002 million by the end of 2024. The incremental growth suggests higher taxable income or changes in tax rates or regulations affecting income tax provisions.

Cash Operating Taxes

Cash operating taxes also demonstrate a steady upward trend over the same period. Beginning at 1,245 million US dollars in 2020, this amount increases to 1,537 million in 2021, and rises further to 1,835 million in 2022. The upward momentum continues with 1,947 million recorded in 2023 and 2,205 million by the close of 2024. The progression suggests increased actual cash outflows related to operating tax obligations, consistent with or possibly exceeding the growth pattern of the income tax provision.

In summary, both tax provisions and actual tax payments display a pattern of continuous growth with cash operating taxes consistently higher than provisions for income taxes. This could indicate a timing difference between accrued taxes and cash payments, additional tax obligations beyond income tax, or other operating tax factors influencing the cash tax outflows. The rising trend across both lines suggests the company is experiencing increasing tax costs as part of its operational and profitability changes during the observed periods.

The financial data over the five-year period exhibit notable trends in the company's capital structure and investment levels. The total reported debt and leases show a general upward trajectory, increasing from US$17,223 million in 2020 to US$22,609 million in 2024. This indicates a rising reliance on debt financing over the period, with a significant jump between 2021 and 2022, followed by continued growth in subsequent years.

Concurrently, shareholders' equity demonstrates a consistent decline from US$47,317 million in 2020 to US$38,092 million in 2024. This steady decrease suggests erosion in the company’s net equity base, which could reflect dividend distributions, share repurchases, or losses not apparent from the data provided but warrants further investigation. The reduction in equity, coupled with rising debt levels, points to a shifting balance of the company’s financing sources.

Invested capital remains relatively stable throughout the period, beginning at US$78,771 million in 2020 and experiencing minor fluctuations, ending slightly lower at US$74,884 million in 2024. The investment base appears largely maintained despite the changes in the composition of equity and debt. This stability in invested capital suggests that the company is sustaining its asset base or capital employed at a consistent level while adjusting its financing structures.

Debt Trend

Total reported debt & leases increased by approximately 31% over the five years, indicating enhanced leverage or increased borrowing capacity.

Equity Trend

Total shareholders' equity decreased by about 20%, which could impact the company’s financial flexibility and investor perception.

Invested Capital

Invested capital shows a slight decline of around 5%, suggesting stable asset deployment but potential changes in asset composition or valuation.

Overall Analysis

The simultaneous rise in debt and decline in equity, with stable invested capital, implies a strategic shift towards greater leverage. This could affect the risk profile and cost of capital, highlighting the importance of monitoring debt servicing capacity and equity trends in future periods.

The financial performance, as indicated by economic value added metrics, demonstrates a consistent pattern over the five-year period. Economic profit remains negative throughout, though the magnitude of the loss decreases over time. Invested capital exhibits relative stability with a slight upward trend in later years. The economic spread ratio, a key indicator of profitability relative to the cost of capital, shows a clear improvement, albeit remaining negative.

Economic Profit

Economic profit begins at a loss of US$8,914 million in 2020 and gradually decreases in absolute terms to a loss of US$4,632 million by 2024. This suggests an improving, but still negative, value creation from the perspective of investors’ required returns. The rate of improvement appears to accelerate in the later years of the period.

Invested Capital

Invested capital decreased from US$78,771 million in 2020 to US$72,560 million in 2021. It then remained relatively stable between US$72,341 million and US$73,409 million for the years 2021 through 2023, before increasing to US$74,884 million in 2024. This indicates a period of capital consolidation followed by modest reinvestment.

Economic Spread Ratio

The economic spread ratio consistently registers negative values, indicating that returns on invested capital are less than the cost of capital. The ratio improves from -11.32% in 2020 to -6.19% in 2024. This improvement parallels the reduction in the magnitude of the economic profit loss, suggesting a narrowing gap between returns and the cost of capital. The rate of improvement in the economic spread ratio also appears to increase in the later years.

Overall, the trend suggests a positive, though incomplete, shift in financial performance. While the company continues to destroy economic value (negative economic profit and economic spread ratio), the rate of value destruction is decreasing, and the gap between returns and the cost of capital is narrowing. The slight increase in invested capital in 2024 may warrant further investigation to determine its impact on future performance.

The financial performance, as indicated by economic profit and its margin, demonstrates a consistent pattern of negative economic profit over the five-year period from 2020 to 2024. However, the magnitude of the economic loss has decreased over time, accompanied by an improving economic profit margin.

Economic Profit

Economic profit exhibits a negative value each year. Starting at a loss of US$8,914 million in 2020, the loss decreased to US$7,186 million in 2021, remained relatively stable at US$7,194 million in 2022, and then further decreased to US$4,934 million in 2023. This trend of diminishing losses continued into 2024, with a reported economic profit of US$4,632 million. This suggests improving capital efficiency or profitability relative to the cost of capital.

Sales

Sales experienced growth from 2020 to 2023, increasing from US$27,243 million to US$32,854 million. While sales remained relatively flat in 2024 at US$33,005 million, the overall trend indicates a positive trajectory in revenue generation. The stabilization of sales in the most recent year does not appear to have hindered the improvement in economic profit.

Economic Profit Margin

The economic profit margin, consistently negative, reflects the ongoing negative economic profit. The margin improved steadily from -32.72% in 2020 to -23.34% in 2021, then to -21.56% in 2022. Further improvement was observed in 2023 (-15.02%) and 2024 (-14.03%). This upward trend indicates that, while still generating an economic loss, the proportion of economic loss relative to sales is decreasing. The consistent improvement in the economic profit margin, despite the continued negative economic profit, suggests that the company is becoming more effective at generating returns that exceed its cost of capital, even if absolute economic profit remains negative.

In summary, the observed trends suggest a positive, albeit gradual, shift in financial performance. While the company continues to report negative economic profit, the decreasing magnitude of the loss and the improving economic profit margin indicate a strengthening financial position over the analyzed period.