Merck & Co. Inc. (NYSE:MRK)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) initially increased from 2021 to 2022, experienced a substantial decline in 2023, and then recovered strongly in 2024 and 2025. Invested capital generally increased over the period, although a decrease was observed between 2022 and 2023. The cost of capital remained relatively stable, with a slight increase in 2022 followed by minor fluctuations.

NOPAT Trend

NOPAT increased from US$13,349 million in 2021 to US$14,154 million in 2022, representing a growth of approximately 6.0%. A dramatic decrease occurred in 2023, with NOPAT falling to a loss of US$714 million. This was followed by a significant recovery, reaching US$16,744 million in 2024 and further increasing to US$17,864 million in 2025.

Cost of Capital

The cost of capital experienced a modest increase from 7.16% in 2021 to 7.57% in 2022. It peaked at 7.59% in 2023 before decreasing slightly to 7.41% in 2024 and 7.43% in 2025. These changes were relatively small compared to the fluctuations in NOPAT.

Invested Capital

Invested capital increased from US$70,735 million in 2021 to US$73,942 million in 2022. A decrease was noted in 2023, with invested capital falling to US$69,966 million. Subsequently, it rose substantially to US$79,426 million in 2024 and continued to increase to US$97,963 million in 2025, indicating significant capital deployment in later years.

Economic Profit

Economic profit mirrored the NOPAT trend. It increased from US$8,284 million in 2021 to US$8,554 million in 2022. The substantial decline in NOPAT in 2023 resulted in a negative economic profit of US$6,026 million. Economic profit recovered strongly in 2024 to US$10,862 million and remained high in 2025 at US$10,583 million. The magnitude of the economic profit in 2024 and 2025 suggests a strong ability to generate returns exceeding the cost of capital during those periods.

The significant negative economic profit in 2023 warrants further investigation to understand the underlying causes of the NOPAT decline. The subsequent recovery and strong economic profit in 2024 and 2025 suggest successful corrective actions or favorable market conditions. The increasing invested capital base in the later years should be monitored to ensure continued efficient capital allocation and profitability.

Net income attributable to Merck & Co., Inc. and Net Operating Profit After Taxes (NOPAT) demonstrate distinct performance patterns over the five-year period. While net income generally exhibits an upward trajectory, NOPAT reveals a more volatile performance, including a significant decline in 2023.

Overall Trend - Net Income

Net income attributable to Merck & Co., Inc. increased from US$13,049 million in 2021 to US$14,519 million in 2022. A substantial decrease was observed in 2023, falling to US$365 million, before recovering significantly to US$17,117 million in 2024 and further increasing to US$18,254 million in 2025. This indicates a generally positive trend with a notable disruption in 2023.

Overall Trend - NOPAT

NOPAT followed a similar pattern to net income through 2022, increasing from US$13,349 million in 2021 to US$14,154 million in 2022. However, NOPAT experienced a dramatic decline in 2023, resulting in a negative value of US$-714 million. Subsequent years showed a strong recovery, with NOPAT reaching US$16,744 million in 2024 and US$17,864 million in 2025.

Comparison of Net Income and NOPAT

While both metrics generally move in the same direction, the magnitude of change differs. The decline in 2023 was far more pronounced for NOPAT than for net income. This suggests that factors impacting operating profitability, rather than solely net income, were the primary drivers of the 2023 downturn. The recovery in 2024 and 2025 was also substantial for NOPAT, indicating improved operational performance. The difference between net income and NOPAT suggests the presence of non-operating items or tax effects influencing net income.

NOPAT Volatility

The significant fluctuation in NOPAT, particularly the negative value in 2023, warrants further investigation. This volatility could be attributed to changes in operating expenses, revenue recognition, or other factors affecting the core profitability of the business. The subsequent recovery suggests these issues were addressed or were temporary in nature.

The reported taxes on income from continuing operations exhibited fluctuations over the five-year period. Initial values increased from 2021 to 2022, followed by a decrease in 2023, and then a substantial rise in 2024 and 2025, remaining relatively stable between those final two years. However, a more pronounced trend is observed in cash operating taxes.

Cash Operating Taxes Trend

Cash operating taxes demonstrate a significant increase from 2021 to 2022, nearly doubling from US$1,553 million to US$3,760 million. This increase is followed by a moderate decline in 2023 to US$3,497 million. Subsequent years, 2024 and 2025, show continued growth, reaching US$4,246 million and US$4,597 million respectively. The pattern suggests a generally increasing tax burden as measured by cash outflows.

The divergence between taxes on income from continuing operations and cash operating taxes is notable. While income taxes fluctuated, cash operating taxes consistently increased over the period, albeit with a slight dip in 2023. This difference could be attributable to timing differences between reported income tax expense and actual cash payments, such as deferred tax assets or liabilities, or changes in tax credits utilized. The substantial increase in cash operating taxes from 2021 to 2022 warrants further investigation to understand the underlying drivers, potentially including changes in tax laws, profitability, or the utilization of tax loss carryforwards.

Comparative Analysis

The difference between the two tax measures widened considerably in 2022 and remained elevated through 2025. In 2021, the difference was US$32 million. By 2022, this difference grew to US$1,842 million. While the gap narrowed somewhat in 2023 (US$1,985 million), it expanded again in 2024 (US$1,443 million) and 2025 (US$1,793 million). This sustained difference suggests a significant impact on free cash flow and should be considered when evaluating economic value added.

The consistent upward trend in cash operating taxes, particularly when contrasted with the more volatile reported income taxes, indicates a growing cash commitment to tax obligations. This trend should be monitored closely as it directly impacts available cash for reinvestment, debt reduction, or shareholder returns.

The invested capital of the company exhibited fluctuations over the five-year period. Total reported debt & leases and total stockholders’ equity both contribute to the calculation of invested capital, and their individual trends influence the overall invested capital figure.

Invested Capital Trend

Invested capital increased from US$70,735 million in 2021 to US$73,942 million in 2022, representing a growth of approximately 4.5%. A subsequent decrease was observed in 2023, with invested capital falling to US$69,966 million. This was followed by a more substantial increase in 2024, reaching US$79,426 million, and continued growth in 2025 to US$97,963 million. The most significant increase occurred between 2024 and 2025.

Debt & Leases

Total reported debt & leases decreased from US$34,631 million in 2021 to US$31,985 million in 2022. An increase was then noted in 2023, reaching US$36,268 million, and continued into 2024 with a value of US$38,270 million. A considerable rise occurred in 2025, with debt & leases reaching US$50,534 million. This suggests a shift towards increased reliance on debt financing in the latter part of the period.

Stockholders’ Equity

Total stockholders’ equity increased significantly from US$38,184 million in 2021 to US$45,991 million in 2022. A decrease was observed in 2023, with equity falling to US$37,581 million. Equity then rebounded in 2024 to US$46,313 million and continued to grow in 2025, reaching US$52,606 million. The fluctuations in equity likely reflect retained earnings, share issuances, and share repurchases.

The combined effect of these trends in debt and equity resulted in the overall pattern observed in invested capital. The substantial increase in invested capital between 2024 and 2025 appears to be driven by a combination of increased debt and equity, with debt contributing a larger proportion of the growth.

The economic spread ratio exhibited fluctuating performance over the five-year period. Initial stability gave way to a significant decline, followed by a substantial recovery and subsequent moderation. Economic profit demonstrated a similar pattern of initial growth, a marked downturn, and then a return to positive figures, though not to the initial levels.

Economic Spread Ratio - Overall Trend

The economic spread ratio began at 11.71% in 2021 and remained relatively consistent at 11.57% in 2022. A substantial decrease was observed in 2023, with the ratio falling to -8.61%. This indicates that the return on invested capital was less than the cost of capital during that year. A strong recovery occurred in 2024, with the ratio rising to 13.68%, representing the highest value in the observed period. The ratio then moderated to 10.80% in 2025.

Economic Profit - Relationship to Spread Ratio

Economic profit and the economic spread ratio demonstrate a clear correlation. The positive economic profit values in 2021 and 2022 align with the relatively high and stable spread ratios during those years. The negative economic profit in 2023 corresponds directly with the negative economic spread ratio, confirming a period where capital was not generating sufficient returns. The return to positive economic profit in 2024 and 2025 is mirrored by the positive and increasing, then moderating, spread ratios.

Invested Capital - Impact on Spread Ratio

Invested capital generally increased over the period, from US$70,735 million in 2021 to US$97,963 million in 2025. While invested capital increased in 2023, the significant decline in economic profit resulted in a negative economic spread ratio. The substantial increase in economic profit in 2024, coupled with a further increase in invested capital, led to the peak spread ratio. The continued increase in invested capital in 2025, alongside a slight decrease in economic profit, resulted in a lower, though still positive, spread ratio.

The fluctuations suggest a sensitivity of the economic spread ratio to changes in both economic profit and the level of invested capital. The negative spread ratio in 2023 warrants further investigation to understand the underlying factors contributing to the shortfall in returns relative to the cost of capital.

The economic profit margin exhibited considerable fluctuation over the five-year period. Initial values demonstrated strong profitability, followed by a significant downturn, and then a recovery to levels comparable to the beginning of the period.

Economic Profit Margin Trend

The economic profit margin began at 17.01% in 2021, indicating a substantial economic profit relative to sales. A decrease was observed in 2022, with the margin falling to 14.43%. This downward trend continued sharply in 2023, resulting in a negative margin of -10.02%, signifying an economic loss. A substantial recovery occurred in 2024, with the margin rebounding to 16.93%. This positive momentum continued into 2025, with a margin of 16.28%, remaining at a strong level.

The volatility in economic profit margin closely mirrors the fluctuations in economic profit itself. The negative margin in 2023 directly corresponds to the negative economic profit reported for that year. The subsequent recovery in the margin aligns with the return to positive economic profit in 2024 and 2025.

Sales Relationship

Sales demonstrated a consistent upward trend throughout the period, increasing from US$48,704 million in 2021 to US$65,011 million in 2025. However, the increase in sales did not consistently translate into increased economic profit. The substantial sales growth between 2021 and 2022 was accompanied by a decrease in economic profit margin, suggesting rising costs or a less favorable capital allocation during that time. The significant sales increase from 2022 to 2023 did not prevent a substantial economic loss.

The period demonstrates that maintaining a positive economic profit margin is not solely dependent on increasing sales. Effective cost management and capital allocation appear to be critical factors influencing the economic profit margin, as evidenced by the negative margin in 2023 despite relatively high sales.