Parker-Hannifin Corp. (NYSE:PH)

The period between June 30, 2017, and June 30, 2022, demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) and invested capital fluctuate over the observed timeframe, the cost of capital remains relatively stable, contributing to the persistent shortfall in economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,132,702 thousand in 2017 to US$1,184,764 thousand in 2018, representing a modest gain. A significant increase was then observed in 2019, reaching US$1,718,681 thousand. However, NOPAT decreased to US$1,466,070 thousand in 2020 before recovering to US$1,895,230 thousand in 2021. A substantial decline occurred in 2022, with NOPAT falling to US$1,166,223 thousand. This indicates volatility in operational profitability.

Cost of Capital

The cost of capital experienced a slight increase from 19.32% in 2017 to 20.34% in 2018. It then decreased to 18.56% in 2019, followed by a rise to 18.88% in 2020. The cost of capital increased notably to 20.91% in 2021 before decreasing slightly to 19.37% in 2022. These fluctuations, while present, are less pronounced than those observed in NOPAT.

Invested Capital

Invested capital decreased from US$13,507,821 thousand in 2017 to US$13,016,451 thousand in 2018. A subsequent increase was seen in 2019, reaching US$15,269,283 thousand, and continued to rise to US$17,529,292 thousand in 2020. Invested capital decreased to US$16,926,500 thousand in 2021, but experienced a significant increase in 2022, reaching US$21,994,132 thousand. This suggests a growing capital base, particularly in the final year of the period.

Economic Profit

Economic profit remained negative throughout the entire period. The negative economic profit was approximately US$1,477,253 thousand in 2017 and US$1,462,566 thousand in 2018. It improved slightly to US$1,114,896 thousand in 2019, but worsened to US$1,843,278 thousand in 2020. The negative economic profit continued in 2021 at US$1,644,765 thousand, and reached its lowest point in the period at US$3,094,013 thousand in 2022. The increasing magnitude of the negative economic profit in 2022, despite an increase in NOPAT compared to 2020 and 2021, is attributable to the substantial increase in invested capital.

The consistent negative economic profit indicates that the company’s returns on invested capital have not been sufficient to cover its cost of capital throughout the analyzed period. The increasing negative economic profit in 2022, despite a relatively high NOPAT, suggests that capital is being deployed in projects or assets that are not generating returns commensurate with the associated risk and cost.

Net Income Attributable to Common Shareholders

The net income attributable to common shareholders demonstrates a generally positive trend from June 30, 2017, to June 30, 2021, increasing from approximately 983 million US dollars to over 1.74 billion US dollars. This represents a significant growth over this four-year period, highlighting strong profitability. However, there is a notable decline in the year ending June 30, 2022, where net income falls to roughly 1.32 billion US dollars, which suggests some challenges or increased expenses affecting profitability in the most recent period.

Net Operating Profit After Taxes (NOPAT)

NOPAT follows a similar upward trajectory from June 30, 2017, through June 30, 2021, rising from about 1.13 billion US dollars to approximately 1.90 billion US dollars. This consistent increase reflects improving operating efficiency and effective tax management during this period. However, there is a significant reduction in NOPAT in the year ending June 30, 2022, falling to nearly 1.17 billion US dollars, indicating a considerable drop in operating profitability or increased tax expenses most recently.

Summary of Trends

Both net income and NOPAT demonstrate strong growth over the initial five-year period, suggesting favorable operational performance and profitability enhancements. The peak values recorded in the year ending June 30, 2021, indicate the company's highest profitability during the timeframe examined. The sharp declines in both metrics for the year ending June 30, 2022, signal a reversal of this trend and may imply emerging financial challenges or external factors impacting profitability. The divergence in the magnitude of decrease between net income and NOPAT in 2022 could also point to changes in non-operating items or tax effects during that period.

Income Taxes

The income taxes show a fluctuating trend over the six-year period. Beginning at 344,797 thousand US dollars in 2017, the figure notably increased to 640,962 thousand US dollars in 2018. After this peak, there was a decline in 2019, with the value dropping to 420,494 thousand US dollars. The downward trajectory continued into 2020, reaching a low of 305,924 thousand US dollars. However, a substantial recovery occurred in 2021, rising again to 500,096 thousand US dollars. In 2022, income taxes decreased to 298,040 thousand US dollars, marking one of the lower points across the given years.

Cash Operating Taxes

Cash operating taxes exhibit more volatility and a generally increasing trend throughout the same period. Starting at 367,985 thousand US dollars in 2017, values soared to a high of 745,009 thousand US dollars in 2018, the largest increase observed. In 2019, these taxes declined to 429,023 thousand US dollars but remained higher than the 2017 baseline. The downward movement persisted into 2020, registering 357,562 thousand US dollars. However, in contrast to income taxes, cash operating taxes surged significantly in 2021, reaching 604,610 thousand US dollars, and escalated further to 703,301 thousand US dollars in 2022.

General Observations

There is a noticeable divergence in the trends of income taxes and cash operating taxes, particularly evident in the later years. While income taxes fell sharply in 2022 relative to the prior year, cash operating taxes continued to experience substantial growth. This discrepancy may indicate differences in accounting treatment, timing of tax payments, or underlying operational cash flow changes. The initial spike for both tax measures in 2018 suggests extraordinary activities or tax events occurred in that year, followed by varying recoveries and declines in subsequent periods. Overall, the analysis reveals a dynamic tax expense environment with significant annual fluctuations.

Total reported debt & leases

The total reported debt and leases fluctuated significantly over the period analyzed. It initially decreased from approximately 6.08 billion USD in mid-2017 to about 5.16 billion USD in mid-2018. Subsequently, it experienced a sharp increase to roughly 7.23 billion USD in mid-2019, continuing to rise to around 8.60 billion USD in mid-2020. A notable decline occurred in mid-2021, dropping to approximately 6.72 billion USD, followed by a substantial increase to nearly 11.62 billion USD by mid-2022. This trend indicates considerable volatility and an overall increasing debt load in recent years, particularly the marked increase between mid-2021 and mid-2022.

Shareholders’ equity

Shareholders' equity showed a consistent upward trend throughout the analyzed period. Starting at around 5.26 billion USD in mid-2017, it steadily increased each year, reaching approximately 5.86 billion USD in mid-2018, 5.96 billion USD in mid-2019, and 6.11 billion USD in mid-2020. A significant rise occurred between mid-2020 and mid-2021, where equity increased sharply to about 8.40 billion USD. The growth continued at a slower pace, reaching approximately 8.85 billion USD by mid-2022. This steady increase suggests strengthening equity capital and potentially retained earnings accumulated over the years.

Invested capital

Invested capital, representing the aggregate of debt and equity financing, exhibited considerable growth. Beginning at approximately 13.51 billion USD in mid-2017, it slightly declined to roughly 13.02 billion USD in mid-2018. Thereafter, a consistent upward trajectory is evident: rising to about 15.27 billion USD in mid-2019, followed by 17.53 billion USD in mid-2020. A marginal decrease to approximately 16.93 billion USD was noted in mid-2021, but invested capital surged substantially to nearly 22.0 billion USD by mid-2022. The data indicate increased resource deployment backed by both debt and equity, with particularly robust growth in the most recent year.

The economic spread ratio exhibited considerable fluctuation over the observed period. Initially, the ratio demonstrated a slight deterioration from -10.94% in 2017 to -11.24% in 2018. A notable improvement followed in 2019, with the ratio increasing to -7.30%. However, this positive trend was reversed in 2020, as the ratio declined to -10.52%. The ratio continued to worsen in subsequent years, reaching -14.07% in 2022, representing the lowest value within the analyzed timeframe.

Economic Spread Ratio Trend

The economic spread ratio generally indicates a decreasing ability to generate returns exceeding the cost of capital. The initial decline from 2017 to 2018 suggests a weakening of profitability relative to invested capital. The improvement in 2019 offered a temporary respite, but the subsequent declines, culminating in the significant drop in 2022, point to a sustained and increasing challenge in achieving positive economic value creation.

Concurrently, economic profit consistently remained negative throughout the period. The magnitude of the negative economic profit increased from approximately -1.48 billion US dollars in 2017 to -3.09 billion US dollars in 2022. This trend aligns with the declining economic spread ratio, reinforcing the observation that the company’s returns are falling short of its cost of capital.

Invested Capital

Invested capital generally increased over the period, rising from 13.51 billion US dollars in 2017 to 21.99 billion US dollars in 2022. While increased investment can be a driver of future growth, the simultaneous decline in the economic spread ratio suggests that these investments are not currently generating sufficient returns to offset their cost. The increase in invested capital, coupled with the worsening economic spread, contributes to the larger negative economic profit observed in later years.

The combination of a consistently negative economic profit and a declining economic spread ratio suggests a concerning trend in value creation. The company appears to be increasingly deploying capital in a manner that does not generate returns commensurate with the associated costs.

The economic profit margin exhibited a generally declining trend over the observed period. While fluctuations occurred, the metric consistently remained negative, indicating the company did not generate returns exceeding its cost of capital during these years.

Economic Profit Margin Trend

The economic profit margin began at -12.28% in 2017 and decreased to -19.51% in 2022. This represents a substantial worsening in economic profitability over the six-year period.

A slight improvement was noted between 2017 and 2019, with the margin moving from -12.28% to -7.79%. However, this positive movement was short-lived.

From 2019, the margin deteriorated significantly, reaching -13.46% in 2020, -11.46% in 2021, and ultimately -19.51% in 2022. This suggests increasing challenges in generating economic profits.

Relationship to Net Sales

Net sales increased overall from $12,029,312 thousand in 2017 to $15,861,608 thousand in 2022. Despite this growth in revenue, the economic profit margin worsened, indicating that the increase in sales was not sufficient to offset rising costs or a higher cost of capital.

The largest year-over-year increase in net sales occurred between 2017 and 2018, but this did not prevent the economic profit margin from remaining negative and decreasing.

Economic Profit

The absolute value of economic profit increased over the period, moving from -$1,477,253 thousand in 2017 to -$3,094,013 thousand in 2022. This confirms the declining trend in economic profitability and suggests a widening gap between the company’s returns and its cost of capital.

In summary, the analysis reveals a consistent inability to generate economic profits, coupled with a worsening economic profit margin despite growth in net sales. This trend warrants further investigation into the underlying factors contributing to the decline in economic profitability.