Parker-Hannifin Corp. (NYSE:PH)

The financial data reveals several noteworthy trends and fluctuations over the analyzed periods.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from approximately 1.13 billion in mid-2017 to a peak of around 1.90 billion in mid-2021, reflecting growth in core profitability. However, a significant decline occurred in mid-2022, with NOPAT falling sharply to about 1.17 billion, close to the mid-2017 level. This suggests a downturn in operating profit generation capacity during the last year.

Cost of Capital

The cost of capital exhibited moderate variability, ranging from approximately 15.81% to 17.74%. The lowest cost was seen in mid-2019, followed by an increase to a high in mid-2021. By mid-2022, it slightly decreased but remained elevated relative to earlier periods. This elevated cost of capital may have influenced investment decisions and profitability assessments.

Invested Capital

Invested capital showed a general upward trajectory across the timeline, rising from about 13.5 billion in mid-2017 to nearly 22 billion in mid-2022. Notably, there was a considerable increase from mid-2020 onwards, indicating substantial capital deployment or asset growth during recent years. The expansion in invested capital outpaced the growth in NOPAT, particularly evident towards mid-2022.

Economic Profit

Economic profit was consistently negative throughout all periods, indicating that the returns generated on invested capital did not exceed the cost of capital. Although the negative economic profit narrowed somewhat in mid-2019, suggesting improved value creation, it widened markedly again by mid-2022 to roughly -2.46 billion. This deepening negative economic profit reflects increasing value destruction, potentially caused by rising invested capital, declining NOPAT, or a combination of both alongside a relatively high cost of capital.

Overall, the data points to a company experiencing growth in invested capital and operating profit until around 2021, followed by a downturn in profitability and worsening economic profit in 2022. Despite maintaining a relatively high cost of capital, the company has struggled to generate positive economic value, with the gap widening in the latest period analyzed.

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.

Economic Profit

The economic profit shows a consistently negative trend throughout the analyzed periods, indicating that the company did not generate returns above its cost of capital. The value declined from -1,084,789 thousand US dollars in 2017 to a much larger loss of -2,456,054 thousand US dollars in 2022. A temporary improvement is seen in 2019 with a reduction in the magnitude of the loss, but subsequent years show worsening economic profit, especially notable in 2020 and 2022, suggesting increasing economic inefficiency or higher costs relative to returns.

Invested Capital

The invested capital demonstrates a generally upward trend over the years, rising from 13,507,821 thousand US dollars in 2017 to 21,994,132 thousand US dollars in 2022. Although there is a slight dip in 2018 and 2021, the overall pattern reflects an increasing scale of capital investment in the company’s operations. This increase, particularly the sharp rise in 2022, may suggest significant expansion or asset acquisition activities.

Economic Spread Ratio

The economic spread ratio remains negative across all periods, emphasizing that the returns on invested capital consistently failed to cover the cost of capital. The ratio fluctuates but shows an overall decline in performance, moving from -8.03% in 2017 to -11.17% in 2022. There was an improvement in 2019 where the negative spread narrowed to -4.55%, but it worsened again by 2020 and continued declining through 2022. This trend indicates not only persistent underperformance but also a deterioration in the company's ability to generate value above its cost of capital.

Overall Analysis

The combined observation of the three financial indicators suggests that while the company has increased its invested capital substantially, it has been unable to translate this into positive economic profit or a positive economic spread ratio. The growing negative economic profit and declining spread ratio point to challenges in operational efficiency or profitability. The investment scale increase without corresponding returns may raise concerns about capital allocation effectiveness and long-term value creation for shareholders.

Net Sales

Net sales exhibited an overall upward trend over the analyzed period, increasing from approximately $12.03 billion in 2017 to about $15.86 billion in 2022. After a consistent rise through 2018 and 2019, there was a slight dip in 2020, possibly influenced by external factors affecting the market that year, followed by continued growth in 2021 and 2022, reaching the highest reported sales figure.

Economic Profit

Economic profit remained negative throughout the period, indicating the company did not generate returns above its cost of capital. The magnitude of economic losses fluctuated, with relatively lower losses in 2019 (-$695 million) and significantly higher losses in alternating years, peaking at -$2.46 billion in 2022. This pattern suggests variability in the company’s ability to create economic value despite rising sales.

Economic Profit Margin

The economic profit margin mirrored the trend in economic profit, maintaining negative values across all years. It improved somewhat in 2019, narrowing to -4.86%, but deteriorated subsequently, reaching a low point of -15.48% in 2022. This indicates that although sales increased, the proportion of value lost relative to sales also grew, suggesting rising costs or reduced efficiency relative to invested capital.

Overall Analysis

Despite continuous growth in net sales, the persistent and increasing negative economic profits and profit margins highlight challenges in achieving economic profitability. The data suggest that factors such as cost management, capital efficiency, or pricing might be areas requiring attention to convert high sales volumes into positive economic returns. The volatility in economic profit margins emphasizes the need for strategic initiatives to improve value creation over time.