Parker-Hannifin Corp. (NYSE:PH)

The financial data reveals several noteworthy trends relating to profitability, cost of capital, invested capital, and economic profit over the analyzed periods.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited fluctuations throughout the six-year period. Starting at approximately $1.13 billion in mid-2017, it experienced a moderate increase until mid-2019, where it reached a peak close to $1.72 billion. However, a decline occurred in mid-2020 followed by a sharp recovery in mid-2021 to around $1.90 billion, which then decreased substantially to approximately $1.17 billion by mid-2022. This volatility suggests varying operational challenges and successes that affected profitability.

Cost of Capital

The cost of capital remained relatively stable in the mid-teens percentage range, varying between 15.81% and 17.74%. The highest cost was observed in mid-2021 at 17.74%, while the lowest occurred in mid-2019 at 15.81%. Such fluctuations imply changes in the company's risk profile, market conditions, or both, but overall the cost of capital maintained consistency without extreme volatility.

Invested Capital

There was a general upward trend in invested capital, increasing from approximately $13.5 billion in mid-2017 to about $22.0 billion by mid-2022. This steady growth, with a notable acceleration between mid-2020 and mid-2022, indicates ongoing investments in assets and resources, potentially aiming to support future growth and operational capacity.

Economic Profit

Despite positive NOPAT and rising invested capital, economic profit was negative for every reported year, indicating that the returns generated did not exceed the cost of capital. While the negative economic profit narrowed slightly from mid-2017 to mid-2019, reaching its least negative value near -$694.9 million, it deteriorated significantly thereafter, hitting the most substantial negative value of approximately -$2.46 billion in mid-2022. This trend highlights challenges in generating value above the required return, suggesting inefficiencies or heightened costs relative to capital employed.

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 has consistently remained negative throughout the observed period, indicating that returns did not cover the cost of capital. Initially, economic losses were substantial, with a value of approximately -1,084 million USD in mid-2017. These losses slightly decreased by mid-2019, reaching around -695 million USD. However, from 2020 onwards, there was a renewed increase in economic losses, culminating in the highest deficit of approximately -2,455 million USD by mid-2022. This trend suggests growing challenges in generating value over the cost of invested capital.

Invested Capital

Invested capital demonstrated a generally upward trend through the period analyzed, rising from about 13,508 million USD in mid-2017 to nearly 22,000 million USD by mid-2022. There was some fluctuation, notably a peak at mid-2020 before a slight decrease at mid-2021, followed by a marked increase thereafter. This indicates that the company has substantially increased its capital base, potentially investing in growth or operational expansion despite ongoing economic profit deficits.

Economic Spread Ratio

The economic spread ratio, which measures the difference between return on invested capital and cost of capital, remained negative each year, confirming that the company's operational returns have been insufficient to cover its capital costs. The ratio showed some improvement by mid-2019, reaching a less negative position near -4.55%. Nevertheless, this improvement was not sustained, as the spread worsened again through subsequent years, reaching its most negative point at -11.16% by mid-2022. This deteriorating spread aligns with the increasing economic losses and highlights growing inefficiencies or declining profitability relative to invested capital.

The financial data indicates several notable trends in the economic profit, net sales, and economic profit margin over the presented periods.

Net Sales

Net sales exhibit a general upward trend, increasing from approximately 12.03 billion USD in mid-2017 to about 15.86 billion USD in mid-2022. There was a slight dip observed in mid-2020, potentially reflecting external economic challenges, but the overall trajectory remains positive.

Economic Profit

Despite the rising net sales, economic profit values remain consistently negative throughout the periods, indicating that the company has not achieved positive economic profit in any fiscal year shown. The economic loss reached its lowest point around mid-2020, with a notable deterioration by mid-2022 to over -2.45 billion USD, suggestive of increased costs, reduced efficiencies, or other financial pressures adversely affecting profitability.

Economic Profit Margin

The economic profit margin reflects a negative percentage in all years, fluctuating but largely following a downward trend. Starting at approximately -9.01% in mid-2017, it improved slightly by mid-2019 to around -4.85%, followed by regression to nearly -15.48% in mid-2022. This decline indicates worsening profitability relative to revenues despite growth in net sales.

In summary, the company has experienced steady revenue growth, but this has not translated into improved economic profitability. The increasingly negative economic profit margin suggests that operational or capital costs may be rising faster than sales, reducing overall economic value generation. The persistence and deepening of negative economic profit call for an examination of cost structures and business strategies to enhance financial performance.