RH (NYSE:RH)

The analysis reveals a consistent pattern of negative economic profit over the observed period. While net operating profit after taxes (NOPAT) demonstrates significant fluctuation, it has not been sufficient to generate a return exceeding the cost of capital. Invested capital has generally increased over time, contributing to the sustained negative economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced substantial growth from 2018 to 2022, increasing from US$78,790 thousand to US$752,355 thousand. However, a notable decrease occurred in 2023, with NOPAT falling to US$544,162 thousand. Despite the peak in 2022, NOPAT levels were insufficient to offset the cost of capital throughout the entire period.

Cost of Capital

The cost of capital fluctuated considerably. It initially rose from 22.48% in 2018 to 23.08% in 2019, then decreased to 19.23% in 2020. A significant increase was observed in 2021, reaching 28.20%, before declining to 22.47% in 2022 and further to 20.53% in 2023. These variations in the cost of capital impacted the economic profit calculation, exacerbating the negative returns in years with higher capital costs.

Invested Capital

Invested capital generally trended upward, increasing from US$1,226,304 thousand in 2018 to US$4,553,261 thousand in 2022. A slight decrease was recorded in 2023, with invested capital at US$4,379,253 thousand. The increasing capital base, coupled with the cost of capital, contributed to the widening negative economic profit.

Economic Profit

Economic profit remained negative throughout the period, ranging from a low of US$-355,105 thousand in 2023 to a high of US$-45,544 thousand in 2019. The magnitude of the negative economic profit increased over time, particularly from 2021 onwards, indicating a growing disparity between returns generated and the cost of capital employed. The largest negative economic profit occurred in 2023, despite the decrease in the cost of capital, suggesting that the decline in NOPAT outweighed the benefit of the lower cost of capital.

In summary, the organization consistently failed to generate economic profit over the analyzed timeframe. While NOPAT experienced growth, it was outpaced by the cost of capital and the increasing investment base. The trend suggests a need to evaluate capital allocation strategies and operational efficiency to improve returns and achieve positive economic profit.

Net Income

The net income has shown a significant upward trend from 2018 to 2022, starting at 2,180 thousand US dollars in 2018 and reaching a peak of 688,546 thousand US dollars in 2022. However, in 2023, there is a notable decline to 528,642 thousand US dollars, indicating a decrease from the previous year's peak.

Net Operating Profit After Taxes (NOPAT)

NOPAT has also demonstrated a consistent increase over the years, rising from 78,790 thousand US dollars in 2018 to 752,355 thousand US dollars in 2022. Similar to net income, NOPAT decreases in 2023 to 544,162 thousand US dollars, showing a reduction compared to the prior year.

Overall Trends and Insights

Both net income and NOPAT exhibit strong growth from 2018 through 2022, reflecting improved profitability and operational efficiency. The concurrent decline in both metrics in 2023 suggests potential challenges or one-time events that affected the company's earnings and operating profit. Despite the decrease in 2023, the company maintains substantially higher profitability levels compared to the earlier years.

Income Tax Expense (Benefit)

The income tax expense shows a general upward trend from 2018 through 2022, increasing from 27,971 thousand US dollars in 2018 to a peak of 133,558 thousand US dollars in 2022. This indicates a substantial rise in reported tax expense over this period. However, in 2023, there is a significant reversal, with the figure turning negative to -91,358 thousand US dollars, suggesting a tax benefit or refund in that year rather than an expense.

Cash Operating Taxes

Cash operating taxes exhibit a consistent increase from 58,643 thousand US dollars in 2018 to a high of 159,201 thousand US dollars in 2022. This steady growth indicates rising cash outflows for taxes related to operations. In 2023, however, the cash operating taxes decline sharply to 30,049 thousand US dollars, which is less than one-fifth of the prior year’s amount, pointing to a significant reduction in tax payments made in cash during this period.

Overall Tax Trends

Both income tax expense and cash operating taxes generally trend upwards through most of the timeframe, reflecting increasing tax obligations. The notable shifts in 2023, with income tax expense turning into a benefit and cash operating taxes dropping markedly, suggest exceptional tax events or adjustments that could be related to changes in profitability, tax regulation, or tax planning strategies implemented during or prior to that fiscal year. The divergence between tax expense and cash taxes in the final year indicates that the recorded tax expense does not correspond to actual cash outflows, highlighting potential timing differences or non-cash tax items influencing the reported figures.

Total reported debt & leases

The total reported debt and leases show a generally increasing trend over the analyzed periods. Starting at approximately 1.25 billion US dollars in early 2018, the amount rises modestly to about 1.3 billion in early 2019. A significant increase is observed in 2020, reaching around 1.8 billion, followed by a slight decline in 2021 to about 1.62 billion. However, from 2021 to 2023, the debt nearly doubles, peaking at approximately 3.75 billion US dollars by early 2023. This indicates a substantial increase in leverage towards the latter years.

Stockholders’ equity (deficit)

Stockholders’ equity exhibits notable volatility. It begins with a deficit of roughly -7.3 million in early 2018, worsening to -22.9 million in 2019. A positive turnaround occurs in 2020, with equity improving to about 18.7 million. This positive trajectory continues strongly, reaching approximately 447 million in 2021 and peaking at around 1.17 billion in 2022. However, equity declines significantly in 2023 to roughly 784 million, though it remains positive. The initial deficits suggest prior financial struggles, followed by a recovery period and some recent weakening.

Invested capital

Invested capital follows a pattern similar to total debt and equity combined, displaying growth over the period examined. Starting near 1.23 billion in 2018, it remains relatively flat through 2019 before a marked increase to about 1.77 billion in 2020. Steady growth continues into 2021, reaching just over 2 billion. A substantial surge occurs in 2022, with invested capital approximately doubling to 4.55 billion, before slightly decreasing to 4.38 billion in 2023. The significant increase in invested capital aligns with the rise in debt and equity previously noted, indicating increased capitalization.

The economic spread ratio exhibited considerable fluctuation over the observed period. Initially negative, the ratio demonstrated improvement before declining again to reach its lowest point in the final year presented. A consistent pattern of negative economic profit is also apparent throughout the period, indicating that the company’s returns are not exceeding its cost of capital.

Economic Spread Ratio

The economic spread ratio began at -16.05% in February 2018. A substantial improvement was noted in February 2019, with the ratio increasing to -3.65%. This positive trend did not persist, as the ratio decreased to -2.59% in February 2020. A significant decline followed, with the ratio reaching -11.44% in January 2021. A slight recovery to -5.94% occurred in January 2022, but this was short-lived, as the ratio concluded the period at -8.11% in January 2023. This suggests increasing difficulty in generating returns above the cost of capital in recent years.

Economic Profit & Invested Capital

Economic profit consistently remained negative throughout the period, starting at -196,855 thousand US dollars in February 2018 and decreasing to -355,105 thousand US dollars in January 2023. Invested capital increased substantially over the period, rising from 1,226,304 thousand US dollars in February 2018 to 4,553,261 thousand US dollars in January 2022, before decreasing slightly to 4,379,253 thousand US dollars in January 2023. The increasing invested capital alongside consistently negative economic profit contributes to the declining economic spread ratio.

The combination of negative economic profit and a fluctuating, ultimately declining, economic spread ratio suggests a weakening ability to generate value for investors. The substantial increase in invested capital without a corresponding improvement in profitability is a key observation.

The economic profit margin demonstrates a generally negative trend over the observed period. While fluctuations exist, the company consistently reports economic losses, as indicated by negative economic profit values. Net revenues exhibit an overall increase during the period, but this growth has not translated into positive economic profit.

Economic Profit

Economic profit consistently registers as negative throughout the analyzed timeframe. The magnitude of the loss increased significantly from 2018 to 2021, peaking at -231,210 (US$ in thousands). While the loss decreased slightly in 2022, it increased substantially in 2023 to -355,105 (US$ in thousands), representing the largest economic loss within the period.

Net Revenues

Net revenues generally increased from 2,440,174 (US$ in thousands) in 2018 to 3,758,820 (US$ in thousands) in 2022. However, a decrease was observed in 2023, with net revenues falling to 3,590,477 (US$ in thousands). Despite the overall revenue growth, it has not been sufficient to generate a positive economic profit.

Economic Profit Margin

The economic profit margin began at -8.07% in 2018, improved to -1.82% in 2019, and -1.73% in 2020. A substantial decline occurred in 2021, reaching -8.12%. The margin remained negative in 2022 at -7.20%, and further deteriorated to -9.89% in 2023. This indicates a worsening ability to generate profit exceeding the cost of capital as a percentage of revenue.

The increasing negative trend in the economic profit margin, despite revenue growth, suggests that the cost of capital is increasing at a faster rate than the company’s ability to generate economic profit. The substantial decline in the margin in 2021 and 2023 warrants further investigation into the underlying factors contributing to these losses.