Sherwin-Williams Co. (NYSE:SHW)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) generally increased over the five-year span, while the cost of capital remained relatively stable with some variation. Invested capital exhibited an initial increase followed by a decrease and then a substantial rise in the final year. However, economic profit remained negative throughout the period, indicating that the company’s returns did not exceed its cost of capital.

NOPAT Trend

Net operating profit after taxes increased from US$2,357,407 thousand in 2021 to US$3,193,137 thousand in 2025. The largest year-over-year increase occurred between 2023 and 2024, rising by US$452,979 thousand. Growth was more moderate in other periods.

Cost of Capital Trend

The cost of capital experienced minor fluctuations. It decreased slightly from 17.67% in 2021 to 17.49% in 2022, then increased to 18.43% in 2024 before decreasing slightly to 18.27% in 2025. These changes were relatively small compared to the changes observed in NOPAT and invested capital.

Invested Capital Trend

Invested capital increased from US$15,808,100 thousand in 2021 to US$17,346,300 thousand in 2022, then decreased to US$16,412,900 thousand in 2023. A significant increase was observed in 2025, reaching US$19,297,800 thousand. This final increase suggests a substantial reinvestment in the business or potentially an acquisition.

Economic Profit Trend

Economic profit was negative in each year of the period. The most substantial loss occurred in 2022, at US$-556,328 thousand. While the losses decreased between 2022 and 2024 to US$-117,201 thousand, economic profit became more negative again in 2025, reaching US$-332,237 thousand. This suggests that despite increasing NOPAT, the growth in invested capital and the cost of capital outweighed the gains, resulting in continued value destruction.

The consistent negative economic profit indicates that the company is not generating returns sufficient to cover its cost of capital. While NOPAT is trending upwards, the increases are not enough to offset the cost of the invested capital, particularly given the substantial increase in invested capital in the final year. Further investigation into the drivers of invested capital and the efficiency of capital allocation would be warranted.

Net income and net operating profit after taxes (NOPAT) both demonstrate positive performance over the analyzed period. While net income experienced a slight decrease in the most recent year, NOPAT consistently increased, suggesting improvements in core operational profitability. The divergence between the two metrics warrants further investigation.

NOPAT Trend

NOPAT exhibited a consistent upward trend from 2021 through 2025. Starting at US$2,357,407 thousand in 2021, it increased to US$2,478,341 thousand in 2022, and US$2,509,420 thousand in 2023. The rate of increase accelerated in 2024, reaching US$2,962,399 thousand, and continued to rise to US$3,193,137 thousand in 2025. This indicates strengthening operational efficiency and profitability.

Net Income Trend

Net income also generally increased from 2021 to 2024. It rose from US$1,864,400 thousand in 2021 to US$2,020,100 thousand in 2022, and US$2,388,800 thousand in 2023. A further increase was observed in 2024, reaching US$2,681,400 thousand. However, net income decreased in 2025 to US$2,568,500 thousand, representing a potential shift in factors impacting overall profitability beyond core operations.

Relationship between NOPAT and Net Income

From 2021 to 2024, NOPAT consistently exceeded net income. This difference could be attributed to factors such as interest expense, non-operating income or expenses, and tax implications. The widening gap between NOPAT and net income in 2024 and 2025, coupled with the decline in net income in 2025, suggests that non-operating factors are increasingly influencing the bottom line. Further analysis is needed to determine the specific drivers of this divergence.

The sustained growth in NOPAT is a positive indicator of the company’s core business performance. However, the recent decrease in net income, despite continued NOPAT growth, suggests a need to investigate factors impacting overall profitability beyond operational efficiency.

The provisions for income taxes and cash operating taxes both demonstrate an increasing trend from 2021 to 2023, followed by stabilization and a decrease in the most recent year presented. A more detailed examination reveals differing patterns between the two measures.

Provisions for Income Taxes

Provisions for income taxes increased from US$384.2 million in 2021 to US$721.1 million in 2023, representing a substantial rise over the two-year period. Growth slowed in 2024, with provisions reaching US$770.4 million, and then decreased slightly to US$769.7 million in 2025. This suggests a potential stabilization of tax obligations after a period of significant increase.

Cash Operating Taxes

Cash operating taxes exhibited a similar upward trajectory from 2021 to 2023, increasing from US$545.6 million to US$908.0 million. The rate of increase was notably higher than that of provisions for income taxes. Like provisions, growth moderated in 2024, reaching US$948.1 million, before experiencing a more pronounced decrease to US$731.4 million in 2025. This decline is more substantial than the decrease observed in provisions for income taxes.

The divergence between the two measures in 2025 is noteworthy. The larger decrease in cash operating taxes compared to provisions for income taxes could indicate factors such as tax credits, changes in tax planning strategies, or timing differences between reported provisions and actual cash outflows. Further investigation would be required to determine the underlying causes of this difference.

Overall Trend

Both measures initially increased, likely reflecting increased profitability or changes in the tax environment. The subsequent stabilization and decrease in 2025 suggest a potential shift in the company’s tax position or a response to evolving economic conditions. The differing magnitudes of change between provisions and cash taxes warrant further scrutiny to understand the drivers of these trends and their impact on economic value added.

The invested capital of the company demonstrates a generally increasing trend over the five-year period, though with some fluctuation. Total reported debt & leases and shareholders’ equity both contribute to this invested capital figure, and their individual movements influence the overall trend.

Invested Capital Trend

Invested capital increased from US$15,808.1 million in 2021 to US$17,346.3 million in 2022, representing a significant rise. A decrease was then observed in 2023, falling to US$16,412.9 million. This was followed by a modest increase in 2024 to US$16,707.9 million, before a more substantial increase in 2025, reaching US$19,297.8 million. The 2025 value represents the highest level of invested capital over the observed period.

Debt & Leases

Total reported debt & leases generally increased throughout the period. From US$11,495.4 million in 2021, it rose to US$12,507.9 million in 2022. A decrease occurred in 2023 to US$11,809.7 million, followed by a slight increase in 2024 to US$12,102.6 million. The most significant increase was observed between 2024 and 2025, with debt & leases reaching US$13,138.0 million.

Shareholders’ Equity

Shareholders’ equity exhibited consistent growth throughout the period. It increased from US$2,437.2 million in 2021 to US$3,102.1 million in 2022, US$3,715.8 million in 2023, US$4,051.2 million in 2024, and finally to US$4,598.3 million in 2025. This represents a steady and substantial increase in equity over the five years.

The fluctuations in invested capital appear to be influenced by both debt and equity levels. While debt experienced a dip in 2023, equity continued to grow, partially offsetting the decrease. The substantial increase in invested capital in 2025 is attributable to increases in both debt & leases and shareholders’ equity.

The economic spread ratio exhibited a fluctuating pattern over the five-year period. Initially negative, the ratio demonstrated improvement before declining again. Invested capital increased overall, while economic profit remained consistently negative, though with varying magnitudes.

Economic Spread Ratio

The economic spread ratio began at -2.76% in 2021 and decreased to -3.21% in 2022, indicating a widening gap between the company’s cost of capital and its return on invested capital. A notable improvement occurred in 2023, with the ratio moving to -0.70%, suggesting a narrowing of this gap. However, this positive trend was not sustained, as the ratio deteriorated to -1.72% in 2025. The 2023 value represents the closest the ratio came to positive territory during the observed period.

Economic Profit

Economic profit was negative throughout the entire period. The largest negative value occurred in 2022, at -556,328 US$ in thousands. While the absolute value of economic profit decreased in 2023 to -484,887 US$ in thousands, it increased again in subsequent years, reaching -332,237 US$ in thousands in 2025. This suggests that while the company consistently destroyed economic value, the rate of destruction varied annually.

Invested Capital

Invested capital generally increased over the period, rising from 15,808,100 US$ in thousands in 2021 to 19,297,800 US$ in thousands in 2025. There was a slight decrease between 2022 and 2023, but the overall trend is upward. This increase in invested capital occurred concurrently with consistently negative economic profit, potentially exacerbating the negative economic spread ratio.

The combination of negative economic profit and increasing invested capital suggests a need for evaluation of capital allocation strategies and operational efficiency. The temporary improvement in the economic spread ratio in 2023 warrants further investigation to understand the factors contributing to that change and whether they can be replicated or sustained.

The economic profit margin exhibited fluctuations over the five-year period. Initially negative, the margin demonstrated a worsening trend before showing signs of improvement, though remaining in negative territory.

Economic Profit Margin Trend

In 2021, the economic profit margin stood at -2.18%. This margin deteriorated to -2.51% in 2022, representing the lowest point within the observed timeframe. A partial recovery was noted in 2023, with the margin improving to -2.10%. Further improvement occurred in 2024, reaching -0.51%, indicating a substantial, though incomplete, reduction in the negative margin. The most recent year, 2025, saw the margin increase to -1.41%, continuing the positive trend but still reflecting an economic loss.

The economic profit itself consistently remained negative throughout the period, aligning with the negative economic profit margin. While the magnitude of the economic loss varied, the company did not generate economic profit in any of the years examined. The trend in economic profit generally mirrored the trend in the economic profit margin, with the largest loss occurring in 2022 and a reduction in losses observed in subsequent years.

Relationship to Net Sales

Net sales increased steadily from 2021 to 2025, moving from US$19,944,600 thousand to US$23,574,300 thousand. Despite this growth in net sales, the company was unable to translate this revenue increase into positive economic profit. The improvement in the economic profit margin from 2022 to 2025 suggests that while economic losses persisted, the company became more efficient in generating profit relative to its sales as sales increased.

The observed trend suggests a potential improvement in the company’s ability to generate returns exceeding its cost of capital, but further analysis is required to determine if this trend will continue and ultimately lead to positive economic profit.