Stryker Corp. (NYSE:SYK)

The period under review demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) fluctuates, it does not generate sufficient returns to cover the cost of capital employed. Invested capital generally increased over the period, contributing to the sustained negative economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased significantly from 2017 to 2018, rising from US$1,187 million to US$2,098 million. It continued to grow modestly in 2019, reaching US$2,347 million. However, a decline was observed in 2020, with NOPAT falling to US$1,867 million, followed by a slight recovery to US$2,015 million in 2021. Despite these fluctuations, NOPAT remained below the level required to generate a positive economic profit.

Cost of Capital

The cost of capital remained relatively stable throughout the period, fluctuating between 15.13% and 15.52%. A slight decrease was noted in 2020, but it rebounded in 2021. The consistency in the cost of capital suggests that external factors influencing funding costs did not significantly change during this timeframe.

Invested Capital

Invested capital exhibited a consistent upward trend from 2017 to 2020, increasing from US$17,502 million to US$27,132 million. This indicates a continued investment in the business. A minor decrease was observed in 2021, with invested capital falling to US$26,516 million, but it remained substantially higher than the initial value in 2017. The increasing capital base, coupled with a consistent cost of capital, contributed to the growing magnitude of negative economic profit.

Economic Profit

Economic profit remained negative throughout the entire period. The initial negative economic profit of US$-1,529 million in 2017 worsened to US$-2,238 million in 2020, representing the lowest value observed. While a slight improvement occurred in 2021, with economic profit at US$-2,079 million, it remained significantly negative. This indicates that the returns generated from invested capital were consistently insufficient to cover the cost of that capital.

In summary, the organization consistently failed to generate economic profit during the analyzed period. Increases in invested capital, combined with a stable cost of capital and fluctuating NOPAT, resulted in sustained negative economic profit. While NOPAT showed some growth, it was not sufficient to offset the increasing capital base and associated cost.

Net Earnings

Net earnings experienced significant volatility over the five-year period. Beginning at 1,020 million US dollars in 2017, the figure surged remarkably to 3,553 million US dollars in 2018, representing a substantial one-year increase. However, this peak was not sustained, as net earnings declined sharply to 2,083 million US dollars in 2019 and further decreased to 1,599 million US dollars in 2020. In 2021, net earnings showed a partial recovery, increasing to 1,994 million US dollars, but remained below the peak level attained in 2018.

Net Operating Profit After Taxes (NOPAT)

NOPAT displayed a more consistent and generally upward trajectory compared to net earnings. Starting at 1,187 million US dollars in 2017, NOPAT increased steadily to 2,098 million US dollars in 2018 and further to 2,347 million US dollars in 2019. Despite a decline in 2020 to 1,867 million US dollars, likely reflecting operational challenges during that year, NOPAT rebounded in 2021 to 2,015 million US dollars. Overall, NOPAT demonstrated more resilience and less volatility than net earnings.

Comparative Insights

Comparing the two metrics reveals that net operating profit after taxes maintained a more stable and sustained improvement trajectory relative to net earnings, which exhibited marked fluctuations. The disparity in patterns suggests that non-operating factors or extraordinary items may have influenced net earnings particularly in 2018, 2019, and 2020. The decrease observed in both measures during 2020 aligns temporally with global disruptions impacting corporate performance. The subsequent partial recovery in 2021 indicates improved financial performance, though net earnings have yet to reach prior peak levels.

Income Tax Expense (Benefit)

The income tax expense exhibits significant volatility over the analyzed period. In 2017, the expense was positive at 1,043 million USD, indicating a tax liability. However, in 2018, there was a notable reversal with a tax benefit of 1,197 million USD, representing a significant reduction in tax expense or recognition of deferred tax assets. In the subsequent years, the income tax expense resumed positive values, recorded at 479 million USD in 2019, decreasing to 355 million USD in 2020, and further declining to 287 million USD by the end of 2021. This trend suggests a normalization of tax expense after the considerable benefit observed in 2018, with a consistent downward trajectory in tax expense amounts during the latter years.

Cash Operating Taxes

Cash operating taxes show a different behavior compared to the income tax expense line. Starting at 1,076 million USD in 2017, there is a sharp decline to 417 million USD in 2018. For the years 2019 and 2020, cash operating taxes remain relatively stable at 383 million USD and 354 million USD, respectively. In 2021, an increase occurs, rising to 583 million USD. This increase may indicate a higher tax cash outflow in the most recent year, potentially due to changes in taxable income, tax policy, or timing differences in tax payments. Overall, cash operating taxes appear to stabilize after the initial decrease, with a notable uptick in the final year of the period analyzed.

Total reported debt & leases

The total reported debt and leases exhibited an increasing trend from 2017 to 2020, rising from $7,518 million to $14,425 million. This represents a significant increase in leverage over the four-year period. However, in 2021, there was a reduction to $12,901 million, indicating some deleveraging or repayment of obligations after the peak in 2020.

Total Stryker shareholders’ equity

Shareholders’ equity showed consistent growth throughout the period under review. Starting at $9,966 million in 2017, equity steadily increased each year, reaching $14,877 million by 2021. This progression suggests ongoing retention of earnings or issuance of equity contributing to strengthening the capital base.

Invested capital

Invested capital followed an upward trajectory from 2017 to 2020, growing from $17,502 million to $27,132 million. This growth aligns with the increases in both debt and equity, reflecting expanded investment in assets or operations. In 2021, invested capital slightly decreased to $26,516 million, likely influenced by the reduction in total debt and leases observed in the same year.

The financial performance, as indicated by economic value added metrics, demonstrates a consistent pattern of negative economic profit over the five-year period from 2017 to 2021. While invested capital generally increased during this time, it did not translate into positive economic profit generation.

Economic Profit

Economic profit consistently remained negative throughout the observed period. The magnitude of the loss increased from US$1,529 million in 2017 to US$2,238 million in 2020, before decreasing slightly to US$2,079 million in 2021. This suggests a growing inability to generate returns exceeding the cost of capital, although the rate of decline lessened in the final year.

Invested Capital

Invested capital exhibited an upward trend from 2017 to 2021, increasing from US$17,502 million to US$26,516 million. The most substantial increase occurred between 2019 and 2020, with an addition of US$3,858 million. While capital investment grew, it did not correlate with improved economic profitability.

Economic Spread Ratio

The economic spread ratio, representing the difference between the return on invested capital and the cost of capital, was negative for each year. The ratio fluctuated, beginning at -8.74% in 2017, improving to -5.35% in 2018, remaining relatively stable at -5.32% in 2019, then declining to -8.25% in 2020 and -7.84% in 2021. This indicates that the company’s returns on its investments were consistently below its cost of capital, and the gap widened in 2020 before a slight improvement in 2021.

Overall, the analysis reveals a pattern of increasing investment without a corresponding increase in economic profitability. The negative and fluctuating economic spread ratio highlights a persistent challenge in generating returns that cover the cost of capital. The slight improvement in the economic spread ratio in 2021, coupled with a decrease in the magnitude of economic loss, may warrant further investigation to determine the underlying drivers and potential for future improvement.

The economic profit margin exhibited considerable fluctuation between 2017 and 2021. While net sales generally increased over the period, economic profit remained negative, resulting in consistently negative economic profit margins.

Economic Profit Margin Trend

The economic profit margin began at -12.29% in 2017. An improvement was noted in 2018, with the margin increasing to -8.17%. This positive trend did not continue, as the margin decreased slightly to -8.33% in 2019. A significant decline occurred in 2020, with the margin reaching -15.60%, the lowest point in the observed period. The margin experienced a partial recovery in 2021, rising to -12.15%, but remained in negative territory.

Relationship to Net Sales

Net sales increased from US$12,444 million in 2017 to US$17,108 million in 2021. Despite this growth in sales, the economic profit remained negative throughout the period. The largest increase in net sales occurred between 2020 and 2021, growing by US$2,757 million. However, the economic profit margin did not improve proportionally, suggesting that increases in costs or capital charges outpaced revenue growth.

Economic Profit

Economic profit itself showed a pattern of fluctuation. Starting at a loss of US$1,529 million in 2017, it improved to a loss of US$1,111 million in 2018. It then worsened to a loss of US$1,239 million in 2019, followed by a substantial decline to a loss of US$2,238 million in 2020. A slight improvement was observed in 2021, with the loss decreasing to US$2,079 million, but still remaining significantly negative.

The consistent negative economic profit margins indicate that the company’s returns are not covering its cost of capital. The substantial decline in the economic profit margin in 2020 warrants further investigation to determine the underlying causes, despite the partial recovery in 2021.