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, NOPAT decreased in 2020 to US$1,867 million, and experienced a slight recovery in 2021 to US$2,015 million. Despite these fluctuations, NOPAT remained below the level required to generate positive economic profit.

Cost of Capital

The cost of capital remained relatively stable throughout the period, fluctuating between 15.14% and 15.53%. A slight decrease was observed in 2020, but it returned to a level comparable to prior years 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, increasing from US$17,502 million in 2017 to US$27,132 million in 2020. A minor decrease was noted in 2021, with invested capital settling at US$26,516 million. This growth in invested capital, coupled with a cost of capital exceeding NOPAT, directly contributed to the negative economic profit.

Economic Profit

Economic profit remained negative throughout the entire period. The magnitude of the negative economic profit increased from US$-1,531 million in 2017 to US$-2,242 million in 2020, representing the lowest point. While the negative economic profit lessened slightly in 2021 to US$-2,082 million, it remained substantial. This indicates that the company’s investments are not generating returns sufficient to cover the cost of capital.

In summary, the analysis reveals a consistent inability to generate economic profit. While NOPAT experienced some growth, it was insufficient to offset the increasing invested capital and the relatively stable cost of capital. The trend suggests a need to evaluate investment strategies and operational efficiency to improve returns and achieve positive economic profit.

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. Simultaneously, invested capital generally increased during this timeframe, though a slight decrease is observed in the most recent year. The economic spread ratio, reflecting the relationship between economic profit and invested capital, consistently registers negative values, mirroring the negative economic profit.

Economic Profit

Economic profit exhibits volatility, beginning at negative US$1,531 million in 2017, improving to negative US$1,113 million in 2018, then declining to negative US$1,242 million in 2019. A more substantial decrease is noted in 2020, reaching negative US$2,242 million, followed by a slight improvement to negative US$2,082 million in 2021. This suggests increasing difficulty in generating returns exceeding the cost of capital, particularly in 2020.

Invested Capital

Invested capital shows a generally increasing trend, rising from US$17,502 million in 2017 to US$27,132 million in 2020. However, 2021 presents a slight decrease to US$26,516 million. This indicates a period of capital expansion, with a potential stabilization or minor pullback in the latest year. The continued investment despite negative economic profit warrants further investigation.

Economic Spread Ratio

The economic spread ratio consistently remains negative, ranging from -8.75% in 2017 to -5.34% in 2019, then declining to -8.26% in 2020 and -7.85% in 2021. This signifies that the company’s return on invested capital is consistently below its weighted average cost of capital. The ratio’s downward trend from 2017 to 2020, followed by a slight recovery in 2021, mirrors the fluctuations in economic profit. The persistent negative spread indicates a fundamental challenge in creating shareholder value.

In summary, the observed trends suggest a growing disparity between capital employed and the returns generated. While invested capital has largely increased, the company has consistently failed to achieve economic profit, resulting in a negative economic spread. The slight improvements observed in 2018, 2019, and 2021 were insufficient to shift the overall trend towards positive value creation.

The economic profit margin exhibited a generally negative trend over the five-year period. While fluctuations occurred, the company consistently generated negative economic profit, indicating that returns did not exceed the cost of capital.

Economic Profit Margin

The economic profit margin began at -12.30% in 2017. A relative improvement was seen in 2018, with the margin increasing to -8.18%. This improvement was not sustained, as the margin decreased slightly to -8.34% in 2019. A significant decline occurred in 2020, with the margin reaching -15.62%, the lowest point in the observed period. The margin experienced a partial recovery in 2021, rising to -12.17%, but remained negative.

Net sales demonstrated an overall upward trend, increasing from US$12,444 million in 2017 to US$17,108 million in 2021. However, this increase in sales did not translate into positive economic profit. The largest increase in net sales occurred between 2020 and 2021, growing by US$2,757 million. Despite this substantial sales growth, the economic profit margin remained negative in 2021.

Economic Profit

Economic profit remained negative throughout the period, ranging from -US$1,113 million to -US$2,242 million. The largest negative economic profit was recorded in 2020 at -US$2,242 million, coinciding with the lowest economic profit margin. Economic profit decreased from -US$1,531 million in 2017 to -US$2,242 million in 2020, before decreasing less severely to -US$2,082 million in 2021.

The divergence between increasing net sales and consistently negative economic profit suggests that the cost of capital, or operational inefficiencies, are increasing at a faster rate than revenue growth. Further investigation into the components of economic profit – net operating profit after tax and the cost of capital – would be necessary to pinpoint the specific drivers of this trend.