Stryker Corp. (NYSE:SYK)

The financial performance from 2017 to 2021 is characterized by a consistent inability to generate positive economic profit, with values remaining negative throughout the five-year period. Despite fluctuations in operating profitability, the return on invested capital failed to exceed the cost of capital, resulting in a sustained destruction of economic value.

Net Operating Profit After Taxes (NOPAT)

A general upward trajectory in NOPAT was observed from 2017 to 2019, rising from US$ 1,187 million to a peak of US$ 2,347 million. A notable decline occurred in 2020, where NOPAT dropped to US$ 1,867 million, followed by a partial recovery to US$ 2,015 million in 2021. This volatility indicates a period of operational contraction in 2020 before a subsequent trend of stabilization.

Invested Capital and Cost of Capital

Invested capital exhibited a steady expansion for the majority of the period, increasing from US$ 17,502 million in 2017 to a peak of US$ 27,132 million in 2020, before a slight contraction to US$ 26,516 million in 2021. During this period of capital growth, the cost of capital remained remarkably stable, fluctuating within a narrow range between 15.20% and 15.59%, establishing a consistent and high hurdle rate for value creation.

Economic Profit Trends

Economic profit remained negative across all observed years, with the most significant deficit occurring in 2020 at -US$ 2,258 million. This trough was driven by the combined effect of decreasing NOPAT and peak invested capital. While there was a modest improvement in 2018 (-US$ 1,126 million), the overall trend indicates that the growth in the capital base has outpaced the growth in operating returns, preventing the company from achieving a positive economic value added status.

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.

An analysis of the economic value added indicators between 2017 and 2021 reveals a consistent failure to generate positive economic profit, signifying that the returns on invested capital did not exceed the weighted average cost of capital during this period.

Economic Profit Trends

Economic profit remained negative throughout the five-year window. While a moderate improvement occurred between 2017 and 2018, losses deepened significantly in 2020, reaching a peak deficit of -2,258 million USD. A slight recovery was observed in 2021, although the value remained substantially negative at -2,099 million USD.

Invested Capital Expansion

Invested capital exhibited a strong growth trend from 2017 through 2020, increasing from 17,502 million USD to 27,132 million USD. This represents a significant expansion of the capital base. A slight contraction occurred in 2021, with invested capital decreasing to 26,516 million USD.

Economic Spread Ratio Performance

The economic spread ratio remained negative for the entire duration, reflecting a persistent gap where the cost of capital exceeded the actual return. The ratio improved from -8.81% in 2017 to a high of -5.40% in 2019. However, this trend reversed sharply in 2020, with the ratio dropping to -8.32%, before stabilizing slightly at -7.91% in 2021. The correlation between increasing invested capital and declining economic profit in 2020 suggests that the additional capital deployed did not generate proportionate returns.

The analyzed period from 2017 to 2021 is characterized by a persistent failure to generate positive economic profit, indicating that the company's operational returns did not exceed its cost of capital. Despite a substantial increase in net sales over the five-year duration, the economic profit margin remained negative, signaling a lack of economic value creation.

Economic Profit Analysis

Absolute economic profit exhibited significant volatility, starting at -1,542 million US dollars in 2017 and reaching its lowest point in 2020 at -2,258 million US dollars. A slight recovery was noted in 2021, with the figure improving to -2,099 million US dollars, though it remained substantially lower than the 2018 high of -1,126 million US dollars.

Net Sales Performance

Revenue growth was observed for most of the period, with net sales rising from 12,444 million US dollars in 2017 to 17,108 million US dollars in 2021. This growth trend was interrupted in 2020 by a decrease to 14,351 million US dollars, which corresponds with the period of the most severe economic profit deficit.

Economic Profit Margin Trends

The economic profit margin demonstrated a non-linear negative trend. After improving from -12.39% in 2017 to -8.28% in 2018, the margin remained relatively stable in 2019 at -8.44%. A sharp decline occurred in 2020, with the margin widening to -15.73%, before partially recovering to -12.27% in 2021.