Stryker Corp. (NYSE:SYK)

The analysis of economic value added from 2017 to 2021 reveals a consistent failure to generate positive economic profit, indicating that the operating returns were insufficient to cover the cost of the capital employed during this period.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited significant volatility, starting at 1,187 million USD in 2017 and peaking at 2,347 million USD in 2019. A notable decline occurred in 2020, where profit dropped to 1,867 million USD, before recovering slightly to 2,015 million USD by the end of 2021.

Cost of Capital

The cost of capital remained remarkably stable over the five-year horizon, fluctuating within a narrow range between 15.12% and 15.51%. This consistency suggests that the company's risk profile and the broader macroeconomic funding environment remained steady.

Invested Capital

There was a sustained increase in invested capital from 2017 through 2020, rising from 17,502 million USD to a peak of 27,132 million USD. A slight contraction was observed in 2021, with invested capital decreasing to 26,516 million USD. This expansion in the capital base increased the absolute dollar amount of the capital charge that NOPAT needed to exceed to achieve positive economic profit.

Economic Profit

Economic profit remained negative throughout the entire period, signifying that the company did not create economic value above its cost of capital. The deficit improved slightly in 2018 but deteriorated sharply in 2020, reaching a low of -2,237 million USD. This deterioration in 2020 was the result of a simultaneous decrease in NOPAT and a peak in invested capital, which maximized the capital charge while minimizing operating returns.

The overarching trend indicates that while operating profits grew between 2017 and 2019, the growth in invested capital outpaced the growth in NOPAT. Consequently, the spread between the return on invested capital and the cost of capital remained negative, resulting in a persistent destruction of economic value.

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 from 2017 to 2021 reflects a consistent inability to generate positive economic profit, indicating that the returns on invested capital remained below the company's cost of capital throughout the period. While there were intermittent periods of marginal improvement, the overall trend demonstrates a persistent value destruction from an economic value added perspective.

Economic Profit Trends

Economic profit remained negative for all five years analyzed. A modest recovery occurred between 2017 and 2018, where losses narrowed from -1,528 million to -1,109 million. However, this trend reversed in 2020, with economic profit dropping sharply to -2,237 million, the lowest point in the period. A slight improvement was noted in 2021, with the figure rising to -2,077 million, though it remained substantially lower than 2017 levels.

Invested Capital Growth

There was a sustained increase in invested capital from 2017 through 2020, growing from 17,502 million to a peak of 27,132 million. This represents a significant expansion of the capital base. In 2021, a slight contraction was observed, with invested capital decreasing to 26,516 million.

Economic Spread Ratio Analysis

The economic spread ratio mirrors the trajectory of economic profit, remaining negative throughout the duration. The ratio improved from -8.73% in 2017 to a peak of -5.32% in 2019. This stability was interrupted in 2020 when the ratio deteriorated to -8.24%, coinciding with the spike in economic losses. By 2021, the ratio saw a minor recovery to -7.83%. The persistent negative spread indicates that the return on invested capital did not meet the weighted average cost of capital during this five-year window.

The correlation between the increasing invested capital from 2017 to 2020 and the widening economic losses in 2020 suggests that the capital expansions did not yield immediate proportional returns sufficient to cover the cost of that capital. The failure of the economic spread ratio to transition into positive territory confirms a sustained gap between operational performance and capital requirements.

The financial performance from 2017 to 2021 is characterized by consistent negative economic profit despite a general upward trajectory in net sales. The persistent negative values indicate that the returns on capital invested remained below the required cost of capital throughout the analyzed period.

Economic Profit Trends

Economic profit remained negative for all five years, ranging from a peak of -1,109 million USD in 2018 to a low of -2,237 million USD in 2020. A significant deterioration is observed in 2020, where the economic loss increased substantially before experiencing a marginal recovery to -2,077 million USD in 2021.

Net Sales Performance

Net sales demonstrated an overall growth trend, increasing from 12,444 million USD in 2017 to 17,108 million USD in 2021. Although a temporary decline occurred in 2020, falling to 14,351 million USD, the subsequent growth in 2021 marked the highest revenue level within the observed timeframe.

Economic Profit Margin Analysis

The economic profit margin mirrored the volatility of the absolute economic profit, remaining negative throughout the period. The margin improved from -12.28% in 2017 to -8.16% in 2018 and remained relatively stable at -8.31% in 2019. A sharp decline to -15.58% was recorded in 2020, representing the most significant erosion of value. By 2021, the margin partially recovered to -12.14%, although it did not return to the improved levels seen in 2018 and 2019.