United Parcel Service Inc. (NYSE:UPS)

The period under review demonstrates significant fluctuations in economic profit. Initially, the company experienced a substantial loss, followed by a period of positive economic profit, which subsequently declined, culminating in a negative economic profit in the most recent year.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased dramatically from 2020 to 2021, reaching a peak of US$15,125 million. This was followed by a decrease in 2022 and a more pronounced decline in 2023 and 2024, ending at US$6,582 million. This suggests a weakening in operational profitability over the latter part of the period.

Cost of Capital

The cost of capital exhibited a slight increasing trend from 2020 to 2022, peaking at 15.38%. It then decreased in 2023 and 2024, settling at 14.42%. While fluctuations were present, the cost of capital remained relatively stable overall, ranging between 14.42% and 15.38% throughout the period.

Invested Capital

Invested capital consistently increased throughout the period, rising from US$33,181 million in 2020 to US$48,150 million in 2024. This indicates a continuous reinvestment in the business or expansion of assets.

Economic Profit

Economic profit began at a loss of US$-3,686 million in 2020. A significant turnaround occurred in 2021, with economic profit reaching US$8,371 million. Positive economic profit continued in 2022 (US$5,841 million) and 2023 (US$908 million), but diminished considerably. By 2024, economic profit had turned negative again, reaching US$-361 million. The decline in economic profit, despite increasing invested capital, suggests that the returns generated from those investments are not consistently exceeding the cost of capital.

The initial improvement in economic profit appears strongly correlated with the substantial increase in NOPAT observed between 2020 and 2021. However, the subsequent decline in NOPAT, coupled with continued increases in invested capital, has eroded the economic profit, ultimately resulting in a negative value in the final year of the period.

Net Income Trend

The net income shows significant volatility over the analyzed period. It started relatively low at 1,343 million USD in 2020, then experienced a sharp increase to 12,890 million USD in 2021. Following that peak, net income declined to 11,548 million USD in 2022, and continued to decrease more substantially in 2023 and 2024, reaching 6,708 million USD and 5,782 million USD respectively. This indicates a strong peak in profitability in 2021 followed by a steady decline, though it remains above the initial 2020 level.

NOPAT (Net Operating Profit After Taxes) Trend

The NOPAT also exhibits a similar pattern to net income, beginning at 1,136 million USD in 2020. Thereafter, it rose markedly to 15,125 million USD in 2021, representing the highest value within the period. It then experienced a decrease, falling to 12,726 million USD in 2022, and continued to decline in the subsequent years to 7,622 million USD in 2023 and 6,582 million USD in 2024. Despite the decline after 2021, the NOPAT levels in the later years remain notably higher than those at the start of the period.

Overall Pattern

Both key profitability metrics—net income and NOPAT—reflect a peak in 2021 followed by a downward trend through 2024. The declines from the peak values are quite pronounced, suggesting that the company faced challenges impacting profitability after 2021. Nevertheless, profitability metrics have not returned to the low levels seen in 2020, indicating retained periodic strength despite the decreases.

Income Tax Expense

The income tax expense exhibits significant volatility across the observed periods. There is a substantial increase from 501 million USD in 2020 to 3,705 million USD in 2021, indicating a sharp rise in tax liabilities or taxable income during that year. Subsequently, the tax expense decreases slightly but remains elevated at 3,277 million USD in 2022. Following 2022, a notable downward trend occurs with the tax expense falling to 1,865 million USD in 2023 and further down to 1,660 million USD in 2024. This pattern suggests a peak in tax expense in the early years followed by a considerable reduction towards the later years.

Cash Operating Taxes

Cash operating taxes show a more consistent upward movement initially, rising from 1,520 million USD in 2020 to 2,219 million USD in 2021, and further increasing to 2,913 million USD in 2022. Despite the initial rise, the trend reverses after 2022, with cash operating taxes decreasing to 1,861 million USD in 2023. However, there is a slight increase again in 2024 to 1,889 million USD. Overall, cash operating taxes demonstrate a growing burden through the first three years, followed by a reduction and a minor rebound in the final year.

Comparison and Insights

While both income tax expense and cash operating taxes start at relatively lower levels in 2020 and rise significantly in the subsequent years, income tax expense peaks higher and declines more sharply than cash operating taxes. The divergence in their trajectories after 2022 indicates possible changes in tax strategies, timing differences between accrued tax expense and actual cash paid, or adjustments related to deferred tax assets or liabilities. The fluctuations suggest a dynamic tax environment with a shift toward lower reported tax expenses and cash taxes in the recent years, potentially reflecting changes in profitability, tax planning measures, or regulatory impacts.

Total reported debt & leases

The total reported debt and leases exhibit a fluctuating but generally declining trend over the five-year period. Starting from $27,754 million at the end of 2020, the figure decreased to $23,521 million by the end of 2022, followed by a rise to $26,729 million in 2023, before dipping again to $25,652 million in 2024. This pattern suggests some variability in debt management, possibly influenced by financing activities or capital expenditure requirements.

Equity for controlling interests

Equity for controlling interests shows a significant increase between 2020 and 2021, rising sharply from $657 million to $14,253 million. This upward trajectory continued, albeit at a slower pace, reaching $19,786 million in 2022. However, equity decreased moderately in the subsequent years to $17,306 million in 2023 and further to $16,718 million in 2024. The initial surge might reflect strong retained earnings or capital injections, while the later decline could suggest share repurchases, dividends, or losses impacting shareholder equity.

Invested capital

Invested capital demonstrates a consistent upward trend throughout the period. Starting at $33,181 million in 2020, it increased steadily each year, reaching $44,780 million in 2022 and continuing to rise to $48,150 million by the end of 2024. This gradual growth indicates ongoing investment in the company’s assets, potentially reflecting expansion or enhancement of operational capacity.

The economic spread ratio exhibited significant fluctuations over the five-year period. Initially negative, it demonstrated substantial improvement before declining again in the most recent year. This analysis details the observed trends in economic profit, invested capital, and the resulting economic spread ratio.

Economic Spread Ratio

The economic spread ratio began at -11.11% in 2020, indicating that the company’s return on invested capital was less than its cost of capital. A marked positive shift occurred in 2021, with the ratio increasing to 18.85%, suggesting a strong outperformance relative to the cost of capital. This positive trend continued into 2022, albeit at a slower pace, reaching 13.04%. However, a considerable decline was observed in 2023, with the ratio falling to 2.00%. This downward trajectory continued into 2024, resulting in a ratio of -0.75%, returning the company to a position where returns are slightly below the cost of capital.

Economic Profit

Economic profit mirrored the trend in the economic spread ratio. A substantial loss of US$3,686 million was recorded in 2020. This was followed by a significant increase in economic profit to US$8,371 million in 2021 and US$5,841 million in 2022. A substantial decrease in economic profit was observed in 2023, falling to US$908 million, and further declining to a loss of US$361 million in 2024.

Invested Capital

Invested capital consistently increased throughout the period. Starting at US$33,181 million in 2020, it rose to US$44,396 million in 2021 and US$44,780 million in 2022. Further increases were noted in 2023 (US$45,460 million) and 2024 (US$48,150 million). The consistent growth in invested capital, coupled with the fluctuating economic profit, significantly influenced the economic spread ratio.

The observed decline in the economic spread ratio in 2023 and 2024, despite continued growth in invested capital, suggests a potential weakening in the company’s ability to generate returns exceeding its cost of capital. Further investigation into the factors driving this trend is warranted.

The economic profit margin exhibited significant fluctuations between 2020 and 2024. Initially negative, it demonstrated substantial improvement before declining again in the most recent period. A detailed examination of the trends reveals key insights into the company’s profitability relative to its cost of capital.

Economic Profit Margin Trend

In 2020, the economic profit margin was negative at -4.36%. This indicates that the company’s economic profit was insufficient to cover its cost of capital. A marked positive shift occurred in 2021, with the margin increasing to 8.60%, signifying a substantial improvement in value creation. The margin remained positive in 2022, although it decreased to 5.82%, suggesting a moderation in the rate of value creation. A further decline was observed in 2023, with the margin falling to 1.00%, indicating a diminishing economic profit. Finally, in 2024, the economic profit margin turned negative again, reaching -0.40%, suggesting that the company’s returns were once more below its cost of capital.

The economic profit margin’s trajectory closely mirrors the trend in economic profit. The substantial increase in economic profit from 2020 to 2021 directly drove the improvement in the margin. The subsequent declines in economic profit in 2022, 2023, and 2024 correspondingly led to a decrease in the economic profit margin, culminating in a negative value in 2024.

Relationship to Revenue

Revenue increased from US$84,628 million in 2020 to US$97,287 million in 2021, and peaked at US$100,338 million in 2022. While revenue decreased to US$90,958 million in 2023 and remained relatively stable at US$91,070 million in 2024, the economic profit margin’s decline suggests that revenue growth alone was not sufficient to maintain or improve value creation. The negative margin in 2024, despite comparable revenue to 2023, indicates that cost of capital exceeded economic profit even at that revenue level.

The observed pattern suggests a sensitivity of economic profit margin to factors beyond revenue, potentially including changes in operating costs, capital efficiency, or the cost of capital itself. Further investigation into these underlying drivers would be necessary to fully understand the fluctuations in economic profit margin.