United Rentals Inc. (NYSE:URI)

The period under review demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) fluctuates, it does not sufficiently offset the increasing cost of capital applied to the invested capital base.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,784 million in 2018 to US$1,925 million in 2019, indicating improved operational profitability. However, it declined to US$1,323 million in 2020, likely due to external factors. A substantial recovery occurred in 2021, reaching US$2,048 million, and continued growth was observed in 2022, with NOPAT reaching US$3,088 million. Despite this growth, NOPAT has not been sufficient to generate positive economic profit.

Cost of Capital

The cost of capital exhibits a consistent upward trend throughout the period. Starting at 14.30% in 2018, it rose to 15.11% in 2019, 18.19% in 2020, 19.66% in 2021, and peaked at 20.65% in 2022. This increase suggests a growing risk profile or changes in market interest rates, impacting the required rate of return for investors.

Invested Capital

Invested capital generally increased over the period, moving from US$17,871 million in 2018 to US$18,200 million in 2019. A slight decrease was noted in 2020 to US$17,027 million, followed by increases in 2021 (US$19,019 million) and 2022 (US$22,485 million). The growth in invested capital, coupled with a rising cost of capital, contributes to the negative economic profit.

Economic Profit

Economic profit remained negative throughout the entire period. The deficit widened from US$-771 million in 2018 to US$-824 million in 2019 and further to US$-1,774 million in 2020. While the negative economic profit lessened slightly in 2021 to US$-1,692 million, it remained substantial and increased again in 2022 to US$-1,554 million. This indicates that the company’s returns are not exceeding its cost of capital, despite the growth in NOPAT.

In summary, the increasing cost of capital and growing invested capital base consistently outweigh the gains in NOPAT, resulting in a sustained period of negative economic profit. While NOPAT demonstrates positive growth, it has not been sufficient to overcome the increasing financial burden associated with funding the company’s operations and investments.

Net Income Trends

The net income demonstrated a generally positive trajectory over the five-year period. Starting at 1,096 million US dollars in 2018, it exhibited a moderate increase in 2019 to 1,174 million. However, in 2020, there was a noticeable decline to 890 million, which may reflect operational or market challenges during that year. In the following years, the net income recovered robustly, rising to 1,386 million in 2021 and reaching a significant peak of 2,105 million in 2022. This indicates a strong improvement in profitability towards the end of the period under review.

Net Operating Profit After Taxes (NOPAT) Trends

The NOPAT figures show a similar pattern to net income but with generally higher absolute values. Beginning at 1,784 million US dollars in 2018, NOPAT increased to 1,925 million in 2019. Like net income, it saw a decline in 2020 down to 1,323 million, suggesting a potential operational impact consistent with that year's challenges. The subsequent years saw substantial recovery and growth, with NOPAT rising sharply to 2,048 million in 2021 and further to 3,088 million in 2022. This indicates enhanced operational efficiency and profitability after tax, reflecting strong business performance in the latter years.

Comparative Insights

Both net income and NOPAT experienced a dip in 2020, likely due to external or internal disruptions affecting the company’s financial results. Despite this setback, the company demonstrated robust recovery and growth in 2021 and 2022, with both metrics exceeding prior peak levels. The growth in NOPAT outpaces that of net income, which could imply improved operational profitability and tax efficiency. Overall, the data reflects resilience and improving profitability over the five-year period, culminating in significantly stronger financial outcomes in the most recent year.

Provision for Income Taxes

The provision for income taxes showed a general upward trend over the analyzed period. Starting at $380 million in 2018, it decreased to $340 million in 2019 and further declined to $249 million in 2020. However, from 2020 onward, there was a notable increase, reaching $460 million in 2021 and continuing to rise to $697 million in 2022. This suggests fluctuations in taxable income or changes in tax planning strategies, with a significant rise in the last two years under review.

Cash Operating Taxes

Cash operating taxes exhibited considerable volatility throughout the years. Beginning at $228 million in 2018, the amount increased to $279 million in 2019, followed by a sharp rise to $517 million in 2020. Subsequently, cash operating taxes decreased to $287 million in 2021 and further dropped slightly to $260 million in 2022. The spike in 2020 may reflect extraordinary tax payments or adjustments, whereas the reduction post-2020 indicates normalization or timing differences in tax payments relative to income.

Total Reported Debt & Leases

The total reported debt and leases showed a decreasing trend from 12,395 million USD at the end of 2018 to 10,409 million USD by the end of 2020. Following that decline, there was a slight increase in 2021 to 10,508 million USD and a more pronounced rise to 12,223 million USD by the end of 2022. Overall, debt levels decreased initially but exhibited an upward reversal in the last two years.

Stockholders’ Equity

Stockholders’ equity progressively increased throughout the five-year period, rising from 3,403 million USD in 2018 to 7,062 million USD in 2022. The growth was consistent year-on-year, with the most substantial increments occurring in 2021 and 2022. This indicates a strengthening of the equity base and suggests enhanced retained earnings or equity issuance over time.

Invested Capital

Invested capital experienced fluctuations, starting at 17,871 million USD in 2018 and peaking at 18,200 million USD in 2019 before declining to the lowest point of 17,027 million USD in 2020. From 2020 onward, there was a recovery and marked growth to 19,019 million USD in 2021 and further to 22,485 million USD in 2022. The overall trend after 2020 reflects expanding invested capital, which may result from increased asset acquisition or other investments.

The economic spread ratio exhibited a declining trend over the five-year period, although with some fluctuation. Economic profit consistently remained negative throughout the observed timeframe, while invested capital generally increased. These factors combined to drive the observed changes in the economic spread ratio.

Economic Spread Ratio

The economic spread ratio decreased from -4.32% in 2018 to -4.53% in 2019, indicating a slight worsening in the relationship between returns and the cost of capital. A significant decline was then observed in 2020, with the ratio reaching -10.42%. While the ratio improved somewhat in 2021 to -8.90%, it continued to decline in 2022, settling at -6.91%. This suggests that, despite some improvement in 2021, the company’s returns relative to its invested capital remained a concern.

Economic Profit

Economic profit demonstrated a consistent negative value across all years examined. The magnitude of the loss increased from US$771 million in 2018 to US$824 million in 2019. The largest absolute loss occurred in 2020, reaching US$1,774 million. Although the loss decreased to US$1,692 million in 2021, it remained substantial. A further decrease to US$1,554 million was noted in 2022, but the company still did not generate economic profit.

Invested Capital

Invested capital generally increased over the period. It rose from US$17,871 million in 2018 to US$18,200 million in 2019. A decrease was observed in 2020, falling to US$17,027 million, before increasing significantly to US$19,019 million in 2021. The most substantial increase occurred between 2021 and 2022, with invested capital reaching US$22,485 million. This growth in invested capital, coupled with consistently negative economic profit, likely contributed to the worsening economic spread ratio, particularly in 2020 and 2021.

The combination of negative economic profit and increasing invested capital suggests that the company’s investments are not generating returns sufficient to cover the cost of capital. The slight improvement in the economic spread ratio in 2022, despite continued negative economic profit, may be attributable to the rate of increase in invested capital slowing down.

The economic profit margin exhibited a generally worsening trend from 2018 through 2020, followed by a period of improvement through 2022. While remaining negative across the observed period, the rate of decline decelerated in the latter years. This analysis details the observed patterns in economic profit, adjusted revenues, and the resulting economic profit margin.

Economic Profit

Economic profit consistently registered as a negative value throughout the five-year period. The magnitude of the loss increased from US$771 million in 2018 to US$1,774 million in 2020, representing a substantial deterioration. However, the losses moderated in subsequent years, decreasing to US$1,692 million in 2021 and further to US$1,554 million in 2022. This suggests a potential stabilization or slight improvement in the generation of returns exceeding the cost of capital.

Adjusted Revenues

Adjusted revenues demonstrated an overall upward trajectory. Revenues increased from US$8,057 million in 2018 to US$9,350 million in 2019. A slight decrease was observed in 2020, with revenues falling to US$8,526 million. Subsequently, revenues rebounded, reaching US$9,748 million in 2021 and further increasing to US$11,690 million in 2022. This growth in revenue did not translate into positive economic profit during the period.

Economic Profit Margin

The economic profit margin, calculated as economic profit divided by adjusted revenues, began at -9.57% in 2018. It deteriorated to -20.81% in 2020, indicating a significant decline in profitability relative to the capital employed. The margin improved in both 2021 (-17.36%) and 2022 (-13.29%), though it remained negative. The improvement in the margin from 2020 onwards coincides with the increase in adjusted revenues and the moderation of economic profit losses, suggesting a growing, but still insufficient, ability to generate returns above the cost of capital.

In summary, while revenue growth was evident, the company consistently failed to generate positive economic profit. The economic profit margin, though improving in the latter years of the period, remained negative, indicating that the returns generated were insufficient to cover the cost of capital.