Waste Management Inc. (NYSE:WM)

An examination of the financial performance from 2017 to 2021 reveals a persistent trend of negative economic profit. While operating profitability remained relatively stable, the growth in invested capital outpaced the growth in net operating profit after taxes (NOPAT), leading to a sustained degradation in value creation.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced an initial increase from 1,952 million USD in 2017 to a peak of 2,286 million USD in 2018. Subsequently, a gradual decline followed, with the figure stabilizing at 2,064 million USD by 2021. This indicates a stagnation in core operating profitability over the latter half of the observed period.

Invested Capital and Cost of Capital

Invested capital showed a significant upward trajectory, increasing from 17,686 million USD in 2017 to a peak of 23,729 million USD in 2020, before a slight reduction to 22,932 million USD in 2021. During this time, the cost of capital remained relatively constant, fluctuating within a narrow range between 12.03% and 12.91%, suggesting a stable risk profile and financing environment.

Economic Profit Trends

Economic profit remained negative throughout the five-year period, signifying that the returns generated were insufficient to cover the cost of the capital employed. A notable deterioration occurred between 2018 and 2019, where economic profit dropped from -93 million USD to -734 million USD. This decline correlates with the substantial increase in invested capital, which expanded the capital charge beyond the capacity of the NOPAT to cover it. The trend concluded with a further decline to -849 million USD in 2021, reflecting a widening gap between operating returns and the cost of capital.

The financial data indicates fluctuations and trends in the profitability measures of the entity over the five-year period ending December 31, 2021.

Net Income Attributable to the Company

The net income shows a declining trend from 2017 through 2020, starting at 1,949 million US dollars in 2017, slightly decreasing to 1,925 million in 2018, followed by a more pronounced decrease to 1,670 million in 2019 and further down to 1,496 million in 2020. However, there is a rebound in 2021, with net income rising to 1,816 million, indicating a recovery after the decline in prior years.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures reveal a different pattern. Starting at 1,952 million US dollars in 2017, NOPAT increased substantially in 2018 to 2,286 million, peaking in that year. Afterward, it declined over the next two years to 2,119 million in 2019 and 2,018 million in 2020. By 2021, NOPAT experienced a slight increase to 2,064 million, indicating some stabilization or modest recovery in operating profitability after taxes.

In summary, while both net income and NOPAT exhibit declines starting around 2018 or 2019, net income shows a more significant decrease and a notable rebound by 2021, whereas NOPAT peaked earlier in 2018, followed by declines with a slight recovery by 2021. These patterns may reflect variations in non-operating income, expenses, taxes, or other adjustments impacting net income differently compared to operating profit.

The financial data over the five-year period ending December 31, 2021, shows distinct trends in both income tax expense and cash operating taxes.

Income Tax Expense

Income tax expense experienced a general increase from 2017 to 2021, with fluctuations during the intermediate years. The value rose significantly from $242 million in 2017 to $453 million in 2018. It then slightly decreased to $434 million in 2019 and further declined to $397 million in 2020. However, in 2021, there was a notable increase to $532 million, marking the highest expense in the period analyzed.

Cash Operating Taxes

Cash operating taxes demonstrated a downward trend from 2017 through 2020, followed by a sharp rise in 2021. Specifically, cash operating taxes decreased from $626 million in 2017 to $511 million in 2018 and further to $424 million in 2019. This downward trajectory continued with a reduction to $324 million in 2020. In 2021, this trend reversed dramatically as cash operating taxes surged to $689 million, surpassing all previous years in the data set.

Overall, while the income tax expense shows variability with an eventual upward movement to reach its peak in 2021, cash operating taxes reveal a more pronounced downward trend until 2020, followed by a significant increase in the last year. The contrasting movements in these two tax-related financial items in 2021 may indicate changes in tax policy application, operational performance, or other tax-related accounting factors impacting the company’s tax obligations.

The financial data reveals distinct trends in key balance sheet components over the five-year period ending December 31, 2021.

Total Reported Debt & Leases

The total reported debt and leases exhibit an overall upward trend from 2017 through 2020, increasing from approximately $9,976 million in 2017 to a peak near $14,326 million in 2020. This represents a significant increase of roughly 43% over three years. In 2021, a slight decline to $13,928 million is noted, indicating a minor reduction in indebtedness or lease obligations after reaching the high point the prior year.

Total Stockholders’ Equity

Stockholders' equity also shows a general increase over the reviewed period, rising from about $6,019 million in 2017 to a maximum of $7,452 million in 2020. This growth suggests accumulated retained earnings and possible capital contributions enhancing the company’s net asset base. However, equity decreases slightly in 2021 to $7,124 million, indicating some erosion following the peak, which could be due to net losses, dividends, or other equity-reducing activities.

Invested Capital

Invested capital follows a similar pattern to total debt and equity, with steady growth from $17,686 million in 2017 to $23,729 million in 2020. This growth, amounting to approximately 34%, reflects increased deployment of financial resources into the company's operations, likely contributing to expansion or asset acquisition. The figure slightly contracts to $22,932 million in 2021, aligning with the modest declines in both debt and equity components.

Overall, the data depicts growth in the company’s financial size and capital structure through 2020, with a slight retrenchment in debt, equity, and invested capital during 2021. This trend suggests a period of expansion followed by cautious tightening or normalization of the balance sheet in the most recent year.

The analysis of economic value added indicators from 2017 to 2021 reveals a consistent trend of value destruction, characterized by negative economic profit and a deteriorating economic spread ratio. While a marginal improvement occurred in 2018, the subsequent three years demonstrate a significant decline in the ability to generate returns exceeding the cost of capital.

Economic Profit

Economic profit remained negative throughout the entire period, indicating that the returns on invested capital were insufficient to cover the cost of that capital. A brief recovery was observed in 2018, where the deficit narrowed to -93 million US dollars. However, a sharp reversal occurred in 2019, with economic profit dropping to -734 million US dollars, followed by a continued downward trajectory to -849 million US dollars by 2021.

Invested Capital

There was a general expansion in the capital base between 2017 and 2020, with invested capital increasing from 17,686 million US dollars to a peak of 23,729 million US dollars. A notable surge in investment occurred between 2018 and 2019, during which capital increased by approximately 4,205 million US dollars. A slight contraction was observed in 2021, with the balance adjusting to 22,932 million US dollars.

Economic Spread Ratio

The economic spread ratio reflects a widening gap between the return on invested capital and the cost of capital. After an initial improvement from -1.47% in 2017 to -0.51% in 2018, the ratio deteriorated sharply to -3.24% in 2019. This negative trend persisted through 2020 and 2021, reaching -3.70%, which signifies a deepening inefficiency in value creation relative to the capital deployed.

A strong correlation is observed between the increase in invested capital and the decline in economic performance starting in 2019. The substantial capital infusion during that period coincided with a precipitous drop in both economic profit and the economic spread ratio, suggesting that the additional investments failed to yield returns above the required threshold, thereby accelerating the destruction of economic value.

An analysis of the economic value added metrics reveals a persistent negative economic profit from 2017 through 2021, indicating that the returns generated from operations were insufficient to cover the company's cost of capital during this period.

Economic Profit Trends

Economic profit remained negative throughout the five-year period. A temporary improvement occurred in 2018, where the deficit narrowed to -93 million USD from -260 million USD in 2017. However, a significant reversal followed, with economic profit dropping sharply to -734 million USD in 2019 and continuing to deteriorate to -849 million USD by the end of 2021.

Adjusted Operating Revenues

Operating revenues exhibited a generally positive growth trajectory, increasing from 14,495 million USD in 2017 to 17,963 million USD in 2021. While a slight contraction was noted in 2020 (15,223 million USD), a substantial increase in revenue occurred in 2021. Despite this top-line growth, the increase in revenue did not translate into positive economic profit.

Economic Profit Margin Analysis

The economic profit margin fluctuated significantly, reflecting the disconnect between revenue growth and capital efficiency. The margin reached its highest point in 2018 at -0.63%, suggesting the closest alignment between returns and cost of capital. This was followed by a marked decline to -4.74% in 2019 and a trough of -5.50% in 2020. By 2021, the margin saw a slight recovery to -4.73%, though it remained substantially lower than the 2017-2018 levels.

The divergence between rising adjusted operating revenues and deepening economic losses between 2018 and 2021 suggests that the cost of capital or operating expenses increased at a rate that outpaced the gains from revenue expansion.