Amazon.com Inc. (NASDAQ:AMZN)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) exhibited substantial growth from 2020 to 2021, followed by a considerable decline in 2022, a recovery in 2023, and further growth in 2024. Invested capital consistently increased throughout the period, while the cost of capital remained relatively stable, with minor variations annually.

Economic Profit Trend

Economic profit began at a negative value in 2020, improving to a positive value in 2021. However, it experienced a dramatic negative shift in 2022, representing the largest negative economic profit of the period. While improving in 2023, economic profit remained negative. The final year observed, 2024, shows a continued negative economic profit, though less severe than in 2022 and 2023.

NOPAT and Economic Profit Relationship

The substantial decrease in NOPAT in 2022 directly correlates with the largest negative economic profit for that year. The recovery in NOPAT during 2023 and subsequent growth in 2024 are associated with less negative economic profit figures, indicating a strong relationship between operational profitability and economic profit generation.

Cost of Capital and Invested Capital

Invested capital increased each year, suggesting ongoing investment in the business. The cost of capital remained relatively consistent, fluctuating within a narrow range. Despite the increasing invested capital, the cost of capital did not appear to be a primary driver of the significant swings in economic profit, as its changes were comparatively small. The negative economic profits suggest that returns on the invested capital were insufficient to cover the cost of that capital in multiple years.

Overall, the analysis reveals a period of volatile economic performance. While the company consistently expanded its invested capital base, its ability to generate economic profit was inconsistent, with significant negative economic profit observed in 2020, 2022, 2023 and 2024. The fluctuations in NOPAT appear to be the dominant factor influencing economic profit during this period.

Net Income (Loss)

The net income fluctuated significantly over the five-year period. Beginning at $21,331 million in 2020, there was a substantial increase to $33,364 million in 2021. However, 2022 marked a notable downturn with a net loss of $2,722 million. This negative performance rebounded sharply in the subsequent years, reaching $30,425 million in 2023 and further rising to $59,248 million in 2024. The data indicates a strong recovery and growth trajectory after the loss experienced in 2022.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar pattern to net income, starting at $24,183 million in 2020 and rising to $37,525 million in 2021. It then experienced a sharp decline to a negative $5,619 million in 2022, deeper than the net income loss in the same year, indicating challenges in operating profitability. However, a significant recovery occurred in 2023 with NOPAT increasing to $31,856 million, followed by a strong increase to $58,988 million in 2024. This suggests an improvement in the company's core operational efficiency and profitability in the last two years.

Overall Analysis

The financial results reveal volatility, with a peak in 2021, a pronounced downturn in 2022, and substantial recovery and growth by 2024. The presence of negative figures in 2022 for both net income and NOPAT indicates operational and profitability challenges during that year. The subsequent rebound in 2023 and 2024 demonstrates strong adaptive or strategic measures resulting in enhanced earnings and operating profit, achieving new highs at the end of the evaluated period.

Provision (benefit) for income taxes, net

The net provision for income taxes showed considerable volatility over the observed periods. In 2020 and 2021, the provision increased significantly from 2,863 million USD to 4,791 million USD. However, the year 2022 presented an unusual pattern with a net tax benefit of -3,217 million USD, indicating a reversal or tax benefit situation rather than a conventional tax expense. Subsequently, the provision rose again sharply to 7,120 million USD in 2023 and further to 9,265 million USD in 2024, reflecting a substantial increase in tax obligations or adjustments during these years.

Cash operating taxes

Cash operating taxes exhibited a steadily increasing trend from 3,844 million USD in 2020 to 5,646 million USD in 2021, followed by a more moderate rise to 5,689 million USD in 2022. In 2023, there was a notable surge to 13,583 million USD, nearly doubling the previous year's amount. This upward momentum continued in 2024 with cash operating taxes reaching 14,023 million USD. The substantial increase observed in the last two years suggests significant growth in actual tax payments, potentially correlated with rising taxable income or changes in tax rates and regulations.

Total reported debt & leases

Over the five-year period, total reported debt and leases exhibited an overall increasing trend from 100,504 million US dollars in 2020 to a peak of 154,972 million in 2022. This increase suggests a significant rise in the company's leverage or obligations during these years. However, this peak level of debt was relatively maintained in 2023, with a slight decrease to 154,556 million, followed by a further moderate reduction to 147,838 million in 2024. The slight decline in the last two years might indicate strategic deleveraging or improved debt management efforts.

Stockholders’ equity

Stockholders' equity demonstrated strong and consistent growth throughout the period under review. Starting at 93,404 million US dollars in 2020, equity levels increased markedly year over year, reaching 138,245 million in 2021 and continuing upward to 146,043 million in 2022. This growth accelerated significantly during 2023 and 2024, culminating in a sizable equity base of 285,970 million by the end of 2024. The substantial rise in equity in the final years suggests enhanced retained earnings, possible equity issuances, or asset revaluations, which strengthen the company's net asset position and financial stability.

Invested capital

Invested capital showed a continuous and pronounced increase across the five years. Beginning at 150,160 million US dollars in 2020, it increased substantially to 202,836 million in 2021, then accelerated its upward trajectory to 269,358 million in 2022. The growth sustained momentum through 2023 and 2024, reaching 326,668 million and 375,421 million respectively. This pattern indicates significant expansion in the company's total capital employed in operations, possibly due to investments in long-term assets, acquisitions, or business growth initiatives.

The economic spread ratio exhibited considerable fluctuation between 2020 and 2024. Initially negative, it became positive in 2021 before declining significantly in subsequent years, though remaining above the 2022 level in 2024. This pattern correlates with the movement of economic profit, which also transitioned from negative to positive and then back to negative values over the same period.

Economic Spread Ratio Trend

In 2020, the economic spread ratio was -2.15%, indicating that the company’s return on invested capital was less than its weighted average cost of capital. A substantial improvement was observed in 2021, with the ratio rising to 0.57%, signifying that the company generated returns exceeding its cost of capital. However, this positive spread was short-lived. The ratio decreased sharply to -19.32% in 2022, representing a significant underperformance relative to the cost of capital. A partial recovery occurred in 2023, with the ratio moving to -8.25%, and continued into 2024, reaching -2.66%. While still negative, the 2024 value represents the best performance since 2021.

The invested capital consistently increased throughout the period, rising from US$150,160 million in 2020 to US$375,421 million in 2024. This growth in invested capital did not translate into a sustained positive economic spread, as evidenced by the fluctuating economic profit and spread ratio.

Relationship between Economic Profit and Economic Spread

The economic spread ratio directly reflects the economic profit. The negative economic profit values in 2020, 2022, 2023, and 2024 are consistent with the corresponding negative economic spread ratios. The positive economic profit of US$1,149 million in 2021 aligns with the positive economic spread ratio of 0.57% for that year. The magnitude of the economic spread ratio appears to be sensitive to changes in economic profit, particularly the large negative profit in 2022 which resulted in a substantial negative spread.

The trend suggests a challenge in consistently generating returns that exceed the cost of capital, despite substantial increases in invested capital. Further investigation into the factors driving the cost of capital and the efficiency of capital allocation would be warranted.

The economic profit margin exhibited significant fluctuations between 2020 and 2024. Initial observations reveal a period of negative economic profit in 2020, followed by a positive margin in 2021, and subsequent returns to negative values through 2024. The magnitude of the negative economic profit increased substantially in 2022 before decreasing in the following years, though remaining negative.

Economic Profit Margin Trend

In 2020, the economic profit margin stood at -0.83%. This indicates that the company’s economic profit was less than zero, meaning the return generated was below the cost of capital. A substantial improvement was observed in 2021, with the margin increasing to 0.24%, signifying economic profit exceeding the cost of capital. However, this positive trend was short-lived. The margin declined sharply to -10.08% in 2022, representing a significant deterioration in economic profitability. This negative trend continued, albeit at a slower pace, with margins of -4.65% in 2023 and -1.56% in 2024. The trend suggests increasing difficulty in generating returns exceeding the cost of capital, particularly evident in 2022.

The adjusted net sales consistently increased throughout the period, moving from US$387,482 million in 2020 to US$641,635 million in 2024. Despite this growth in sales, the economic profit margin did not consistently benefit, as evidenced by the continued presence of negative margins in multiple years. This suggests that increases in costs or capital employed outpaced revenue growth, impacting the ability to generate economic profit.

Relationship between Sales and Economic Profit Margin

While adjusted net sales demonstrated a consistent upward trajectory, the economic profit margin did not follow suit. The divergence between increasing sales and fluctuating, often negative, economic profit margins suggests that revenue growth alone is insufficient for generating economic value. Factors such as rising operating expenses, increased capital investment, or a higher cost of capital may be contributing to this disconnect. The substantial decline in the economic profit margin in 2022, despite increased sales, warrants further investigation into the underlying cost structure and capital allocation decisions.

The movement from a negative margin in 2020 to positive in 2021, and then back to increasingly negative margins, indicates a volatile economic performance. The most recent data, from 2024, shows a lessening of the negative margin compared to 2022 and 2023, but still indicates that the company is not currently generating returns that cover its cost of capital.