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, and then a recovery in 2023 and 2024. Invested capital consistently increased throughout the five-year period, while the cost of capital remained relatively stable, fluctuating within a narrow range.

Economic Profit Trend

Economic profit experienced a negative value in 2020, indicating the company’s return on invested capital was less than its cost of capital. This improved to a positive value in 2021, suggesting value creation. However, 2022 saw a dramatic decrease, resulting in a substantial negative economic profit, the largest of the period. While economic profit improved in both 2023 and 2024, it remained negative, indicating continued value destruction, albeit at a diminishing rate.

NOPAT Analysis

NOPAT increased significantly from US$24,183 million in 2020 to US$37,525 million in 2021, representing a growth of approximately 55%. The subsequent drop to a loss of US$5,619 million in 2022 is noteworthy. A recovery was then observed, with NOPAT reaching US$31,856 million in 2023 and further increasing to US$58,988 million in 2024. This suggests operational performance is highly sensitive to external factors or internal strategic shifts.

Cost of Capital and Invested Capital

The cost of capital remained relatively consistent, ranging from 17.24% to 18.38% over the period. This indicates a stable risk profile or consistent financing structure. Invested capital demonstrated a consistent upward trend, increasing from US$150,160 million in 2020 to US$375,421 million in 2024. This growth in invested capital, coupled with the fluctuations in NOPAT, significantly impacted economic profit.

The negative economic profit in 2020, 2022, 2023, and 2024 suggests that, despite increasing investments, the company did not generate returns exceeding its cost of capital during those years. The substantial decline in economic profit in 2022 warrants further investigation to understand the underlying causes of the significant NOPAT decrease. The positive economic profit in 2021 was a brief period of value creation, but the subsequent returns indicate a need to evaluate investment strategies and operational efficiency.

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 its 2022 low in 2023 and 2024. This pattern is closely linked to the performance of economic profit and the growth of invested capital.

Economic Spread Ratio

In 2020, the economic spread ratio stood at -2.15%, indicating that the company’s return on invested capital was below its weighted average cost of capital. A substantial improvement was observed in 2021, with the ratio rising to 0.56%, signifying a positive economic spread and value creation. However, this positive trend was short-lived. The ratio experienced a dramatic decrease in 2022, reaching -19.32%, and remained negative in 2023 (-8.25%) and 2024 (-2.67%). While the ratio improved from the 2022 low, it did not return to the positive territory achieved in 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. Economic profit, which directly influences the economic spread ratio, was negative in 2020, positive in 2021, and then negative again in 2022, 2023, and 2024. The magnitude of the negative economic profit in 2022 and 2023 was particularly substantial, contributing to the significant decline in the economic spread ratio during those years.

Relationship between Economic Profit and Economic Spread

The economic spread ratio’s movements directly mirror those of economic profit. The positive economic profit in 2021 drove the ratio into positive territory. Conversely, the substantial negative economic profits in 2022, 2023, and 2024 resulted in a negative economic spread ratio for those years. This indicates that while the company continued to invest capital, it struggled to generate returns exceeding its cost of capital during those periods.

The increasing invested capital base, coupled with fluctuating and ultimately negative economic profit, suggests a potential challenge in effectively deploying capital to generate sufficient returns. The improvement in the economic spread ratio from 2022 to 2024, despite continued negative economic profit, may indicate some efficiency gains or a moderation in the cost of capital, but further investigation would be required to confirm this.

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 -10.09% 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 consistent growth in sales, the economic profit margin did not follow suit, indicating that revenue growth alone was insufficient to drive economic profitability. The widening gap between net sales and economic profit margin, especially in 2022, suggests potential issues with cost management, capital efficiency, or pricing strategies.

Relationship between Sales and Economic Profit Margin

While adjusted net sales demonstrated a consistent upward trajectory, the economic profit margin experienced volatility. The substantial increase in sales between 2020 and 2021 did not translate into a proportionally larger positive economic profit margin. The significant decline in the economic profit margin in 2022, despite continued sales growth, suggests that factors beyond revenue generation were impacting profitability. The subsequent, though smaller, improvements in the margin from 2022 to 2024, alongside continued sales increases, indicate a potential stabilization, but not a return to the profitability levels seen in 2021.

The observed pattern suggests a growing challenge in converting sales into economic profit. Further investigation into the underlying drivers of cost of capital and operational efficiency is warranted to understand the reasons for the declining economic profit margin despite increasing sales.