Automatic Data Processing Inc. (NASDAQ:ADP)

Over the observed period, the financial performance, as measured by economic profit, demonstrates a generally positive trajectory with some fluctuation. Net operating profit after taxes (NOPAT) and invested capital both exhibited increases over the six years, though not consistently. The cost of capital remained relatively stable, fluctuating within a narrow range.

NOPAT Trend

Net operating profit after taxes increased from US$1,527,436 thousand in 2016 to US$1,771,847 thousand in 2017, representing a significant gain. A subsequent decrease was noted in 2018 to US$1,628,778 thousand, before a substantial rise to US$2,290,136 thousand in 2019. This upward trend continued into 2020, reaching US$2,508,856 thousand, the highest value in the period. A slight decline occurred in 2021, with NOPAT reported at US$2,334,712 thousand.

Cost of Capital

The cost of capital experienced a gradual increase from 12.93% in 2016 to 13.20% in 2019. It then decreased slightly to 13.15% in 2020 before rising again to 13.19% in 2021. The overall variation remained minimal, suggesting a consistent cost of funding throughout the period.

Invested Capital

Invested capital decreased from US$7,921,908 thousand in 2016 to US$7,289,794 thousand in 2018. However, it then increased substantially, reaching US$9,463,158 thousand in 2019 and US$9,580,300 thousand in 2020. The trend continued with further growth to US$10,152,600 thousand in 2021, indicating increasing investment in the business.

Economic Profit

Economic profit showed an increasing trend from US$502,762 thousand in 2016 to US$789,041 thousand in 2017. It experienced a slight decrease in 2018 to US$668,839 thousand, followed by a significant increase to US$1,041,020 thousand in 2019. The highest economic profit was recorded in 2020 at US$1,249,432 thousand, before decreasing to US$995,788 thousand in 2021. Despite the decrease in the final year, economic profit remained substantially higher than the initial value in 2016.

The observed increases in both NOPAT and invested capital generally contributed to the growth in economic profit. While the cost of capital remained relatively stable, its impact on economic profit is evident in the calculation. The fluctuations in economic profit appear to be primarily driven by changes in NOPAT, with the invested capital also playing a role.

Net Earnings

The net earnings exhibited an overall increasing trend from 2016 to 2021. Starting at $1,492,500 thousand in 2016, the figure rose to $1,733,400 thousand in 2017 before experiencing a slight decline to $1,620,800 thousand in 2018. After this dip, net earnings showed a significant increase to $2,292,800 thousand in 2019, continuing upward to $2,466,500 thousand in 2020 and reaching $2,598,500 thousand in 2021. This pattern suggests a strong recovery and consistent growth momentum in recent years despite minor fluctuations.

Net Operating Profit After Taxes (NOPAT)

The NOPAT values closely mirror the net earnings trend with increasing values from 2016 through 2020 followed by a decline in 2021. Initially, NOPAT rose from $1,527,436 thousand in 2016 to $1,771,847 thousand in 2017 but then decreased to $1,628,778 thousand in 2018. It rebounded substantially to $2,290,136 thousand in 2019 and increased further to a peak of $2,508,856 thousand in 2020. In 2021, however, NOPAT declined to $2,334,712 thousand. This decline in 2021 contrasts with the continued rise in net earnings, highlighting potential changes in operational efficiency, tax impacts, or adjustments in operating expenses.

Comparative Insights

Both metrics demonstrate a pattern of growth punctuated by a downturn in 2018, followed by robust increases through 2020. The divergence observed in 2021, where net earnings continued to grow but NOPAT decreased, may require further investigation. This discrepancy could point to factors such as non-operating income influences on net earnings, changes in tax structures, or operational cost shifts affecting NOPAT independently of net profits. Overall, the financial data shows resilience with strong profitability gains over the period analyzed.

Provision for Income Taxes

The provision for income taxes showed fluctuations over the period under review. It initially increased from 741,300 thousand US dollars in mid-2016 to 797,700 thousand US dollars by mid-2017. This was followed by a notable decline to 550,300 thousand US dollars in mid-2018. Subsequently, the provision rose again, reaching 712,800 thousand US dollars in 2019 and remaining relatively stable around 716,100 thousand US dollars in 2020. By mid-2021, it increased slightly to 762,700 thousand US dollars. Overall, the data indicate some volatility with a general tendency towards recovery and growth in the latter years.

Cash Operating Taxes

Cash operating taxes mirrored the trends of provision for income taxes, reflecting a general correlation between the two metrics. Starting at 744,765 thousand US dollars in 2016, cash operating taxes slightly decreased to 794,364 thousand US dollars in 2017 before falling significantly to 559,875 thousand US dollars in 2018. Subsequently, there was an increase to 713,664 thousand US dollars in 2019. In 2020, there was a slight decrease to 694,262 thousand US dollars, followed by a substantial jump to 1,018,322 thousand US dollars in 2021. The sharp increase in 2021 suggests a possible change in tax obligations or operational cash flows impacting tax payments.

Comparative Insights

Both the provision for income taxes and cash operating taxes show some alignment in their patterns with synchronous ups and downs over the years. However, cash operating taxes experienced a more pronounced increase in 2021 compared to the provision for income taxes, indicating either an adjustment in timing or recognition of actual cash tax payments vis-à-vis accounting provisions. This divergence in the final year could warrant further investigation to understand underlying causes such as changes in tax policy, fiscal adjustments, or operational factors.

Total reported debt & leases

The total reported debt and leases figures indicate some fluctuations over the analyzed periods. Initially, the debt remained relatively stable between 2016 and 2018, with values just above 2.4 billion US dollars. In 2019, there was a noticeable increase to approximately 2.81 billion, followed by a decrease in 2020 to around 2.46 billion. However, by 2021, the debt sharply increased to approximately 3.45 billion, representing the highest level within the given timeframe.

Stockholders’ equity

The stockholders’ equity showed a declining trend from 2016 to 2018, dropping from about 4.48 billion to around 3.46 billion US dollars. A significant recovery is observed in 2019, with equity rising sharply to approximately 5.4 billion, continuing to increase moderately in 2020 to about 5.75 billion. In 2021, there was a slight decrease to roughly 5.67 billion, though equity remained well above the levels seen in the initial years.

Invested capital

Invested capital experienced a downward trend from 2016 through 2018, declining from approximately 7.92 billion to about 7.29 billion US dollars. In 2019, invested capital increased markedly to roughly 9.46 billion, and then grew slightly in 2020 to approximately 9.58 billion. The upward movement continued into 2021, reaching around 10.15 billion, the highest level in the period examined.

Overall analysis

The data reflect a period of contraction in both equity and invested capital through 2018, followed by a phase of robust growth starting in 2019. The sudden increase in total debt in 2021, coupled with the continued growth in invested capital, suggests increased leverage and investment activity during that year. Despite the spike in debt in 2021, stockholders’ equity remained relatively strong compared to earlier years, indicating a potentially balanced approach to financing growth with a mix of debt and equity.

The economic spread ratio demonstrates a generally positive trend over the observed period, though with some fluctuation. Economic profit also exhibits growth, but with a decrease in the most recent year. Invested capital generally increased throughout the period.

Economic Spread Ratio

The economic spread ratio increased from 6.35% in 2016 to 10.49% in 2017, representing a significant improvement. It continued to rise, reaching 11.00% in 2019, the highest value observed. A further increase to 13.04% was noted in 2020. However, the ratio decreased to 9.81% in 2021, though remaining above the initial value from 2016. This suggests improving efficiency in capital allocation for most of the period, with a slight decline in the most recent year.

Economic Profit

Economic profit increased from US$502,762 thousand in 2016 to US$789,041 thousand in 2017. It experienced a decrease in 2018 to US$668,839 thousand, before recovering and increasing substantially to US$1,041,020 thousand in 2019 and further to US$1,249,432 thousand in 2020. In 2021, economic profit decreased to US$995,788 thousand, representing a decline from the peak in the prior year, but still remaining above levels seen in earlier years.

Invested Capital

Invested capital decreased slightly from US$7,921,908 thousand in 2016 to US$7,519,836 thousand in 2017. A further decrease was observed in 2018, reaching US$7,289,794 thousand. However, from 2019 onwards, invested capital increased consistently, reaching US$9,463,158 thousand, US$9,580,300 thousand, and finally US$10,152,600 thousand in 2021. This indicates a growing scale of operations and increased investment in the business.

The combination of increasing invested capital and a generally increasing economic spread ratio suggests that the company has been effectively deploying capital to generate returns. The decrease in economic spread ratio and economic profit in 2021 warrants further investigation to determine the underlying causes and potential implications.

The economic profit margin demonstrates a generally positive trend over the observed period, though with some fluctuation. Initial values show growth, peaking in 2020, followed by a decline in the most recent year presented.

Economic Profit Margin Trend

The economic profit margin began at 4.30% in 2016 and increased to 6.37% in 2017, indicating improved profitability relative to capital employed. A slight decrease to 5.03% occurred in 2018, before a substantial rise to 7.37% in 2019. The margin continued to improve, reaching a high of 8.59% in 2020. However, in 2021, the economic profit margin decreased to 6.64%, representing a notable decline from the previous year’s peak.

Economic profit itself also exhibits a generally upward trend, though with similar fluctuations. The economic profit margin’s movement suggests that while absolute economic profit generally increased, the efficiency with which revenue translates into economic profit varied year to year. The 2021 decrease in margin, despite continued high adjusted revenues, suggests a potential increase in the cost of capital or a decrease in operational efficiency relative to revenue growth.

Relationship between Economic Profit and Margin

Adjusted revenues consistently increased throughout the period. However, the economic profit margin did not follow a strictly linear path. This indicates that factors beyond revenue growth, such as cost of capital or operational expenses, significantly influenced the generation of economic profit. The divergence between revenue growth and margin in 2021 warrants further investigation.

The peak margin in 2020 suggests a period of particularly efficient capital allocation and strong economic performance. The subsequent decline in 2021, while still representing a positive margin, signals a potential shift in the company’s economic profitability and may require further scrutiny to understand the underlying drivers.