Axon Enterprise Inc. (NASDAQ:AXON)

The period under review demonstrates significant fluctuations in economic profit. Initially, the company experienced negative economic profit, which worsened over the first three years before a substantial positive shift in the final two years.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited considerable volatility. It decreased significantly from 2018 to 2019, then recovered in 2020, followed by a further decline in 2021. A dramatic increase in NOPAT is observed in 2022, reaching its highest value over the analyzed period.

Cost of Capital

The cost of capital remained relatively stable between 2018 and 2021, fluctuating within a narrow range around 12.9%. A decrease in the cost of capital is noted in 2022, falling to 12.36%.

Invested Capital

Invested capital showed an initial decrease from 2018 to 2019. Subsequently, it increased substantially in 2020 and continued to rise significantly through 2022, indicating growing capital deployment within the business.

Economic Profit

Economic profit began with a modest negative value in 2018, which deteriorated considerably in subsequent years, reaching its lowest point in 2021. The year 2022 marked a turning point, with economic profit becoming positive and reaching a substantial level. This positive shift suggests that the company’s returns exceeded its cost of capital in the most recent year.

The substantial increase in economic profit in 2022 appears to be driven by a combination of significantly higher NOPAT and a slight reduction in the cost of capital, despite a continued increase in invested capital. The earlier negative economic profits suggest that, prior to 2022, the company’s returns were insufficient to cover its cost of capital.

Net Income (Loss)

The company experienced significant fluctuations in net income over the analyzed period. Starting with a substantial net income of $29,205 thousand in 2018, there was a sharp decline to $882 thousand in 2019, followed by a transition into losses in 2020 and 2021, with amounts of -$1,724 thousand and -$60,018 thousand, respectively. In 2022, the company reversed this trend dramatically, recording a significant net income of $147,139 thousand. This volatility indicates periods of financial difficulty followed by a substantial recovery and profitability improvement in the most recent year.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a somewhat different pattern, though it also showed variability. The value started at $78,057 thousand in 2018 and then decreased considerably to $17,857 thousand in 2019. In 2020, NOPAT increased to $51,762 thousand, suggesting operational profitability improvement despite the net loss reported that year. A decline occurred again in 2021 to $38,523 thousand; however, a substantial increase to $326,174 thousand was evident in 2022. This increase in 2022 indicates enhanced operational efficiency and profitability on an after-tax basis.

Overall Trends and Insights

The data reveal a period of instability between 2018 and 2021, characterized by fluctuating and often negative net income, contrasted with positive but volatile NOPAT values. The divergence between net income and NOPAT especially during 2020 and 2021 suggests that non-operating factors or extraordinary charges may have negatively impacted net income. The strong recovery in 2022 across both net income and NOPAT points to improved financial health, possibly driven by operational improvements or a favorable change in the cost or revenue structure. The considerable growth in 2022 in both metrics reflects a pivotal turnaround likely resulting from strategic adjustments or market conditions.

Provision for income taxes (income tax benefit)

Over the five-year period, the provision for income taxes exhibited significant volatility and fluctuation. Initially, there was a negative provision in 2018, indicating an income tax benefit of 1,101 thousand US dollars. This turned positive in 2019, reaching 1,188 thousand US dollars, followed by another shift back to a negative provision in 2020 at -4,567 thousand US dollars. The most pronounced change occurred in 2021 with a substantial negative provision amounting to -81,357 thousand US dollars, suggesting a major income tax benefit that year. However, in 2022, the provision reversed to a positive figure of 49,379 thousand US dollars.

Cash operating taxes

Cash operating taxes demonstrated a generally increasing trend over the analyzed period, with a pronounced exception in 2021. Starting at 7,666 thousand US dollars in 2018, the amount increased steadily to 9,266 thousand US dollars in 2019 and further to 12,034 thousand US dollars in 2020. In 2021, there was a sharp decline, with cash operating taxes reported as negative 851 thousand US dollars, indicating a cash inflow or refund situation. Subsequently, in 2022, the cash operating taxes surged significantly to 27,888 thousand US dollars, more than doubling the previous peak.

The financial data reveals several notable trends in the company's capital structure and financial positioning over the five-year period ending in 2022.

Total Reported Debt & Leases

There is a relatively stable and moderate level of debt from 2018 through 2021, fluctuating between approximately 10.6 million and 27 million USD. However, in 2022, this figure experiences a dramatic increase to over 717 million USD. This sharp rise indicates a significant change in the company's financing strategy or capital structure, suggesting either a substantial new borrowing, lease obligation, or financial arrangement undertaken in the latest period.

Stockholders’ Equity

Stockholders' equity shows steady growth throughout all years, moving from around 467 million USD in 2018 to approximately 1.27 billion USD in 2022. The increase suggests consistent retention of earnings or capital injections, strengthening the company's net worth and reflecting profitable operations or equity financing activities.

Invested Capital

Invested capital fluctuates during the initial years, decreasing from roughly 632 million USD in 2018 to 500 million USD in 2019, then rising again to 723 million USD in 2020. From 2020 onward, invested capital increases significantly, peaking at approximately 1.61 billion USD by the end of 2022. This upward trend illustrates increased capital employed in the business, likely fuelled by the substantial growth in reported debt and equity, indicating expanded operational scale or investment in long-term assets.

Overall, the data suggests a period of gradual growth and stability up to 2021, followed by a marked increase in financial leverage and total capital employed in 2022. The spike in reported debt and leases may raise considerations regarding risk and debt service capacity, while the ongoing growth in equity and invested capital reflects a larger asset base and potentially heightened business activities.

The economic spread ratio exhibited significant fluctuations between 2018 and 2022. Initially negative, the ratio demonstrated a substantial decline before recovering to positive territory. This movement correlates with changes in economic profit and invested capital over the same period.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was -0.52%. It experienced a marked deterioration in 2019, falling to -9.33%. A slight improvement occurred in 2020, with the ratio reaching -5.74%, but this was followed by a further decline to -9.84% in 2021. A substantial positive shift occurred in 2022, with the ratio increasing significantly to 7.93%.

The economic spread ratio’s negative values from 2018 through 2021 indicate that the company’s return on invested capital was less than its weighted average cost of capital during those years, resulting in value destruction. The substantial increase to a positive value in 2022 suggests a reversal of this trend, indicating value creation.

Relationship to Economic Profit

The economic spread ratio’s trajectory closely mirrors the trend in economic profit. Negative economic profit values were observed from 2018 to 2021, aligning with the negative economic spread ratios. The positive economic profit reported in 2022 corresponds with the positive economic spread ratio for that year.

Relationship to Invested Capital

Invested capital increased over the period, particularly from 2020 to 2022. While invested capital grew, the economic spread ratio remained negative until 2022, suggesting that increases in invested capital alone did not drive value creation. The positive economic spread ratio in 2022 occurred alongside the highest level of invested capital, indicating that improved profitability, rather than simply increased investment, was the primary driver of value creation.

The substantial change in the economic spread ratio from negative values to a positive value in 2022 warrants further investigation to understand the underlying factors contributing to this improvement in financial performance.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin demonstrated a substantial decline before ultimately turning positive. A detailed examination of the trends reveals a clear progression from value destruction to value creation.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -0.69%. This indicates that the company’s economic profit, while negative, was relatively limited in its impact on sales. The margin deteriorated considerably in 2019, reaching -8.41%, suggesting a substantial increase in the disparity between economic profit and required returns. This negative trend continued into 2020, with the margin reaching -5.53%, although showing a slight improvement from the prior year. 2021 witnessed the most significant decline, with the economic profit margin falling to -11.96%, representing the largest negative margin observed during the analyzed period. However, a dramatic shift occurred in 2022, as the economic profit margin surged to 9.47%, indicating a successful transition to generating economic profit.

The movement in the economic profit margin closely mirrors the changes in economic profit. The increasing negative values from 2018 to 2021 correlate with growing economic losses, while the positive value in 2022 reflects a substantial increase in economic profit. The adjusted net sales figures consistently increased throughout the period, but the economic profit margin’s trajectory demonstrates that revenue growth alone did not guarantee value creation until 2022.

Relationship to Adjusted Net Sales

Despite consistent growth in adjusted net sales – from US$476,219 thousand in 2018 to US$1,346,663 thousand in 2022 – the economic profit margin remained negative for the first four years of the period. This suggests that increases in sales were insufficient to cover the cost of capital employed. The substantial improvement in the margin in 2022, coinciding with the highest level of adjusted net sales, indicates that the company achieved a level of profitability that exceeded its cost of capital, resulting in economic value creation.

The substantial turnaround in 2022 is a key observation. Further investigation into the factors driving this change – such as improvements in operational efficiency, pricing strategies, or capital allocation – would be beneficial to understand the sustainability of this positive trend.