Etsy Inc. (NASDAQ:ETSY)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) exhibited a consistent increase from 2017 to 2020, followed by a slight decrease in 2021. Simultaneously, invested capital increased substantially throughout the entire period, with the most significant growth occurring between 2020 and 2021. The cost of capital generally remained stable, with a slight decrease observed in 2019 and 2021.

Economic Profit Trend

Economic profit was negative from 2017 to 2019, indicating that the company’s returns were below its cost of capital during those years. The negative economic profit decreased from US$70,749 thousand in 2017 to US$49,052 thousand in 2018, before increasing to US$89,657 thousand in 2019. A substantial shift occurred in 2020, with economic profit turning positive at US$45,980 thousand. However, this positive trend was reversed in 2021, resulting in a significant negative economic profit of US$162,245 thousand.

Relationship between NOPAT and Economic Profit

While NOPAT increased consistently from 2017 to 2020, the economic profit did not follow the same trajectory until 2020. This suggests that the growth in NOPAT was initially offset by the increasing invested capital and the relatively stable cost of capital. The positive economic profit in 2020 indicates that NOPAT growth finally exceeded the combined effect of invested capital and cost of capital. The subsequent decline in economic profit in 2021, despite a slight decrease in the cost of capital, is attributable to the substantial increase in invested capital.

Cost of Capital and Invested Capital

The cost of capital remained relatively consistent, fluctuating between 20.24% and 23.74% over the period. Invested capital, however, experienced a marked increase, more than tripling from 2017 to 2021. This substantial growth in invested capital appears to be a primary driver of the negative economic profit observed in 2021, as the returns generated by the increased capital were insufficient to cover the cost of that capital.

In summary, the company experienced a period of negative economic profit followed by a brief period of positive economic profit, ultimately returning to a substantial negative economic profit. The primary driver of this fluctuation appears to be the relationship between NOPAT, the cost of capital, and, particularly, the significant growth in invested capital.

Net Income

The net income demonstrates a generally increasing trend over the five-year period. Initially, the net income registers at 81,800 thousand USD at the end of 2017, followed by a slight decline to 77,491 thousand USD in 2018. From 2018 onwards, there is consistent growth, with net income rising to 95,894 thousand USD in 2019. This growth accelerates significantly in 2020, reaching 349,246 thousand USD, and continues to increase substantially in 2021, amounting to 493,507 thousand USD. The sharp increase during 2020 and 2021 indicates a notable improvement in profitability.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures also show a positive trajectory throughout the period. Starting at 47,642 thousand USD in 2017, NOPAT rises to 76,568 thousand USD in 2018, reflecting an increase in operating efficiency or profitability. The upward trend continues in 2019 with NOPAT reaching 103,763 thousand USD. A marked jump occurs in 2020, with NOPAT surging to 393,749 thousand USD, aligning with the sharp increase observed in net income during the same year. In 2021, NOPAT grows further but at a slower pace, reaching 413,095 thousand USD. This overall trend indicates enhanced operational performance and effective tax management over the years considered.

Summary of Trends

Both net income and NOPAT exhibit substantial growth, particularly between 2019 and 2021. The periods of 2020 and 2021 stand out as years of significant earnings expansion, indicating improved operational efficiency and overall profitability. The rise in NOPAT more closely aligns with operational improvements, while net income additionally reflects the impact of non-operational factors and tax considerations. The data suggests strengthened financial health and operational leverage leading to improved earnings capacity.

Income Tax Provision (Benefit)

The income tax provision shows significant fluctuations over the five-year period. Beginning in 2017, the provision was a substantial negative figure indicating a tax benefit of -$49,535 thousand. This negative trend decreased in magnitude over the following years, with the benefit lessening to -$22,413 thousand in 2018 and further narrowing to -$15,248 thousand in 2019. Notably, in 2020, the trend reversed to a positive tax provision of $16,463 thousand, indicating an actual tax expense during this year. However, in 2021, the tax provision returned to a negative value of -$21,853 thousand. This irregular pattern suggests volatility in taxable income or tax strategy changes across the years.

Cash Operating Taxes

Cash operating taxes displayed a marked upward trend throughout the observed period. The value, which was a minor negative amount of -$1,409 thousand in 2017, shifted to positive in 2018 at $5,774 thousand. Following this, the amount continued to increase consistently each year, reaching $2,782 thousand in 2019, then sharply rising to $23,282 thousand in 2020, and culminating in a substantial $69,622 thousand in 2021. This steady and sharp increase suggests a growing cash outflow related to taxes paid from operating activities, possibly reflecting higher taxable earnings or changes in tax payment timing or policies.

Total reported debt & leases

The total reported debt and leases show a significant and consistent increase over the five-year period. Starting from 88,048 thousand US dollars at the end of 2017, the figure rose substantially to 2,435,883 thousand US dollars by the end of 2021. This represents a nearly 28-fold increase, indicating a sharp rise in the company's leverage and financial obligations.

Stockholders’ equity

Stockholders’ equity experienced moderate growth from 396,894 thousand US dollars in 2017 to 742,424 thousand in 2020, peaking during the year 2020. However, there was a decline in 2021 to 628,619 thousand US dollars. Overall, equity increased by approximately 58% from 2017 to 2021, but the decline in the final year suggests potential pressures or adjustments impacting the company's net assets.

Invested capital

Invested capital exhibited a continuous and pronounced increase throughout the period evaluated. Beginning at 498,789 thousand US dollars in 2017, it more than quintupled to 2,842,921 thousand US dollars by the end of 2021. This upward trajectory suggests substantial capital deployment, likely reflecting expansion activities supported by rising debt levels and equity contributions.

The economic spread ratio exhibited considerable fluctuation between 2017 and 2021. Initially negative, the ratio improved significantly in 2020 before declining again in 2021. This movement correlates with changes in economic profit and invested capital over the same period.

Economic Spread Ratio Trend

The economic spread ratio began at -14.18% in 2017 and decreased to -9.14% in 2018. A further decline to -10.09% was observed in 2019. A substantial positive shift occurred in 2020, with the ratio reaching 3.09%. However, this improvement was reversed in 2021, as the ratio fell to -5.71%.

The economic spread ratio’s movement suggests a changing relationship between returns generated and the capital employed. The positive value in 2020 indicates that returns exceeded the cost of capital, while the negative values in other years suggest the opposite. The magnitude of the negative values indicates the extent to which returns fell short of the cost of capital.

Relationship to Economic Profit

The economic spread ratio’s positive value in 2020 aligns with the positive economic profit reported for that year. Conversely, the negative economic spread ratios in 2017, 2018, 2019, and 2021 correspond with negative economic profit values. This correlation suggests that the economic spread ratio is a direct reflection of the company’s ability to generate profit above its cost of capital.

Relationship to Invested Capital

Invested capital increased consistently throughout the period, rising from US$498,789 thousand in 2017 to US$2,842,921 thousand in 2021. While economic profit was positive in 2020, the substantial increase in invested capital may have contributed to the subsequent decline in the economic spread ratio in 2021, despite a negative economic profit in that year.

The volatility in the economic spread ratio warrants further investigation to understand the underlying drivers of profitability and capital allocation. The significant increase in invested capital alongside fluctuating economic profit suggests potential challenges in efficiently deploying capital to generate returns.

The economic profit margin exhibited considerable fluctuation between 2017 and 2021. Initially negative, the margin improved significantly in 2020 before declining again in the following year. This analysis details the observed trends in economic profit, adjusted revenue, and the resulting economic profit margin.

Economic Profit

Economic profit demonstrated a volatile pattern over the five-year period. Losses were reported in 2017, 2018, and 2019, with the largest loss occurring in 2019. A substantial shift to profitability occurred in 2020, however, this was followed by a significant loss in 2021, exceeding the losses experienced in prior years.

Adjusted Revenue

Adjusted revenue consistently increased throughout the period. Growth was substantial year-over-year, with a particularly large increase between 2019 and 2020. This growth continued, albeit at a slower rate, into 2021. The consistent revenue growth contrasts with the fluctuating economic profit.

Economic Profit Margin

The economic profit margin began at -16.01% in 2017 and improved to -8.11% in 2018. Further deterioration was observed in 2019, reaching -10.95%. A marked improvement occurred in 2020, with the margin turning positive at 2.66%. However, the margin reverted to a negative value in 2021, declining to -6.96%. The divergence between revenue growth and margin performance suggests increasing costs or a decline in the efficiency of capital utilization despite higher sales.

The positive economic profit margin in 2020 appears to be an anomaly within the observed trend. While revenue increased consistently, the economic profit margin’s inability to sustain positive performance indicates potential challenges in converting revenue growth into economic value. The substantial decline in economic profit in 2021, coupled with a negative margin, warrants further investigation into the underlying factors affecting profitability and capital efficiency.