Palo Alto Networks Inc. (NASDAQ:PANW)

The analysis reveals a fluctuating pattern in economic profit over the observed period. Initially, the company experienced economic losses, followed by a period of substantial economic profit generation, and concluding with a return to economic loss. This pattern is influenced by changes in net operating profit after taxes, cost of capital, and invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrates a generally increasing trend from 2020 to 2023, rising from US$696,422 thousand to US$2,610,314 thousand. However, a decrease is observed in 2024 to US$2,501,707 thousand, followed by a more significant decline in 2025 to US$1,790,811 thousand. This suggests potential challenges in maintaining profitability in the later years of the period.

Cost of Capital

The cost of capital exhibits a consistent upward trend throughout the period, increasing from 16.10% in 2020 to 18.43% in 2025. This increase in the cost of capital likely contributes to the challenges in generating positive economic profit, particularly as NOPAT begins to decline.

Invested Capital

Invested capital steadily increases over the period, growing from US$7,029,200 thousand in 2020 to US$12,434,500 thousand in 2025. This expansion of invested capital, coupled with a rising cost of capital, places greater pressure on NOPAT to generate sufficient returns.

Economic Profit

Economic profit is negative in both 2020 and 2021, at -US$435,440 thousand and -US$394,329 thousand respectively, indicating that the company’s returns were insufficient to cover its cost of capital. A significant positive shift occurs in 2022, with economic profit reaching US$290,657 thousand, and further increasing to US$1,031,378 thousand in 2023. However, this positive trend reverses in 2024, with economic profit declining to US$559,682 thousand, and ultimately becoming negative again in 2025, at -US$501,225 thousand. This suggests a weakening ability to generate returns exceeding the cost of capital in the most recent years.

The interplay between increasing invested capital and a rising cost of capital appears to be a key driver of the observed fluctuations in economic profit. While NOPAT growth initially offset these factors, the subsequent decline in NOPAT, combined with continued increases in the other two components, resulted in a return to economic losses.

Net Income (Loss)

The net income exhibited significant volatility across the periods presented. Initially, there was a substantial loss of $267 million in 2020, which deepened to nearly $499 million in 2021. In 2022, the loss reduced to $267 million, indicating some recovery. Subsequently, in 2023, the company returned to profitability with a net income of approximately $440 million.

Notably, in 2024 net income surged dramatically to approximately $2.58 billion, representing a significant upward trend. However, in 2025, net income declined to about $1.13 billion, still maintaining a profit but at a reduced level compared to the previous year.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a continuous growth trend from 2020 through 2023. Starting at approximately $696 million in 2020, it increased to $845 million in 2021. The upward trajectory accelerated in 2022 with NOPAT reaching about $1.72 billion and peaked at around $2.61 billion in 2023.

Following the peak, NOPAT decreased in 2024 and 2025 to approximately $2.50 billion and $1.79 billion, respectively. Although these declines represent a downward adjustment from the 2023 high, NOPAT levels in 2024 and 2025 remain substantially higher than in the initial years.

Overall Trends and Insights

There is a clear pattern of financial improvement over the period analyzed. Both net income and NOPAT shifted from negative or moderate levels in the earlier years to significant positive figures in later periods.

The net income recovery and subsequent profits after 2022 suggest enhanced operational efficiency or impactful business activities, given that NOPAT, a measure of operational profitability, generally increased prior to and during the years of rising net income.

The reduction in net income and NOPAT in 2025 compared to the previous year could indicate emerging challenges or a normalization after an exceptionally high period in 2024. Nevertheless, profitability remains robust relative to earlier years.

Provision for (benefit from) income taxes

The provision for income taxes shows considerable volatility over the analyzed period. Initially, the values remain positive and relatively stable from 2020 through 2023, increasing from 35,200 to 126,600 thousand US dollars. However, in 2024, there is a significant negative spike, with the provision recorded as a benefit amounting to -1,589,300 thousand US dollars. This sudden reversal likely indicates a substantial tax credit or adjustment during this year. In 2025, the provision shifts back to a positive figure of 461,800 thousand US dollars, indicating another major change in tax positioning.

Cash operating taxes

Cash operating taxes demonstrate a steady upward trend from 2020 to 2025. The figures increase from 57,464 thousand US dollars in 2020 to 74,038 thousand US dollars in 2023, showing consistent growth. Notably, cash taxes surge dramatically in 2024 and 2025, reaching 384,452 and 740,528 thousand US dollars, respectively. This sharp increase in cash taxes contrasts with the provision for income taxes' negative spike in 2024, suggesting differences in the timing or nature of book versus cash tax recognition during these years.

The analysis of the financial data reveals several notable trends over the observed periods.

Total Reported Debt & Leases

This item shows a decreasing trend from the fiscal year ending July 31, 2020 through July 31, 2025. The debt stood at approximately 3.48 billion USD in 2020 and increased slightly to around 3.61 billion USD in 2021. Afterward, the amount peaked in 2022 at roughly 4.02 billion USD before embarking on a steady decline each year. By 2025, the total reported debt and leases had decreased significantly to about 417 million USD, indicating a substantial reduction in the company's leverage or obligations over the period.

Stockholders’ Equity

Stockholders’ equity initially decreased sharply from approximately 1.10 billion USD in 2020 to 210 million USD by 2022, suggesting potential losses, share repurchases, or other equity-reducing activities during this interval. However, beginning in 2023, equity increased markedly, reaching 1.75 billion USD and continuing to grow substantially to about 5.17 billion USD in 2024 and further to 7.82 billion USD in 2025. This strong recovery and subsequent growth may indicate improved profitability, capital infusions, or retained earnings enhancement.

Invested Capital

Invested capital displayed a consistent upward trajectory throughout all periods. Starting at roughly 7.03 billion USD in 2020, it increased gradually each year, reaching approximately 12.43 billion USD by 2025. This steady rise suggests ongoing investment into the company's operations and assets, potentially to support growth strategies or expansion initiatives.

In summary, the financial data indicates a strategic reduction of debt alongside a significant increase in equity and invested capital over the observed period. This combination points towards strengthening financial stability and potentially enhanced capacity for growth and value creation.

The economic spread ratio demonstrates significant fluctuations over the observed period. Initially negative, the ratio transitions to positive values before declining again. This suggests a changing relationship between economic profit and invested capital.

Economic Spread Ratio - Overall Trend

The economic spread ratio began at -6.19% in July 2020 and remained negative the following year, reaching -5.36% in July 2021. A substantial increase is then observed, with the ratio becoming positive at 3.34% in July 2022. The ratio peaked at 11.30% in July 2023, before decreasing to 5.16% in July 2024. Finally, the ratio returns to a negative value of -4.03% in July 2025.

The period between July 2020 and July 2021 shows consistent negative economic spread, indicating that returns on invested capital were insufficient to cover the cost of that capital. The subsequent years, particularly July 2022 and July 2023, represent a period of improved economic performance, with returns exceeding the cost of capital. However, the decline in the ratio in July 2024 and the return to negative territory in July 2025 suggest a potential reversal of this trend.

Relationship to Economic Profit

The economic spread ratio’s movement correlates with the trend in economic profit. Negative economic profit values in July 2020 and July 2021 align with the negative economic spread ratios. The positive economic profit reported in July 2022 and July 2023 corresponds with positive and increasing economic spread ratios. The return to negative economic profit in July 2025 is mirrored by a negative economic spread ratio.

Invested capital consistently increased throughout the period, from US$7,029,200 thousand in July 2020 to US$12,434,500 thousand in July 2025. The fluctuations in the economic spread ratio, despite this consistent increase in invested capital, indicate that the efficiency with which capital is deployed is changing over time.

Peak and Subsequent Decline

The peak economic spread ratio of 11.30% in July 2023 represents the most significant period of value creation relative to invested capital. The subsequent decline to 5.16% and then -4.03% suggests a diminishing ability to generate returns above the cost of capital, potentially due to increased competition, rising costs, or changes in market conditions.

The economic profit margin demonstrates a significant fluctuation over the observed period. Initially negative, the margin transitions to positive values before declining again. A detailed examination of the trends reveals key insights into the company’s profitability from an economic value perspective.

Economic Profit Margin Trend

In fiscal year 2020, the economic profit margin stood at -10.06%. This indicates that the company’s economic profit was negative, meaning the return generated was less than the cost of capital employed. A modest improvement is seen in 2021, with the margin increasing to -7.21%, suggesting a narrowing of the gap between return and cost of capital.

A substantial shift occurs in 2022, as the economic profit margin turns positive, reaching 3.89%. This signifies that the company began generating returns exceeding its cost of capital. The positive trend continues into 2023, with a marked increase to 11.22%, representing a period of strong economic profit generation.

However, the margin experiences a decline in 2024, decreasing to 5.48%, indicating a reduction in the excess return over the cost of capital. This downward trend accelerates in 2025, with the economic profit margin falling to -4.78%, returning to a negative value and suggesting that the company’s returns once again fall short of its cost of capital.

The progression from negative to positive and back to negative economic profit margins highlights a volatile period for the company. The peak in 2023 suggests a period of efficient capital allocation and strong operational performance, while the subsequent decline indicates potential challenges in maintaining profitability relative to the cost of capital. Further investigation into the underlying drivers of these fluctuations, such as changes in revenue, cost of capital, and operational efficiency, would be necessary to fully understand the observed trends.

Relationship to Adjusted Revenue

The adjusted revenue consistently increased from 2020 to 2024, growing from US$4,329,900 thousand to US$10,211,600 thousand. While revenue growth is evident, it did not consistently translate into positive economic profit margins, particularly in the final year of the observed period. The decline in economic profit margin in 2025 occurred despite a further increase in adjusted revenue to US$10,492,900 thousand, suggesting that factors beyond revenue growth, such as increased costs or a higher cost of capital, played a significant role.