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 substantial gains, and then a return to loss. This pattern is closely tied to changes in net operating profit after taxes, cost of capital, and invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a consistent increase 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 exhibited a generally increasing trend throughout the period, rising from 14.06% in 2020 to 16.00% in 2025. This increase in the cost of capital likely contributed to the challenges in generating positive economic profit, particularly in the earlier and later years.

Invested Capital

Invested capital consistently increased over the period, growing from US$7,029,200 thousand in 2020 to US$12,434,500 thousand in 2025. While growth in invested capital can indicate expansion, it also increases the capital charge, potentially offsetting gains in NOPAT.

Economic Profit

Economic profit was negative in both 2020 and 2021, at -US$291,935 thousand and -US$234,879 thousand respectively. A significant positive shift occurred in 2022, with economic profit reaching US$478,541 thousand, and further increasing to US$1,239,787 thousand in 2023. However, this positive trend reversed in 2024, with economic profit declining to US$816,258 thousand, and ultimately becoming negative again in 2025, at -US$198,128 thousand. This indicates that while the company was able to generate returns exceeding its cost of capital for a period, this advantage diminished as the cost of capital rose and NOPAT declined.

The interplay between NOPAT, cost of capital, and invested capital demonstrates a complex financial performance. The initial economic losses were overcome by substantial growth in NOPAT, but the increasing cost of capital and continued investment ultimately led to a return to economic loss in the final year observed. Further investigation into the drivers of NOPAT decline and cost of capital increases would be beneficial.

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 analysis details the observed trends and potential implications.

Economic Spread Ratio - Overall Trend

The economic spread ratio began at -4.15% in July 2020 and remained negative the following year, reaching -3.19% in July 2021. A substantial increase is then observed, with the ratio becoming positive at 5.50% in July 2022. This positive trend continued, peaking at 13.58% in July 2023, before decreasing to 7.53% in July 2024. The most recent period, ending in July 2025, shows a return to negative territory with a ratio of -1.59%.

Relationship to Economic Profit

The economic spread ratio’s movement closely mirrors that of economic profit. The negative ratios in 2020 and 2021 correspond with reported economic losses. The positive ratios in 2022 and 2023 align with periods of economic profit generation. The decline in the ratio in 2024 and the return to a negative value in 2025 coincide with a decrease in economic profit and ultimately, a projected economic loss.

Invested Capital Influence

Invested capital consistently increased throughout the period, rising from US$7,029,200 thousand in July 2020 to US$12,434,500 thousand in July 2025. While increasing invested capital generally requires a higher economic profit to maintain a consistent economic spread ratio, the observed fluctuations in economic profit appear to be the primary driver of the ratio’s changes, rather than solely the increase in invested capital.

Peak and Subsequent Decline

The peak economic spread ratio of 13.58% in July 2023 represents the most efficient use of invested capital during the analyzed timeframe. However, the subsequent decline suggests a diminishing ability to generate returns exceeding the cost of capital. The return to a negative ratio in July 2025 indicates that, based on these figures, the company’s returns are projected to fall below its cost of capital.

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

Economic Profit Margin Trend

In fiscal year 2020, the economic profit margin stood at -6.74%. This indicates that the company’s economic profit was negative, meaning the return generated was less than the cost of capital employed. A subsequent improvement is observed in 2021, with the margin increasing to -4.29%, suggesting a reduction in the shortfall between return and cost of capital.

The fiscal year 2022 marks a turning point, as the economic profit margin becomes positive at 6.40%. This signifies that the company generated returns exceeding its cost of capital. The margin continues to improve substantially in 2023, reaching a peak of 13.48%, indicating a strong economic profit.

However, the positive trend reverses in 2024, with the economic profit margin decreasing to 7.99%. This suggests a decline in the rate at which returns exceed the cost of capital. The most recent year, 2025, shows a return to a negative margin of -1.89%, indicating that economic profit has once again fallen below zero.

The economic profit margin’s trajectory reflects a period of initial underperformance, followed by substantial improvement, and a subsequent decline. The peak margin in 2023 suggests a period of efficient capital allocation and strong profitability. The recent downturn in 2024 and 2025 warrants further investigation to determine the underlying causes and potential implications for future performance.

Relationship to Adjusted Revenue

Adjusted revenue consistently increased from 2020 to 2024, growing from US$4,329,900 thousand to US$10,211,600 thousand. While revenue growth was positive throughout this period, the economic profit margin did not consistently follow suit, indicating that revenue increases alone do not guarantee economic profitability.

The slight increase in adjusted revenue in 2025, from US$10,211,600 thousand to US$10,492,900 thousand, occurred concurrently with a significant drop in the economic profit margin, further emphasizing the importance of considering both revenue and cost of capital when assessing financial performance.

The interplay between economic profit and adjusted revenue highlights the importance of efficient capital utilization. While revenue growth is a positive indicator, it must be accompanied by a return on capital that exceeds the cost of that capital to generate true economic value.