PayPal Holdings Inc. (NASDAQ:PYPL)

The period under review demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) and invested capital generally increased between 2018 and 2020, the cost of capital remained relatively stable, resulting in economic profit remaining negative. Subsequent years show a decline in NOPAT alongside a decreasing, but still substantial, cost of capital, leading to increasingly negative economic profit figures.

Net Operating Profit After Taxes (NOPAT)

NOPAT increased from US$1,833 million in 2018 to US$4,527 million in 2020, representing significant growth. However, this was followed by a substantial decrease to US$3,793 million in 2021 and a further decline to US$1,747 million in 2022. This indicates a weakening in operational profitability in the latter part of the period.

Cost of Capital

The cost of capital exhibited a slight decreasing trend over the five-year period, moving from 20.46% in 2018 to 18.97% in 2022. While the decrease is present, the cost of capital remained consistently high throughout the period, representing a significant hurdle for profitability.

Invested Capital

Invested capital increased steadily from US$17,780 million in 2018 to US$31,496 million in 2022. This growth in invested capital, coupled with the consistently high cost of capital, contributed to the negative economic profit.

Economic Profit

Economic profit was negative for each year of the period, ranging from a low of US$-4,228 million in 2022 to a high of US$-1,612 million in 2020. The magnitude of the negative economic profit increased in both 2021 and 2022, suggesting a growing disparity between returns generated and the cost of capital employed. The trend indicates that the company is not generating returns sufficient to cover its cost of capital.

The observed trends suggest that while the company expanded its invested capital, it struggled to generate sufficient operating profits to overcome its cost of capital. The decline in NOPAT in 2021 and 2022, despite a slight reduction in the cost of capital, exacerbated the negative economic profit, indicating a potential need to reassess capital allocation strategies and operational efficiency.

Net Income

The net income displayed an overall increasing trend from 2018 through 2020, rising from 2,057 million USD to a peak of 4,202 million USD. In 2021, the net income slightly decreased to 4,169 million USD but remained close to the previous year's high. However, in 2022, net income experienced a significant decline to 2,419 million USD, nearly reverting to the level recorded in 2019.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar pattern to net income, increasing steadily from 1,833 million USD in 2018 to reach a maximum of 4,527 million USD in 2020. In 2021, a notable decrease occurred, with NOPAT falling to 3,793 million USD. The downward trend continued more sharply in 2022, with NOPAT dropping to 1,747 million USD, marking the lowest figure within the period analyzed and significantly below the 2018 starting point.

Overall Observations

Both net income and NOPAT demonstrated strong growth leading up to 2020, indicating a period of robust profitability. However, the years following 2020 show a reversal with considerable declines in profitability metrics. The drop in 2022 is particularly pronounced, suggesting challenges or changes in operational performance affecting the company's ability to generate profit after taxes. This downward shift merits further investigation into contributing factors such as revenue changes, cost structures, or external economic conditions affecting the company.

Income tax expense (benefit)

The income tax expense exhibited notable fluctuations over the examined period. Starting at $319 million at the end of 2018, it increased substantially to $539 million in 2019 and further to $863 million in 2020. However, there was a significant reversal in 2021, with the tax expense shifting to a benefit of $70 million, indicating a tax credit or reduction in tax liabilities for that year. This benefit sharply reversed to a substantial expense of $947 million by the end of 2022, suggesting either a change in profitability or tax strategy that led to increased tax obligations.

Cash operating taxes

Cash operating taxes followed a broadly variable trend. Beginning at $475 million in 2018, these taxes rose to $796 million in 2019, indicating an increased cash tax outflow. The figure then declined to $728 million in 2020 and further decreased to $454 million in 2021. This downward trend was reversed in 2022 with a marked increase to $1,790 million, more than tripling the cash operating taxes compared to the previous year. This sharp increase in 2022 signals a significant rise in actual cash taxes paid, which may reflect changes in profitability, tax rates, or deferred tax payments being settled.

Overall analysis

The data illustrates considerable volatility in both reported income tax expense and cash taxes paid over these years. The discrepancy between income tax expense turning into a benefit in 2021 while cash operating taxes decreased suggests timing differences or tax planning effects. The pronounced spike in both income tax expense and cash taxes in 2022 implies a substantial change in the company's tax situation or profitability, warranting further investigation into underlying operational or tax law changes affecting this period.

The financial data indicate noteworthy trends in the company's capital structure and financing over the observed period from 2018 to 2022.

Total reported debt & leases

The company’s total reported debt and leases showed a significant increase throughout the period. Starting at $2,584 million in 2018, the debt nearly doubled by 2019 to $5,472 million. This upward trend continued sharply in 2020, reaching $9,725 million, with a slower but steady rise in 2021 at $9,810 million, and further increase to $11,555 million in 2022. This pattern suggests an expanding use of debt financing or lease obligations over the years.

Total PayPal stockholders’ equity

Stockholders' equity also increased overall but at a more moderate pace compared to debt. Beginning at $15,386 million in 2018, equity rose consistently each year, peaking at $21,727 million in 2021 before slightly declining to $20,274 million in 2022. This trend implies retention of earnings and possible capital infusions, though the 2022 dip may indicate distributions, losses, or other equity reductions in that year.

Invested capital

Invested capital showed a steady growth trend across the period. From $17,780 million in 2018, it increased annually, reaching $31,496 million by 2022. This steady increase reflects the company’s growing asset base financed by both debt and equity, with the notable acceleration seen from 2019 onwards.

In summary, the data reveal an overall expansion in the company’s financial base, with a more pronounced rise in leverage compared to equity. The increased debt levels might indicate strategic investments funded through borrowing, while the equity growth confirms continued shareholder value enhancement until 2021, followed by a slight equity contraction in 2022.

The economic spread ratio exhibited a consistently negative trend between 2018 and 2022. While remaining negative throughout the period, the ratio’s magnitude fluctuated, indicating varying degrees of value destruction. Economic profit also remained negative across the observed timeframe, consistently failing to generate returns exceeding the cost of capital.

Economic Spread Ratio

In 2018, the economic spread ratio was -10.16%. This value deteriorated to -10.54% in 2019, suggesting a worsening of the gap between returns and the cost of capital. A notable improvement occurred in 2020, with the ratio increasing to -5.33%, indicating a reduced, though still negative, spread. However, this improvement was short-lived. The ratio declined to -7.54% in 2021 and further to -13.42% in 2022, representing the most substantial negative spread observed during the analyzed period. This indicates a significant increase in the disparity between the company’s returns and its cost of capital in the most recent year.

Economic Profit & Invested Capital Relationship

Economic profit consistently registered negative values, ranging from -1,806 million in 2018 to -4,228 million in 2022. This demonstrates a consistent failure to generate returns sufficient to cover the cost of invested capital. Invested capital increased from 17,780 million in 2018 to 31,496 million in 2022. Despite the growth in invested capital, the inability to achieve positive economic profit suggests that the increased investment did not translate into commensurate value creation. The widening gap between negative economic profit and increasing invested capital likely contributed to the worsening economic spread ratio observed in later years.

The combined trends suggest a growing challenge in generating returns that adequately compensate for the capital employed. The increasing magnitude of the negative economic spread ratio, coupled with consistently negative economic profit, warrants further investigation into the underlying drivers of profitability and capital allocation efficiency.

The economic profit margin exhibited a generally worsening trend over the five-year period. While fluctuations occurred, the overall movement indicates a decline in the company’s ability to generate economic profit relative to its net revenues.

Economic Profit

Economic profit consistently remained negative throughout the observed period. The magnitude of the negative economic profit increased from US$1,806 million in 2018 to US$4,228 million in 2022. There was a slight improvement in 2020, but this was followed by increases in negative economic profit in both 2021 and 2022.

Net Revenues

Net revenues demonstrated a consistent upward trend, increasing from US$15,451 million in 2018 to US$27,518 million in 2022. This growth in revenue did not translate into positive economic profit, suggesting that the cost of capital consistently exceeded the returns generated by revenue.

Economic Profit Margin

The economic profit margin, expressed as a percentage of net revenues, began at -11.69% in 2018. It deteriorated to -13.21% in 2019, improved slightly to -7.51% in 2020, then worsened again to -9.31% in 2021. The most significant decline occurred in 2022, with the margin reaching -15.36%. This indicates that for every dollar of revenue generated, the company experienced a greater economic loss in 2022 compared to prior years.

The divergence between increasing net revenues and declining economic profit margins suggests potential issues with cost management, capital efficiency, or the returns generated on invested capital. Further investigation into the underlying drivers of these trends is warranted.