Steel Dynamics Inc. (NASDAQ:STLD)

The period under review demonstrates significant fluctuations in economic profit. Initial observations reveal a substantial improvement followed by declines, culminating in a marked increase in the most recent year. Net operating profit after taxes (NOPAT) and invested capital both generally increased over the period, though NOPAT experienced considerable volatility. The cost of capital remained relatively stable, fluctuating within a range of approximately 2 percentage points.

Economic Profit Trend

Economic profit began at a negative value in 2017, at -424,073 US$ in thousands. A significant positive shift occurred in 2018, with economic profit reaching 196,070 US$ in thousands. However, this was followed by negative economic profit in both 2019 (-302,278 US$ in thousands) and 2020 (-509,340 US$ in thousands). A dramatic increase is then observed in 2021, with economic profit rising to 1,962,407 US$ in thousands.

NOPAT Analysis

Net operating profit after taxes exhibited considerable variability. It nearly doubled from 2017 to 2018, then decreased in both 2019 and 2020. The most substantial increase in NOPAT occurred between 2020 and 2021, more than quintupling from 696,079 US$ in thousands to 3,611,424 US$ in thousands. This increase significantly contributed to the positive economic profit observed in 2021.

Cost of Capital and Invested Capital

The cost of capital showed a slight decreasing trend from 19.77% in 2017 to 16.81% in 2019, before increasing again to 19.29% in 2021. Invested capital generally increased throughout the period, moving from 5,964,900 US$ in thousands in 2017 to 8,550,168 US$ in thousands in 2021. The increase in invested capital, coupled with fluctuations in NOPAT and the cost of capital, directly impacted the resulting economic profit.

The substantial improvement in economic profit in 2021 appears to be driven primarily by the significant increase in NOPAT, despite a concurrent increase in invested capital and a slightly higher cost of capital. Prior to 2021, economic profit was sensitive to changes in NOPAT, with declines in NOPAT leading to negative economic profit despite increasing invested capital.

Net income attributable to Steel Dynamics, Inc.

The net income shows a volatile trend over the period analyzed. It increased significantly from 812,741 thousand USD in 2017 to a peak of 1,258,379 thousand USD in 2018. However, this was followed by a sharp decline to 671,103 thousand USD in 2019 and a further decrease to 550,822 thousand USD in 2020. In 2021, net income experienced a remarkable surge, reaching 3,214,066 thousand USD, the highest level in the five-year span.

Net operating profit after taxes (NOPAT)

The NOPAT values exhibit a similar pattern to net income, indicating operational profitability dynamics. Starting at 755,373 thousand USD in 2017, NOPAT rose substantially to 1,420,457 thousand USD in 2018. Subsequently, it experienced a decline, reaching 827,375 thousand USD in 2019 and decreasing slightly to 696,079 thousand USD in 2020. In 2021, NOPAT showed a significant increase to 3,611,424 thousand USD, surpassing prior years and indicating improved operational efficiency or favorable business conditions.

Insights

Both net income and NOPAT demonstrate a pattern of considerable increase in 2018, followed by a decline over the next two years, and then a substantial recovery in 2021. The pronounced increases in 2021 suggest that the company may have benefited from external or internal factors that significantly enhanced profitability. However, the volatility in prior years highlights potential operational challenges or market fluctuations impacting earnings. The alignment between net income and NOPAT trends suggests that both operational performance and overall profitability were similarly affected throughout the period.

Income tax expense

The income tax expense exhibited significant fluctuation over the five-year period. Starting at approximately $129 million in 2017, it sharply increased to nearly $364 million in 2018. This was followed by a marked reduction to about $197 million in 2019 and further declined to approximately $135 million in 2020. However, in 2021, there was a dramatic spike to over $962 million, representing the highest value in the observed timeframe.

Cash operating taxes

Cash operating taxes showed a different pattern compared to the income tax expense. Initially, there was a moderate rise from roughly $317 million in 2017 to $332 million in 2018. This was succeeded by a substantial decrease to about $176 million in 2019, continuing downward to $110 million in 2020. In 2021, cash operating taxes reversed the downward trend, surging significantly to around $656 million, though still below the 2017 and 2018 levels.

Comparison and analysis

Both income tax expense and cash operating taxes experienced fluctuations with a notable peak in 2021. Income tax expense showed more volatility with its lowest value in 2017 and highest in 2021, while cash operating taxes maintained a relatively higher baseline in the earlier years before a marked decline and subsequent increase in 2021. The considerable rise in both metrics in 2021 might indicate higher taxable income or changes in tax policy or company financial structure. The differing trajectories from 2017 to 2020 between the two measures suggest variations in timing or recognition of tax-related cash flows versus accrued tax expenses.

Total reported debt & leases

The total reported debt and leases show a generally increasing trend over the analyzed period. Starting at approximately 2.43 billion USD in 2017, the figure rose steadily each year up to around 3.21 billion USD by the end of 2021. This indicates a growing leverage or financing through debt and lease obligations over time.

Total Steel Dynamics, Inc. equity

Equity values exhibit consistent growth throughout the five-year span. Beginning at approximately 3.35 billion USD in 2017, equity increased to about 6.30 billion USD by 2021, with a notable acceleration between 2020 and 2021. This substantial rise in equity suggests significant retained earnings, capital infusions, or revaluation impacts that strengthened the company’s equity base.

Invested capital

Invested capital experienced steady growth from 5.96 billion USD in 2017 to 8.55 billion USD in 2021. The increase is somewhat consistent year over year, with a marked jump in the final year analyzed. This growth reflects an expansion in the total capital allocated in the business, combining both debt and equity financing sources, which supports the company’s operational capacity and potential for value creation.

Overall trend and insights

The data reveals a balanced expansion financed through both higher liabilities and substantially increased equity, leading to larger invested capital over the five years. The proportionally higher increase in equity compared to debt may indicate a strategic emphasis on strengthening the financial position and reducing financial risk. The rising invested capital underscores ongoing investments in operational assets or business growth initiatives. Such trends typically reflect robust financial health and an upward trajectory in the company’s scale and capital structure sophistication.

The economic spread ratio exhibited significant fluctuations between 2017 and 2021. Initially negative, the ratio demonstrated improvement in 2018 before declining again in subsequent years, culminating in a substantial increase in 2021.

Economic Spread Ratio

In 2017, the economic spread ratio was -7.11%, indicating that the company’s return on invested capital was less than its cost of capital. A positive shift occurred in 2018, with the ratio reaching 3.06%, suggesting the company generated returns exceeding its cost of capital. However, this improvement was not sustained, as the ratio decreased to -4.50% in 2019 and further to -7.51% in 2020. A dramatic turnaround was observed in 2021, with the economic spread ratio surging to 22.95%, signifying a substantial outperformance of returns relative to the cost of capital.

The economic spread ratio’s movement closely mirrors the trend in economic profit. Negative economic profit values in 2017, 2019, and 2020 correspond with negative or significantly lower economic spread ratios. Conversely, positive economic profit in 2018 and the substantial profit in 2021 align with positive and markedly higher economic spread ratios.

Invested Capital

Invested capital consistently increased from 2017 to 2021, growing from US$5,964,900 thousand to US$8,550,168 thousand. This growth in invested capital occurred alongside the fluctuating economic spread ratio, suggesting that increases in capital deployment did not automatically translate into improved profitability relative to cost of capital until 2021.

The substantial increase in the economic spread ratio in 2021, coupled with the continued growth in invested capital, suggests a significant improvement in the company’s ability to generate value from its investments during that year. The earlier periods demonstrate a struggle to achieve returns exceeding the cost of capital, despite increasing investment.

The economic profit margin exhibited significant fluctuation between 2017 and 2021. Initial observations reveal a period of negative economic profit followed by positive performance, then a return to negative values before culminating in substantial positive economic profit in the most recent year.

Economic Profit Margin Trend

In 2017, the economic profit margin stood at -4.45%. This indicates that the company’s economic profit was negative relative to its net sales. A substantial improvement was observed in 2018, with the margin increasing to 1.66%, signifying positive economic profit. However, this positive trend was short-lived, as the margin declined to -2.89% in 2019 and further to -5.30% in 2020. A dramatic reversal occurred in 2021, with the economic profit margin reaching 10.66%, representing a significant increase in economic profit relative to net sales.

The economic profit margin’s volatility suggests a sensitivity to underlying economic factors or company-specific operational changes. The negative margins in 2017, 2019, and 2020 suggest that the company’s returns were not exceeding its cost of capital during those periods. Conversely, the positive margins in 2018 and, particularly, 2021 indicate periods where the company generated returns above its cost of capital.

Relationship to Net Sales

Net sales experienced an increase from 2017 to 2018, followed by a decrease in 2019 and 2020, before a substantial increase in 2021. The largest increase in net sales occurred in 2021, coinciding with the highest economic profit margin. While net sales provide context, the economic profit margin demonstrates that increased sales do not automatically translate to increased economic profit; the cost of capital must also be considered.

The substantial improvement in the economic profit margin in 2021 warrants further investigation to determine the key drivers behind this performance. Factors such as increased operational efficiency, favorable market conditions, or changes in the cost of capital could all contribute to this outcome.