Synopsys Inc. (NASDAQ:SNPS)

The financial performance, as measured by economic profit, exhibits considerable fluctuation over the observed period. Net operating profit after taxes (NOPAT) generally increased, though with a notable decline in 2023, before recovering strongly in the projected years. Simultaneously, invested capital experienced substantial growth, particularly in the later years, significantly impacting economic profit.

Economic Profit Trend

Economic profit began with negative values in 2020 and 2021, at -264,760 and -288,837 US$ in thousands, respectively. A positive economic profit of 144,146 US$ in thousands was achieved in 2022, indicating value creation. However, this was followed by a return to negative economic profit in 2023 (-381,548 US$ in thousands) and a further decline in 2024 (-559,017 US$ in thousands). The most significant negative economic profit occurred in 2025, reaching -4,651,031 US$ in thousands.

NOPAT Analysis

NOPAT demonstrated an initial increase from 774,053 US$ in thousands in 2020 to 800,432 US$ in thousands in 2021. A substantial increase was observed in 2022, reaching 1,357,350 US$ in thousands. A decrease to 891,268 US$ in thousands occurred in 2023, followed by a recovery to 1,062,721 US$ in thousands in 2024. NOPAT continued to rise significantly in 2025, reaching 1,962,565 US$ in thousands.

Cost of Capital

The cost of capital remained relatively stable between 2020 and 2024, fluctuating between 15.61% and 15.75%. A notable decrease to 14.26% is projected for 2025. This reduction in the cost of capital, however, did not prevent the substantial decline in economic profit during that year.

Invested Capital Growth

Invested capital increased steadily from 6,656,460 US$ in thousands in 2020 to 8,083,758 US$ in thousands in 2024. A dramatic increase is projected for 2025, reaching 46,390,870 US$ in thousands. This rapid expansion of invested capital appears to be a primary driver of the significant negative economic profit observed in 2025, despite the increase in NOPAT.

The divergence between NOPAT and economic profit, particularly in 2025, suggests that while the company is generating operating profit, the returns on the substantial investments made are not sufficient to cover the cost of capital. The projected increase in invested capital warrants further investigation to determine the efficiency and profitability of these investments.

Net income attributed to Synopsys and Net Operating Profit After Taxes (NOPAT) both demonstrate fluctuating performance over the observed period. While net income generally increased through 2024, it experienced a significant decline in the final year. NOPAT exhibits a more volatile pattern, with increases followed by substantial decreases, indicating potential shifts in operational efficiency or capital allocation.

Overall Trend - NOPAT

NOPAT increased from US$774,053 thousand in 2020 to US$800,432 thousand in 2021, representing a modest growth rate. A substantial increase is then observed in 2022, reaching US$1,357,350 thousand. However, NOPAT decreased significantly in 2023 to US$891,268 thousand, followed by a smaller increase to US$1,062,721 thousand in 2024. The final year, 2025, shows a considerable rise to US$1,962,565 thousand.

Comparison with Net Income

In 2020 and 2021, NOPAT exceeded net income attributed to Synopsys. This relationship reversed in 2022, 2023, and 2024, where net income surpassed NOPAT. The difference between the two metrics widened in 2023 and 2024 before narrowing again in 2025. This suggests changes in non-operating items or accounting adjustments impacting net income relative to core operational profitability.

Year-over-Year Changes - NOPAT

The largest year-over-year increase in NOPAT occurred between 2021 and 2022 (a US$556,918 thousand increase). The most significant decrease occurred between 2022 and 2023 (a US$466,082 thousand decrease). The final year, 2024 to 2025, shows a substantial increase of US$900,000 thousand. These fluctuations warrant further investigation into the underlying drivers of profitability.

Volatility

NOPAT demonstrates considerable volatility throughout the period. The swings between years suggest sensitivity to external factors, internal operational changes, or both. The substantial increase in 2025, following a period of more moderate growth and a significant decline, is particularly noteworthy and requires further scrutiny.

The provision for income taxes exhibits considerable fluctuation over the observed period. Beginning with a significant benefit of -25,288 in 2020, the provision transitioned to a positive value of 49,155 in 2021, increasing substantially to 137,078 in 2022. A decrease to 83,657 was noted in 2023, followed by a further increase to 99,718 in 2024, and a subsequent decline to 55,991 in 2025.

Cash Operating Taxes Trend

Cash operating taxes demonstrate a consistent upward trend throughout the period. Starting at 89,449 in 2020, these taxes increased to 180,324 in 2021 and 175,476 in 2022. Further growth was observed in 2023, reaching 290,764, and continued into 2024 with a value of 473,015. This upward trajectory persisted in 2025, culminating in 561,026.

The divergence between the provision for income taxes and cash operating taxes is notable. While the provision for income taxes fluctuates, the cash operating taxes consistently increase. This suggests a potential decoupling between reported taxable income and actual cash outflows for taxes. The substantial benefit recorded in 2020 for the provision for income taxes contrasts sharply with the positive cash operating taxes paid in the same year, indicating the utilization of tax loss carryforwards or other tax credits. The increasing cash operating taxes, despite fluctuations in the provision, may reflect increased profitability and a reduced reliance on such tax benefits in later years.

Relationship between Provision and Cash Taxes

The cash operating taxes consistently exceed the provision (benefit) for income taxes, except in 2020. This difference suggests timing differences between when income is recognized for accounting purposes and when taxes are actually paid. These differences could stem from deferred tax assets and liabilities, or from differences in depreciation methods used for financial reporting versus tax purposes. The widening gap between the two figures in recent years indicates a growing divergence in these timing differences.

The substantial growth in cash operating taxes from 2020 to 2025 warrants further investigation to determine the underlying drivers, such as increased revenue, changes in tax rates, or shifts in the geographic distribution of income. The volatility in the provision for income taxes, while less pronounced in the later years, should also be examined to understand the factors contributing to these fluctuations.

The reported invested capital demonstrates a consistent upward trend over the period from October 31, 2020, to October 31, 2023. However, a significant increase is observed between October 31, 2023, and October 31, 2024, and again between October 31, 2024, and October 31, 2025, indicating a substantial shift in capital structure or investment activity during those periods.

Total Reported Debt & Leases

Total reported debt & leases remained relatively stable between 2020 and 2022, fluctuating within a narrow range. An increase is noted in 2023, followed by a slight decrease in 2024. However, a dramatic increase is evident in 2025, suggesting a significant new borrowing event or accounting change. This substantial rise warrants further investigation.

Total Synopsys Stockholders’ Equity

Total stockholders’ equity exhibited consistent growth from 2020 to 2024. The rate of growth accelerated between 2023 and 2024. A very large increase is observed between 2024 and 2025, mirroring the increase in debt and contributing to the overall rise in invested capital. This suggests significant retained earnings or equity issuance.

Invested Capital Trend

Invested capital increased steadily from US$6,656,460 thousand in 2020 to US$8,083,758 thousand in 2023. The growth rate accelerated considerably in 2024, reaching US$10,307,049 thousand, and continued to escalate dramatically in 2025, culminating in US$46,390,870 thousand. This substantial jump in invested capital in the final two periods is primarily driven by the concurrent increases in both debt and equity, and represents a significant change in the company’s capital structure. The magnitude of the increase in 2025 is particularly noteworthy and requires detailed examination to understand the underlying causes.

The substantial increases in both debt, equity, and consequently, invested capital in 2024 and 2025 suggest a period of significant investment or restructuring. Further analysis is needed to determine the specific nature of these investments and their potential impact on future financial performance.

The economic spread ratio demonstrates a volatile pattern over the observed period. Initially negative, it briefly turned positive before reverting to, and then significantly increasing in, negative territory.

Economic Spread Ratio Trend

In 2020, the economic spread ratio was -3.98%. This decreased slightly to -4.16% in 2021, indicating a worsening of the difference between returns generated and the cost of capital. A substantial shift occurred in 2022, with the ratio becoming positive at 1.86%, suggesting the company generated returns exceeding its cost of capital during that year. However, this improvement was short-lived. The ratio declined to -4.72% in 2023 and further to -5.42% in 2024. A dramatic decrease is observed in 2025, with the economic spread ratio falling to -10.03%, representing a significant underperformance relative to the cost of invested capital.

The economic spread ratio’s movement correlates with fluctuations in economic profit. The positive ratio in 2022 aligns with the positive economic profit reported for that year. Conversely, the increasingly negative ratios in 2023, 2024, and particularly 2025 correspond with increasingly negative economic profit values.

Invested Capital and Economic Spread

Invested capital consistently increased from 2020 through 2024. However, a substantial increase in invested capital is seen in 2025, rising to US$46,390,870 in thousands. This increase in invested capital, coupled with a significantly negative economic profit, contributed to the substantial decline in the economic spread ratio in 2025. The ratio’s sensitivity to changes in economic profit is amplified by the growing base of invested capital.

The trend suggests a growing inability to generate returns sufficient to cover the cost of capital, particularly as the level of invested capital expands. The substantial deterioration in the economic spread ratio in the later years warrants further investigation into the underlying drivers of profitability and capital allocation.

The economic profit margin exhibited significant fluctuations over the observed period. Initially negative, it transitioned to positive territory before reverting to negative values, culminating in a substantial decline.

Economic Profit Margin Trend

In fiscal year 2020, the economic profit margin stood at -6.83%. A slight improvement was noted in 2021, with the margin increasing to -6.62%. However, 2022 saw a positive shift, reaching 2.62%. This positive trend proved short-lived, as the margin decreased to -6.66% in 2023. Further deterioration occurred in 2024, with the margin falling to -9.09%. The most pronounced decline occurred in 2025, where the economic profit margin plummeted to -58.50%.

The economic profit margin’s movement closely mirrors the trend in economic profit. The initial negative margins in 2020 and 2021 correspond with negative economic profit values. The positive margin in 2022 aligns with positive economic profit. The subsequent return to negative margins in 2023, 2024, and particularly 2025, is directly linked to the increasingly negative economic profit figures.

Relationship to Adjusted Revenue

Adjusted revenue demonstrated consistent growth throughout the period, increasing from US$3,875,816 thousand in 2020 to US$7,950,128 thousand in 2025. Despite this revenue growth, the economic profit margin declined significantly in the latter years, indicating that the increase in revenue was insufficient to offset increasing costs or capital charges impacting economic profit.

The substantial decline in the economic profit margin in 2025 warrants further investigation. While revenue increased, the concurrent and dramatic decrease in economic profit suggests a significant issue with profitability relative to the capital employed. The magnitude of the decline indicates a potential need to reassess operational efficiency, cost structure, or capital allocation strategies.