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, while the cost of capital remained relatively stable until a decrease in 2025.

Economic Profit Trend

Economic profit initially registered negative values in 2020 and 2021, amounting to US$282,864 and US$307,836 respectively. A positive economic profit of US$122,993 was achieved in 2022, indicating value creation. However, this was followed by a return to negative economic profit in 2023 (US$403,750) and a further deterioration in 2024 (US$587,297). The most significant decline occurred in 2025, with economic profit reaching negative US$4,762,001.

NOPAT Analysis

NOPAT demonstrated an initial increase from US$774,053 in 2020 to US$800,432 in 2021. A substantial surge was observed in 2022, reaching US$1,357,350. A decrease to US$891,268 occurred in 2023, followed by a recovery to US$1,062,721 in 2024. The largest NOPAT value was projected for 2025, at US$1,962,565.

Cost of Capital and Invested Capital

The cost of capital remained relatively consistent between 2020 and 2024, fluctuating between 15.88% and 16.02%. A notable decrease to 14.50% is projected for 2025. Invested capital increased steadily from US$6,656,460 in 2020 to US$8,083,758 in 2024. A dramatic increase to US$46,390,870 is projected for 2025, significantly outpacing the growth in NOPAT.

The increasing invested capital, coupled with the relatively stable cost of capital until 2025, appears to be a primary driver of the declining economic profit, particularly in the later years. While NOPAT is projected to increase in 2025, the substantial growth in invested capital overwhelms this increase, resulting in a significant negative economic profit. The decrease in the cost of capital in 2025 does not appear to fully offset the impact of the increased invested capital.

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 exhibited considerable fluctuation over the observed period. Initially negative, it transitioned to a positive value before reverting to, and significantly increasing in, negative territory.

Economic Spread Ratio Trend

In 2020, the economic spread ratio stood at -4.25%. This value decreased slightly to -4.43% in 2021, indicating a worsening of the difference between return on invested capital and the cost of capital. A substantial improvement occurred in 2022, with the ratio becoming positive at 1.59%, suggesting the company generated returns exceeding its cost of capital. However, this positive trend was short-lived. The ratio declined to -4.99% in 2023 and further to -5.70% in 2024. A dramatic decrease was observed in 2025, with the economic spread ratio falling to -10.26%, representing a significant underperformance relative to the cost of invested capital.

The economic spread ratio’s movement closely mirrors the trend in economic profit. The shift from negative economic profit in 2020 and 2021 to positive economic profit in 2022 aligns with the ratio’s move into positive territory. Conversely, the return to negative economic profit in 2022 and beyond corresponds with the ratio’s subsequent decline and eventual substantial negativity.

Invested Capital and Economic Spread

Invested capital consistently increased from 2020 through 2024, rising from US$6,656,460 thousand to US$10,307,049 thousand. The substantial increase in invested capital in 2025, reaching US$46,390,870 thousand, coincided with the most significant decline in the economic spread ratio. This suggests that while capital was being deployed, the returns generated were insufficient to cover the cost of that capital, particularly in the final year observed.

The increasing magnitude of the negative economic spread ratio, particularly in 2025, warrants further investigation. The substantial growth in invested capital without a corresponding improvement in profitability appears to be a key driver of this trend.

The economic profit margin demonstrates significant fluctuations over the observed period. Initially negative, it improved substantially in 2022 before declining again, culminating in a substantial negative value in 2025.

Economic Profit Margin Trend

The economic profit margin began at -7.30% in 2020 and decreased slightly to -7.05% in 2021. A marked improvement occurred in 2022, with the margin rising to 2.24%. However, this positive trend reversed in 2023, returning to -7.05%. The margin then deteriorated significantly in 2024, reaching -9.55%, and experienced a dramatic decline in 2025, falling to -59.90%.

The economic profit margin’s movement closely mirrors the trend in economic profit. The initial negative economic profit values in 2020 and 2021 resulted in the corresponding negative margins. The positive economic profit in 2022 drove the margin into positive territory. The subsequent return to negative economic profit in 2023 and the increasingly negative values in 2024 and 2025 directly correlate with the declining margins.

Relationship to Adjusted Revenue

Adjusted revenue consistently increased throughout the period, rising 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 substantially in the later years, indicating that the increase in revenue was not sufficient 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 significant negative margin suggests a considerable shortfall in generating returns exceeding the cost of capital. The magnitude of the decline indicates a potential issue with profitability or capital efficiency that requires attention.