Synopsys Inc. (NASDAQ:SNPS)

The financial performance, as measured by economic profit, exhibits a concerning trend over the observed period. While net operating profit after taxes (NOPAT) fluctuates, the economic profit consistently remains negative, and the magnitude of the loss increases substantially in later years. This suggests that, despite generating operating profits, the company is failing to generate returns exceeding its cost of capital.

NOPAT Trend

Net operating profit after taxes demonstrates initial growth from US$774.053 million in 2020 to US$800.432 million in 2021. A significant increase is then observed in 2022, reaching US$1,357.350 million, followed by a decline to US$891.268 million in 2023. Further growth occurs in 2024, reaching US$1,062.721 million, and a substantial increase is seen in 2025, reaching US$1,962.565 million. Despite these fluctuations, NOPAT alone does not indicate overall value creation.

Cost of Capital

The cost of capital remains relatively stable between 2020 and 2024, fluctuating between 18.30% and 18.47%. A notable decrease is observed in 2025, falling to 16.63%. This reduction in the cost of capital, however, does not translate into positive economic profit.

Invested Capital

Invested capital shows a consistent increase from US$6,656.460 million in 2020 to US$7,739.574 million in 2022. This growth continues to US$10,307.049 million in 2024, but experiences a dramatic surge in 2025, reaching US$46,390.870 million. This substantial increase in invested capital, coupled with a relatively high cost of capital, contributes significantly to the negative economic profit.

Economic Profit

Economic profit is negative throughout the entire period. The losses are initially around US$-444.194 million and US$-477.141 million in 2020 and 2021, respectively. The loss decreases to US$-65.511 million in 2022, but then increases again to US$-601.594 million in 2023 and US$-839.306 million in 2024. A significant deterioration is observed in 2025, with economic profit falling to US$-5,750.891 million. This escalating negative economic profit indicates a widening gap between the company’s operating profits and the returns required by its investors.

The increasing invested capital, particularly in 2025, appears to be a primary driver of the worsening economic profit. While the decrease in the cost of capital in 2025 is a positive development, it is insufficient to offset the impact of the significantly higher invested capital base. The consistent negative economic profit suggests a need to re-evaluate capital allocation strategies and improve the efficiency of capital utilization.

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 consistently negative trend over the observed period. Initially, the ratio is relatively stable, but it deteriorates significantly in later years, indicating a widening gap between the return generated from invested capital and the cost of that capital.

Economic Spread Ratio Trend

From October 31, 2020, to October 31, 2022, the economic spread ratio moved from -6.67% to -0.85%. This suggests an initial improvement in the company’s ability to generate returns exceeding its capital costs, although it remained negative. However, this improvement was short-lived.

Between October 31, 2022, and October 31, 2025, the economic spread ratio experienced a substantial decline, falling to -12.40%. This represents a significant deterioration in performance, indicating that the company’s invested capital is generating returns increasingly below the required cost of capital.

The negative economic spread ratio throughout the period suggests the company is destroying economic value. The magnitude of the negative spread is increasing, particularly from 2023 onwards, which is a cause for concern. This trend coincides with a substantial increase in invested capital, especially in the final two observed years, suggesting that larger capital deployments are not translating into proportional economic gains.

Relationship to Economic Profit

The consistently negative economic profit values align with the negative economic spread ratios. The increasing negative economic profit, culminating in a substantial loss of US$5,750,891 thousand in 2025, reinforces the conclusion that the company is not generating sufficient returns on its invested capital.

The accelerating decline in the economic spread ratio, coupled with the growing economic loss, indicates a worsening financial performance. Further investigation is warranted to understand the underlying drivers of this trend, including potential issues with capital allocation, operational efficiency, or the cost of capital.

The economic profit margin demonstrates a volatile pattern over the observed period. Initially, the margin exhibits a slight improvement, followed by significant deterioration in later years. Economic profit itself transitions from substantial negative values to even larger negative figures, indicating a widening gap between returns and the cost of capital.

Economic Profit Margin Trend

From October 31, 2020, to October 31, 2021, the economic profit margin improved modestly, moving from -11.46% to -10.93%. This suggests a slight increase in the efficiency of capital utilization or an improvement in profitability relative to the cost of capital during this period. However, this positive trend was short-lived.

A substantial decline is observed between October 31, 2021, and October 31, 2022, with the margin decreasing to -1.19%. This indicates a significant reduction in the ability to generate returns exceeding the cost of capital. The following year, October 31, 2023, saw a further worsening, with the margin falling to -10.50%.

The most dramatic deterioration occurs between October 31, 2023, and October 31, 2025. The economic profit margin plunges from -10.50% to -72.34%. This represents a substantial decrease in value creation and suggests a significant underperformance relative to the cost of capital. This decline coincides with a considerable increase in the magnitude of negative economic profit.

Economic Profit

Economic profit consistently remains negative throughout the period. While the absolute value of the negative economic profit decreased from US$444,194 thousand in 2020 to US$65,511 thousand in 2022, it then increased substantially, reaching US$5,750,891 thousand in 2025. This indicates that the company is consistently destroying economic value, and the rate of value destruction is accelerating.

Relationship between Revenue and Economic Profit Margin

Adjusted revenue demonstrates a consistent upward trend throughout the period, increasing from US$3,875,816 thousand in 2020 to US$7,950,128 thousand in 2025. However, this revenue growth has not translated into improved economic profitability. The widening gap between revenue and economic profit margin suggests that the cost of generating revenue, or the cost of capital employed, is increasing at a faster rate than revenue itself.

In summary, while revenue is increasing, the company’s ability to generate economic profit is declining significantly. The substantial deterioration in the economic profit margin, coupled with consistently negative and increasing economic profit, raises concerns about the company’s capital allocation efficiency and overall value creation.