Walgreens Boots Alliance Inc. (NASDAQ:WBA)

The analysis of economic profit from 2014 to 2019 reveals a period of consistent value destruction, characterized by negative economic profit throughout the timeframe. However, a distinct recovery trend emerged after 2016, as the company successfully reduced the magnitude of its economic losses.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated significant growth over the observed period, rising from 3,086 million in 2014 to a peak of 5,934 million in 2018. While there was a slight contraction to 5,719 million in 2019, the overall trend indicates a substantial increase in the company's ability to generate operating earnings.

Invested Capital and Cost of Capital

Invested capital experienced a sharp expansion between 2014 and 2016, peaking at 85,356 million. After 2016, a trend of capital optimization is observed, with the balance stabilizing between 76,286 million and 77,429 million. The cost of capital remained relatively stagnant around the 11% mark for five years before decreasing to 10.04% in 2019, reducing the overall capital charge.

Economic Profit Performance

Economic profit declined from -3,130 million in 2014 to a trough of -4,904 million in 2016, a period that coincided with the peak in invested capital. From 2017 through 2019, the economic profit trend reversed, improving steadily to -2,052 million. This recovery was driven by the convergence of increasing NOPAT and a more disciplined approach to invested capital, alongside a reduction in the cost of capital in the final year.

Net earnings attributable to Walgreens Boots Alliance, Inc.

The net earnings exhibit volatility over the six-year period. Starting at 1,932 million USD in 2014, there is a significant increase to 4,220 million USD in 2015. This level is mostly sustained through 2016 and 2017, with values of 4,173 and 4,078 million USD respectively. In 2018, net earnings peak at 5,024 million USD, marking the highest point in the period analyzed. However, a decline occurs in 2019, where earnings fall to 3,982 million USD, indicating a downward shift after the 2018 peak.

Net operating profit after taxes (NOPAT)

The NOPAT shows an overall upward trend with some fluctuations. Beginning at 3,086 million USD in 2014, it rises sharply to 5,501 million USD in 2015. After this peak, it dips to 4,855 million USD in 2016, before increasing again in 2017 and 2018 to 5,246 and 5,934 million USD respectively. The highest NOPAT value is recorded in 2018. In 2019, NOPAT slightly decreases to 5,719 million USD but remains close to the peak level, indicating relatively stable operating profitability in recent years compared to net earnings.

Income Tax Provision

The income tax provision exhibited a general downward trend from 2014 to 2019. Beginning at $1,526 million in 2014, the figure decreased steadily through subsequent years, reaching $588 million in 2019. Notably, the most significant decline occurred between 2017 and 2019.

Cash Operating Taxes

Cash operating taxes remained relatively stable between 2014 and 2018, fluctuating within a narrow range from $1,667 million to $1,856 million. However, in 2019, there was a sharp decrease to $831 million, which represents a substantial reduction compared to the previous years.

Overall Observations

Both income tax provision and cash operating taxes showed significant declines by 2019 compared to earlier periods. While income tax provision steadily decreased over the years, cash operating taxes were stable for several years before dropping markedly in the last year observed. These trends may reflect changes in tax policies, operational adjustments, or shifts in taxable income and cash tax payments.

The financial data reveals several notable trends concerning the company's capital structure and invested capital over the six-year period ending in 2019.

Total reported debt & leases

This figure shows an overall increasing trend from 31,909 million USD in 2014 to 43,464 million USD in 2019, with a peak at 46,508 million USD in 2016. After reaching this peak, there is a decline in 2017 to 39,129 million USD, followed by a gradual increase again through 2018 and 2019. This pattern suggests a significant increase in leveraging activities up to 2016, some deleveraging or repayment in 2017, and subsequent additional borrowings or lease liabilities through 2019.

Total shareholders’ equity

Shareholders' equity exhibits a declining trend over the period. Starting at 20,457 million USD in 2014, the equity rose sharply to 30,861 million USD in 2015 but then continuously decreased each year thereafter to 23,512 million USD by 2019. This reduction over time indicates a depletion of equity capital, which could be attributed to factors such as sustained net losses, dividend distributions exceeding net income, share repurchases, or other equity-reducing activities.

Invested capital

The invested capital closely aligns with the combined effect of debt and equity, representing the total capital used in operations. It increased substantially from 55,001 million USD in 2014 to a peak of 85,356 million USD in 2016. Following this peak, invested capital decreased to 76,485 million USD in 2017 and remained relatively stable, with a slight increase, reaching 77,429 million USD by 2019. This behavior suggests expansion or acquisition activity up to 2016, followed by a period of consolidation or capital optimization in subsequent years.

In summary, the company experienced considerable growth in debt financing and invested capital until 2016, accompanied by an initial rise and then a steady decline in shareholders' equity. The data implies a strategic shift post-2016, characterized by deleveraging and stabilization of invested capital, while equity erosion continued, highlighting potential risks related to capital structure and financial sustainability.

The financial performance between 2014 and 2019 is characterized by a consistent failure to achieve positive economic value added, although a sustained trajectory of improvement is evident from 2016 onward.

Economic Profit Trends

Economic profit remained negative throughout the analyzed period. A downward trend was observed initially, with losses widening from 3,130 million US dollars in 2014 to a peak deficit of 4,904 million US dollars in 2016. Following this trough, a consistent recovery occurred, reducing the economic loss to 2,052 million US dollars by August 31, 2019.

Invested Capital Fluctuations

Invested capital saw a sharp increase in the early part of the period, rising from 55,001 million US dollars in 2014 to 85,356 million US dollars in 2016. From 2017 to 2019, the capital base entered a phase of relative stabilization, maintaining a range between approximately 76,286 million and 77,429 million US dollars.

Economic Spread Ratio Analysis

The economic spread ratio remained negative for the entire duration, indicating that the return on invested capital consistently fell below the weighted average cost of capital. After reaching a low of -5.75% in 2016, the ratio improved steadily each subsequent year, narrowing to -2.65% by 2019. This steady progression suggests a gradual reduction in the gap between actual returns and the required cost of capital, signaling improved capital efficiency over time.

The financial performance from 2014 to 2019 is characterized by consistent negative economic profit, indicating that the company did not generate returns sufficient to cover its cost of capital during this period. However, a distinct trend of recovery is observable starting in 2017, as the magnitude of economic loss decreased steadily despite significant growth in total sales.

Economic Profit Trend

Economic profit exhibited a volatile trajectory, initially declining from -3,130 million US$ in 2014 to a peak loss of -4,904 million US$ in 2016. Following this trough, a consistent recovery phase occurred, with losses narrowing to -3,444 million US$ in 2017, -2,646 million US$ in 2018, and reaching -2,052 million US$ by 2019. This represents a substantial reduction in economic value destruction over the final three years of the analyzed period.

Sales Expansion

Revenue demonstrated uninterrupted growth throughout the six-year interval. Sales increased from 76,392 million US$ in 2014 to 136,866 million US$ in 2019. The most significant jump occurred between 2014 and 2015, where sales rose by approximately 35%. This sustained growth in the top line provided the scale necessary to begin mitigating the economic losses observed in the earlier years.

Economic Profit Margin Analysis

The economic profit margin, which measures the economic loss relative to sales, remained negative but showed an improving trend after 2016. The margin dipped to its lowest point of -4.18% in 2016, correlating with the highest absolute economic loss. Subsequently, the margin improved markedly to -2.91% in 2017, -2.01% in 2018, and -1.50% in 2019. The steady contraction of this negative margin suggests an increase in capital efficiency and a gradual convergence toward positive economic value creation.