Abbott Laboratories (NYSE:ABT)

The period under review demonstrates fluctuating economic profit performance. Net operating profit after taxes (NOPAT) initially increased significantly before declining, while the cost of capital consistently rose. Invested capital remained relatively stable with some variation. Consequently, economic profit exhibited substantial volatility, moving from a significant loss to a small profit and then back to substantial losses.

NOPAT Trend

NOPAT increased substantially from US$4,838 million in 2020 to US$7,014 million in 2021, representing a significant improvement in operational profitability. However, this was followed by a decrease to US$6,718 million in 2022 and a further decline to US$5,289 million in 2023. A slight recovery to US$5,601 million was observed in 2024, but remained below the 2021 peak.

Cost of Capital Trend

The cost of capital experienced a consistent upward trend throughout the period, increasing from 11.19% in 2020 to 11.60% in 2024. This indicates a rising cost of funding for the company’s invested capital.

Invested Capital Trend

Invested capital showed relative stability, beginning at US$60,387 million in 2020, increasing to US$62,076 million in 2021, decreasing to US$61,288 million in 2022, then declining to US$59,651 million in 2023, and finally increasing slightly to US$60,065 million in 2024. The fluctuations were comparatively modest.

Economic Profit Trend

Economic profit was negative and substantial in 2020, at -US$1,921 million. It improved dramatically to a positive US$52 million in 2021, coinciding with the peak in NOPAT. However, economic profit then turned negative again, reaching -US$227 million in 2022, -US$1,543 million in 2023, and -US$1,368 million in 2024. The increasing cost of capital appears to have contributed to the return to negative economic profit, despite the relatively stable invested capital.

The observed pattern suggests that while operational performance initially improved, the rising cost of capital ultimately outweighed the benefits, resulting in a decline in economic profit. The company generated accounting profits, but failed to generate returns exceeding its cost of capital in most years of the period.

The financial performance over the observed periods highlights variability in both net earnings and net operating profit after taxes (NOPAT), with distinct trends and fluctuations evident.

Net Earnings

Net earnings demonstrated significant growth from 2020 to 2021, increasing from 4,495 million US dollars to 7,071 million US dollars. Following this peak, there was a slight decline in 2022 to 6,933 million US dollars, and a more pronounced decrease in 2023 to 5,723 million US dollars. However, in 2024, net earnings surged substantially, reaching 13,402 million US dollars, representing the highest value in the entire period under review.

Net Operating Profit After Taxes (NOPAT)

NOPAT also exhibited a rising trend from 2020 to 2021, increasing from 4,838 million US dollars to 7,014 million US dollars. Subsequently, NOPAT decreased each year through 2023, falling to 5,289 million US dollars. In 2024, there was a modest recovery, with NOPAT rising to 5,601 million US dollars, although this value remained below the peak observed in 2021.

The patterns indicate a strong performance improvement initially, peaking in 2021 for both profitability metrics, followed by a downturn over the next two years. Notably, net earnings exhibited a remarkable recovery and acceleration in 2024, far exceeding previous years' performance, whereas NOPAT showed only a slight improvement without returning to earlier peak levels. This divergence in 2024 suggests that factors impacting net earnings positively may not have equivalently affected operating efficiency or core profitability as measured by NOPAT.

The data reveals notable fluctuations in both taxes on earnings from continuing operations and cash operating taxes over the five-year period analyzed.

Taxes on earnings from continuing operations

This item shows an overall increasing trend from 497 million USD in 2020 to a peak of 1,373 million USD in 2022, followed by a decline to 941 million USD in 2023. Notably, 2024 exhibits a significant negative value of -6,389 million USD, indicating a substantial tax benefit or reversal relative to earnings taxation for that year.

Cash operating taxes

Cash operating taxes also increased from 718 million USD in 2020 to 2,118 million USD in 2022. However, in contrast to taxes on earnings, cash operating taxes declined only slightly to 1,463 million USD in 2023, followed by a moderate increase to 1,626 million USD in 2024. The cash tax payments did not reflect the large negative swing seen in tax expenses on earnings for 2024.

This divergence in 2024 between taxes on earnings and cash operating taxes may suggest the presence of deferred tax assets, tax refunds, adjustments, or accounting reclassifications influencing reported earnings taxes without an immediate effect on cash taxes paid. The general increase in both tax metrics until 2022 aligns with growing taxable earnings or changes in tax rates but the pronounced changes in 2023 and especially 2024 highlight significant tax-related events or accounting impacts during these years.

Total reported debt & leases

The total reported debt and leases demonstrate a consistent downward trend over the observed five-year period. Beginning at approximately 19,890 million US dollars in 2020, the debt level gradually decreased each year, reaching around 15,275 million US dollars by the end of 2024. This steady reduction suggests a focus on debt management or deleveraging initiatives, contributing to an improved financial structure.

Total Abbott shareholders’ investment

Shareholders’ investment exhibits a steady increase across the years. Starting at 32,784 million US dollars in 2020, this figure rose progressively to 47,664 million US dollars by 2024. The growth reflects a strengthening equity base, possibly due to accumulated earnings, retained profits, or new equity infusions, enhancing the company's financial stability and shareholder value.

Invested capital

Invested capital shows a relatively stable pattern with slight fluctuations throughout the period. The value starts at 60,387 million US dollars in 2020 and peaks near 62,076 million in 2021 before slightly declining and stabilizing around 60,065 million by 2024. This relative stability indicates consistent investment levels in the business operations and assets, with minor adjustments potentially reflecting operational changes or capital expenditure variations.

Overall Insights

The financial data highlights a strategic decrease in debt concurrent with increasing shareholder equity, indicating a strengthening financial position. The reduction in debt paired with rising equity suggests improved solvency and reduced financial risk. Stability in invested capital implies maintained operational capacity, supporting sustainable growth. Collectively, these trends point to robust financial management and a focus on enhancing the company’s balance sheet quality over the observed period.

The economic spread ratio exhibited considerable fluctuation between 2020 and 2024. Initially negative, the ratio briefly turned positive before reverting to negative values, ultimately demonstrating a declining trend over the five-year period. Economic profit also displayed volatility, moving from a substantial loss in 2020 to a small profit in 2021, then back to significant losses in subsequent years. Invested capital remained relatively stable, with minor variations throughout the period.

Economic Spread Ratio

In 2020, the economic spread ratio was -3.18%, indicating that the company’s return on invested capital was substantially lower than its cost of capital. A positive shift occurred in 2021, with the ratio reaching 0.08%, suggesting a brief period where returns exceeded the cost of capital. However, this improvement was short-lived, as the ratio declined to -0.37% in 2022 and further to -2.59% in 2023. The downward trend continued into 2024, with the ratio reaching -2.28%. This consistent negativity, and increasing magnitude, suggests a growing disparity between the company’s returns and its capital costs.

Economic Profit

Economic profit mirrored the fluctuations observed in the economic spread ratio. A significant loss of US$1,921 million was recorded in 2020. While 2021 saw a profit of US$52 million, this was followed by a loss of US$227 million in 2022. Losses widened considerably in 2023 to US$1,543 million and remained substantial in 2024 at US$1,368 million. The pattern indicates an inability to consistently generate returns exceeding the cost of capital.

Invested Capital

Invested capital remained relatively consistent throughout the period, ranging from US$60,387 million in 2020 to US$62,076 million in 2021, then decreasing to US$59,651 million in 2023 before slightly recovering to US$60,065 million in 2024. These fluctuations were minor compared to the volatility observed in economic profit and the economic spread ratio, suggesting that changes in invested capital were not the primary driver of the observed performance trends.

The combination of a consistently negative and declining economic spread ratio alongside fluctuating, but ultimately negative, economic profit suggests a concerning trend in value creation. Despite relatively stable levels of invested capital, the company has struggled to generate returns that cover its cost of capital.

The economic profit margin exhibited considerable fluctuation between 2020 and 2024. Initial observations reveal a negative margin in 2020, followed by a brief positive margin in 2021, and a return to negative values for the subsequent three years.

Economic Profit Margin Trend

In 2020, the economic profit margin stood at -5.55%. A significant shift occurred in 2021, with the margin turning positive at 0.12%. However, this improvement was short-lived, as the margin decreased to -0.52% in 2022. Further declines were noted in 2023 and 2024, reaching -3.85% and -3.26% respectively. This indicates a generally worsening trend in economic profitability over the analyzed period, despite a temporary positive outcome in 2021.

The economic profit itself mirrors this trend. A substantial negative economic profit of -1,921 million was recorded in 2020. While 2021 saw a positive economic profit of 52 million, the following years experienced negative economic profits of -227 million, -1,543 million, and -1,368 million in 2022, 2023, and 2024, respectively.

Relationship to Net Sales

Net sales increased from 34,608 million in 2020 to 43,075 million in 2021, and then to 43,653 million in 2022. A decrease to 40,109 million was observed in 2023, followed by a slight increase to 41,950 million in 2024. Despite the overall increase in net sales from 2020 to 2024, the economic profit margin remained largely negative, suggesting that increases in sales were not sufficient to offset the cost of capital and generate positive economic profit.

The consistent negative economic profit margin from 2020 to 2024, excluding 2021, suggests that the company’s returns are not consistently exceeding its cost of capital. The fluctuations in the margin, even with increasing net sales, warrant further investigation into the underlying factors affecting profitability and cost structure.