Abbott Laboratories (NYSE:ABT)

The period under review demonstrates a fluctuating relationship between net operating profit after taxes, cost of capital, and invested capital, resulting in consistently negative economic profit. While NOPAT experienced initial growth, it has not been sufficient to generate positive economic profit given the prevailing cost of capital and levels of invested capital.

Net Operating Profit After Taxes (NOPAT)

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

Cost of Capital

The cost of capital exhibited a steady upward trend throughout the period, increasing from 11.40% in 2020 to 11.81% in 2024. This incremental rise in the cost of capital likely contributed to the sustained negative economic profit.

Invested Capital

Invested capital showed initial growth, rising from $60,387 million in 2020 to $62,076 million in 2021. It then decreased to $61,288 million in 2022 and further to $59,651 million in 2023 before slightly increasing to $60,065 million in 2024. The fluctuations in invested capital, combined with the rising cost of capital, impacted economic profit.

Economic Profit

Economic profit remained negative throughout the entire period. The largest negative economic profit was recorded in 2020 at -$2,044 million. While economic profit improved significantly in 2021 to -$75 million, it subsequently worsened to -$354 million in 2022 and -$1,668 million in 2023. In 2024, economic profit was -$1,496 million, indicating a continued shortfall between returns generated and the cost of capital.

The consistent negative economic profit suggests that the company’s investments are not generating returns exceeding the cost of capital. The slight improvement in NOPAT in 2024 was insufficient to offset the increasing cost of capital and maintain a stable level of invested capital, resulting in continued economic losses.

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 period under review demonstrates a generally negative economic profit position, coupled with fluctuations in invested capital. The economic spread ratio, a key indicator of value creation, exhibits a volatile pattern over the five-year span.

Economic Profit

Economic profit begins at a substantial loss of US$2,044 million in 2020. A significant improvement is noted in 2021, with the loss decreasing to US$75 million. However, economic profit declines again in 2022 to US$354 million, before increasing to a loss of US$1,668 million in 2023. The final year, 2024, shows a slight improvement, but remains negative at US$1,496 million. This suggests inconsistent ability to generate returns exceeding the cost of capital.

Invested Capital

Invested capital shows a moderate increase from US$60,387 million in 2020 to US$62,076 million in 2021. A slight decrease is observed in 2022, falling to US$61,288 million. This is followed by a more noticeable decline in 2023 to US$59,651 million. Invested capital partially recovers in 2024, reaching US$60,065 million, but remains below the 2021 peak. The fluctuations in invested capital may reflect strategic capital allocation decisions or changes in operational needs.

Economic Spread Ratio

The economic spread ratio begins at -3.39% in 2020, indicating a significant shortfall in returns relative to the cost of capital. A substantial improvement occurs in 2021, with the ratio increasing to -0.12%. However, the ratio deteriorates in 2022 to -0.58%, and then sharply declines to -2.80% in 2023. The ratio stabilizes somewhat in 2024 at -2.49%, though it remains negative. The negative values consistently indicate that the company’s returns on invested capital are less than its cost of capital, resulting in value destruction. The volatility suggests sensitivity to changes in economic profit and invested capital.

Overall, the analysis reveals a pattern of negative economic profit and a consistently negative economic spread ratio, indicating that the company has not consistently generated economic value over the observed period. While there are periods of improvement, the overall trend suggests a need for strategies to enhance profitability and improve returns on invested capital.

The economic profit margin exhibited considerable fluctuation between 2020 and 2024. Initially negative, the margin improved significantly in 2021 before declining again over the subsequent three years. A review of the underlying economic profit and net sales figures reveals the drivers of these changes.

Economic Profit Margin

The economic profit margin began at -5.91% in 2020, indicating a substantial shortfall between returns generated and the cost of capital employed. A marked improvement was observed in 2021, with the margin increasing to -0.17%. This suggests a narrowing gap between economic profit and net sales. However, the margin deteriorated to -0.81% in 2022 and continued to decline, reaching -4.16% in 2023 and -3.57% in 2024. This indicates a widening disparity between returns and the cost of capital in the later periods.

Economic Profit

Economic profit itself was negative throughout the analyzed period. The largest negative value occurred in 2020 at -2,044 US$ millions. While improving to -75 US$ millions in 2021, it subsequently worsened to -354 US$ millions in 2022 and -1,668 US$ millions in 2023, before slightly improving to -1,496 US$ millions in 2024. The magnitude of the negative economic profit in 2020 and 2023 significantly impacted the economic profit margin.

Net Sales

Net sales increased from 34,608 US$ millions in 2020 to 43,075 US$ millions in 2021, contributing to the improved economic profit margin observed in that year. Net sales remained relatively stable between 2021 and 2022, at 43,653 US$ millions. A decrease in net sales was noted in 2023, falling to 40,109 US$ millions, and a modest increase to 41,950 US$ millions occurred in 2024. The fluctuations in net sales, while present, do not fully explain the changes in the economic profit margin, suggesting that the cost of capital or operational efficiency played a more significant role.

In summary, while net sales demonstrated growth over the period, the consistently negative economic profit, and its increasing magnitude in certain years, resulted in a generally negative and fluctuating economic profit margin. The improvement in 2021 was likely driven by the increase in net sales, but subsequent declines suggest underlying issues related to profitability relative to the cost of capital.