Colgate-Palmolive Co. (NYSE:CL)

Over the five-year period, net operating profit after taxes exhibited fluctuations. Beginning at US$2,711 million in 2018, it decreased to US$2,572 million in 2019 before increasing to US$2,814 million in 2020. A subsequent decline was observed in 2021, falling to US$2,361 million, and continued in 2022 to reach US$2,048 million. The cost of capital remained relatively stable throughout the period, fluctuating between 10.17% and 10.35%. Invested capital generally increased over the period, rising from US$11,791 million in 2018 to US$14,460 million in 2022, with a slight decrease noted in 2021. Consequently, economic profit followed a decreasing trend, though mirroring the fluctuations in NOPAT.

Economic Profit Trend

Economic profit demonstrated a consistent downward trajectory from US$1,491 million in 2018 to US$577 million in 2022. While a slight recovery was seen in 2020, reaching US$1,396 million, the subsequent years showed a clear decline. This suggests that, despite increases in invested capital, the company’s returns are not keeping pace with its cost of capital over the long term.

Relationship between NOPAT and Economic Profit

The fluctuations in net operating profit after taxes directly impacted economic profit. Years with higher NOPAT, such as 2018 and 2020, corresponded with higher economic profit. Conversely, the declines in NOPAT in 2019, 2021, and 2022 resulted in lower economic profit figures. This indicates a strong correlation between operational profitability and the generation of economic value.

Invested Capital and Cost of Capital

The increase in invested capital, coupled with a relatively constant cost of capital, contributed to the decreasing economic profit. As more capital was deployed, the company needed to generate a higher absolute level of NOPAT simply to maintain the same level of economic profit. The stable cost of capital suggests that the market’s assessment of the company’s risk profile remained consistent, meaning the pressure to generate returns increased with the growing capital base.

In summary, the period was characterized by declining economic profit despite generally increasing invested capital. This suggests a potential need to evaluate capital allocation strategies and operational efficiency to improve returns relative to the cost of capital.

The analysis of financial data over the five-year period reveals several noteworthy trends concerning profitability metrics.

Net Income Attributable to Colgate-Palmolive Company

This metric experienced a slight decline from 2018 to 2019, decreasing from 2400 million USD to 2367 million USD. In 2020, there was a significant increase to 2695 million USD, indicating a strong performance during that year. However, the subsequent years showed a downward trend, with net income falling to 2166 million USD in 2021 and further to 1785 million USD in 2022. This decline over the last two years suggests challenges affecting profitability.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures followed a somewhat similar pattern. Initially, NOPAT decreased from 2711 million USD in 2018 to 2572 million USD in 2019. It then rose to 2814 million USD in 2020, reaching its peak in the observed period. Afterward, there was a decline to 2361 million USD in 2021, followed by a further decrease to 2048 million USD in 2022. While the drop in NOPAT is less steep compared to net income, the downward trajectory indicates a reduction in operating profitability post-2020.

Overall, the data suggests that both net income and net operating profit after taxes peaked in 2020 but have since faced a decline, with 2022 figures lower than those in 2018. The trends could imply external or internal factors negatively impacting earnings and operating efficiency in the latter years.

The financial data indicates a declining trend in the provision for income taxes over the five-year period. Starting at 906 million US dollars in 2018, there is a consistent decrease each year, reaching 693 million US dollars by the end of 2022. This suggests an overall reduction in the income tax obligations recorded, which could be indicative of changes in profitability, tax planning strategies, or tax rates applicable to the company.

Conversely, cash operating taxes show a more fluctuating pattern. From 887 million US dollars in 2018, the figure increases to a peak of 970 million US dollars in 2020, followed by a decline to 812 million US dollars in 2021. In 2022, cash operating taxes rise again to 892 million US dollars. The variation in cash operating tax payments as compared to the steady decline in provision for income taxes suggests differences in timing, tax payments, or adjustments in deferred tax accounts.

Provision for Income Taxes:

Decreased steadily from 906 million in 2018 to 693 million in 2022, indicating a potential decline in taxable income or changes in tax strategy.

Cash Operating Taxes:

Show volatility with a peak in 2020 (970 million), followed by a decline and a subsequent increase in 2022 (892 million), reflecting variability in actual cash tax payments.

Comparison and Implications:

The contrasting trends between provision and cash operating taxes may suggest the presence of timing differences, deferred tax assets or liabilities adjustments, or shifts in tax planning measures affecting reported versus paid taxes.

An analysis of the financial data over the five-year period reveals several notable trends in the company's debt, equity, and invested capital.

Total Reported Debt & Leases

This metric exhibited an overall increasing trend from 2018 to 2022. The reported debt rose from $6,986 million in 2018 to $9,271 million in 2022. Although there was a slight dip in 2020 and 2021, the general direction is upward, suggesting a growing reliance on debt financing over the period.

Total Shareholders’ Equity

This item showed significant volatility with a generally low base and fluctuating values. Starting at a negative value of -$102 million in 2018, equity improved considerably to reach $743 million in 2020, followed by a decline in the subsequent years, falling to $401 million by the end of 2022. This indicates volatility in the company's net assets and potentially some financial or operational challenges affecting retained earnings or other equity components.

Invested Capital

The invested capital demonstrated a steady increase from $11,791 million in 2018 to $14,460 million in 2022. Although minor fluctuations occurred between 2020 and 2021, the trend reflects continued growth in the capital invested in the company's operations, which could be related to expansions, acquisitions, or reinvestment into company assets.

Overall, the company appears to have increased its financial leverage, as evidenced by rising debt levels coupled with relatively stagnant or decreasing equity values. The growth in invested capital suggests ongoing investment in operations despite the fluctuating equity position.

The economic spread ratio exhibited a declining trend over the five-year period. While economic profit fluctuated, the invested capital generally increased, contributing to the observed changes in the economic spread ratio.

Economic Spread Ratio

The economic spread ratio decreased from 12.64% in 2018 to 3.99% in 2022. A substantial drop occurred between 2018 and 2019, followed by a partial recovery in 2020. Further declines were noted in 2021 and 2022, indicating a diminishing ability to generate returns exceeding the cost of capital.

Economic Profit and Invested Capital Relationship

Economic profit peaked in 2018 at US$1,491 million and reached a low of US$577 million in 2022. Invested capital increased from US$11,791 million in 2018 to US$14,460 million in 2022. The combination of decreasing economic profit and increasing invested capital directly contributed to the declining economic spread ratio.

The consistent increase in invested capital, coupled with the decreasing economic profit, suggests that the company is deploying more capital to generate progressively smaller returns. This trend warrants further investigation to understand the underlying drivers of profitability and capital allocation efficiency.

Year-over-Year Changes

The largest year-over-year decrease in the economic spread ratio occurred between 2018 and 2019, falling 4.26 percentage points. The smallest decrease was between 2021 and 2022, with a decline of 0.75 percentage points. This suggests the rate of decline has slowed, but the overall trend remains negative.

The economic profit margin exhibited a declining trend over the five-year period. While economic profit fluctuated, the consistent increase in net sales alongside the decreasing margin suggests a potential shift in the company’s profitability relative to its sales volume.

Economic Profit Margin

The economic profit margin decreased from 9.59% in 2018 to 3.21% in 2022. This represents a substantial reduction, indicating that the company generated less economic profit for each dollar of net sales over time. The most significant decline occurred between 2021 and 2022, with a decrease of 2.40 percentage points.

Economic profit itself showed variability. It began at US$1,491 million in 2018, decreased to US$978 million in 2021, and further declined to US$577 million in 2022. Despite a recovery to US$1,396 million in 2020, the overall trend in economic profit mirrors the decline observed in the economic profit margin.

Net Sales

Net sales demonstrated consistent growth throughout the period, increasing from US$15,544 million in 2018 to US$17,967 million in 2022. This positive trend in sales did not translate into a corresponding increase in economic profit margin, suggesting that the cost of generating those sales, or the capital employed, may have increased at a faster rate than sales revenue.

The divergence between increasing net sales and decreasing economic profit margin warrants further investigation. Potential factors contributing to this trend could include rising operating costs, increased capital investment, or changes in the competitive landscape impacting pricing power. A deeper analysis of the underlying components of economic profit is recommended to identify the specific drivers of this performance.