Emerson Electric Co. (NYSE:EMR)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, beginning at US$2,212 million, increasing to US$2,871 million, then declining to US$1,731 million before a modest recovery to US$2,461 million. Invested capital generally decreased over the period, starting at US$17,628 million and reaching a low of US$15,181 million before increasing to US$16,266 million. The cost of capital remained relatively stable, fluctuating between 15.21% and 16.68%.

Economic Profit Trend

Economic profit was negative in the initial and final years of the period, at -US$637 million and -US$200 million respectively. A positive economic profit of US$236 million was recorded in 2015, representing the only year with economic profit above zero. Subsequent years, 2016, 2017, and 2018, all showed negative economic profit, at -US$830 million, -US$725 million, and -US$481 million respectively. The negative economic profit in the latter years suggests that the company’s returns on invested capital were consistently below its cost of capital.

Relationship between NOPAT and Economic Profit

The increase in NOPAT from 2014 to 2015 coincided with the shift from negative to positive economic profit. However, despite NOPAT increasing from 2017 to 2019, economic profit remained negative, indicating that the cost of capital, combined with the level of invested capital, continued to exceed operational profitability. This suggests that while the company improved its operational performance, it was not sufficient to generate returns exceeding the required rate of return.

Impact of Invested Capital

The decline in invested capital from 2014 to 2017 did not translate into improved economic profit. While a lower capital base should theoretically reduce the capital charge, the decrease in NOPAT during this period offset any potential benefit. The subsequent increase in invested capital from 2018 to 2019, coupled with a continued high cost of capital, contributed to the sustained negative economic profit.

Overall, the analysis indicates a struggle to generate economic value. While NOPAT showed some improvement over the period, it was consistently insufficient to cover the cost of capital given the level of invested capital. The trend suggests a need to either improve operational profitability, reduce the cost of capital, or optimize the level of invested capital to achieve positive economic profit.

The analysis of the financial data for the period from September 30, 2014, to September 30, 2019, reveals notable fluctuations in key profitability metrics.

Net Earnings Common Stockholders

The net earnings attributable to common stockholders demonstrate variability over the periods considered. Initially, there was an increase from 2,147 million USD in 2014 to a peak of 2,710 million USD in 2015. This was followed by a significant decrease to 1,635 million USD in 2016 and a slight further reduction to 1,518 million USD in 2017. Subsequently, the earnings recovered, rising to 2,203 million USD in 2018 and marginally improving to 2,306 million USD by 2019. This pattern suggests volatility in profitability, with a notable dip in the middle years before recovery in the latter two years.

Net Operating Profit After Taxes (NOPAT)

NOPAT shows a similar trend to net earnings, with an increase from 2,212 million USD in 2014 to 2,871 million USD in 2015, followed by a substantial decrease to 1,731 million USD in 2016. Unlike net earnings, NOPAT stabilizes somewhat in 2017 with a slight increase to 1,776 million USD. In the subsequent years, NOPAT rises consistently, reaching 2,124 million USD in 2018 and 2,461 million USD in 2019. This trend indicates a recovery in operating profitability after a period of decline, with steady improvements in the final two years.

Overall, both net earnings and NOPAT experienced a peak in 2015, followed by a decline over the next one to two years, and then a recovery phase from 2017 onward. The recovery in NOPAT appears somewhat stronger and more consistent than that in net earnings. These trends highlight periods of operational challenges and subsequent improvement in financial performance.

Income Tax Expense

The income tax expense demonstrated a fluctuating downward trend over the six-year period. Starting at $1,164 million in 2014, it increased to a peak of $1,428 million in 2015. However, from 2015 onwards, the figure declined significantly to $697 million in 2016 and further decreased to $660 million in 2017. The downward trend continued, reaching a low of $443 million in 2018, before showing a modest increase to $531 million in 2019. This pattern suggests variability in taxable income or changes in tax rates, with a notable reduction after 2015 and slight recovery toward 2019.

Cash Operating Taxes

Cash operating taxes followed a similar overall declining trajectory with some variation. Beginning at $1,394 million in 2014, the amount rose to $1,525 million in 2015, indicating higher cash tax payments that year. Subsequently, there was a sharp decline to $782 million in 2016 and a marginal decrease to $766 million in 2017. The downward movement persisted, with taxes dropping to $737 million in 2018 and then declining further to $619 million in 2019. This trend mirrors the reduction observed in income tax expense, possibly reflecting lower taxable income or effective tax management strategies resulting in decreased cash tax obligations over time.

Total Reported Debt & Leases

The total reported debt and leases exhibited a non-linear trend over the analyzed periods. It increased from 6,834 million USD in 2014 to peak at 7,624 million USD in 2015, followed by a reduction to 5,137 million USD in 2017. Subsequently, the amount rose again, reaching 6,191 million USD by 2019. This pattern suggests fluctuations in debt management, with a notable decrease in the middle period before a moderate rebound.

Common Stockholders’ Equity

Common stockholders’ equity showed a general decline from 10,119 million USD in 2014 to 7,568 million USD in 2016. Thereafter, it increased to 8,947 million USD in 2018, before descending again to 8,233 million USD in 2019. This series of movements indicates some volatility but overall a downward pressure on equity levels during the period.

Invested Capital

Invested capital steadily decreased from 17,628 million USD in 2014 to a low of 15,181 million USD in 2017. After 2017, it gradually increased to 16,266 million USD by 2019. The downward trend in the initial years followed by a recovery suggests adjustments in the company's capital investment strategy or asset base.

Overall Observations

The data reflects a period of financial adjustment, with both liabilities and equity experiencing declines and recoveries at different times. The decrease in invested capital up until 2017, coupled with reduced debt levels in the same period, could indicate an active effort to deleverage or optimize capital structure. Subsequently, the increases in debt and invested capital alongside fluctuating equity values imply dynamic financial management responsive to changing conditions or strategic priorities.

The period between September 30, 2014, and September 30, 2019, demonstrates fluctuating financial performance as measured by economic value added metrics. Economic profit exhibits considerable volatility, shifting from a substantial loss in 2014 to a profit in 2015, before returning to losses for the subsequent years, though with diminishing magnitude. Invested capital generally decreased from 2014 to 2017, then showed a slight increase in 2018 and a further increase in 2019. The economic spread ratio reflects these trends, displaying a pattern of oscillation around zero, indicating inconsistent value creation.

Economic Profit

Economic profit began at a loss of US$637 million in 2014. A significant turnaround occurred in 2015, with a profit of US$236 million. However, this positive result was short-lived, as economic profit returned to a loss of US$830 million in 2016. Losses continued in 2017 and 2018, at US$725 million and US$481 million respectively, before decreasing to US$200 million in 2019. The trend suggests difficulty in consistently generating returns exceeding the cost of capital.

Invested Capital

Invested capital decreased steadily from US$17,628 million in 2014 to US$15,181 million in 2017. A modest increase was observed in 2018, reaching US$15,617 million, and this upward trend continued into 2019, with invested capital rising to US$16,266 million. This suggests potential strategic shifts in capital allocation or investment decisions.

Economic Spread Ratio

The economic spread ratio began at -3.61% in 2014, indicating a substantial shortfall in returns relative to the cost of capital. It improved significantly to 1.36% in 2015, signaling value creation. However, the ratio quickly deteriorated, reaching -5.03% in 2016 and -4.78% in 2017. A gradual improvement occurred in the final two years of the period, with the ratio increasing to -3.08% in 2018 and -1.23% in 2019. The overall trend suggests a struggle to consistently achieve a positive economic spread.

The interplay between economic profit and invested capital is clearly reflected in the economic spread ratio. While invested capital experienced some growth towards the end of the period, the inability to consistently generate positive economic profit resulted in a persistently negative, though improving, economic spread ratio.

The economic profit margin exhibited considerable fluctuation between 2014 and 2019. Initially negative, it briefly turned positive before returning to and remaining in negative territory for the majority of the observed period. Net sales also demonstrated volatility, with a significant decrease in 2016 followed by a recovery and subsequent growth.

Economic Profit Margin

In 2014, the economic profit margin was -2.59%. This indicates that the company’s economic profit was 2.59% lower than its cost of capital. A substantial improvement was seen in 2015, with the margin rising to 1.06%, signifying economic profit exceeding the cost of capital. However, this positive performance was short-lived. The margin declined sharply to -5.72% in 2016, representing the largest negative margin within the analyzed timeframe.

The economic profit margin remained negative in 2017 and 2018, at -4.75% and -2.76% respectively, suggesting continued underperformance relative to the cost of capital. A gradual improvement was observed in 2019, with the margin increasing to -1.09%, although it remained negative. This suggests a narrowing gap between economic profit and the cost of capital, but not a complete recovery to profitability.

Net Sales Trend

Net sales began at $24,537 million in 2014 and decreased to $22,304 million in 2015, a decline of approximately 9.1%. A significant drop occurred in 2016, with net sales falling to $14,522 million. This represents a substantial decrease of approximately 35.2% from the prior year.

From 2016 to 2019, net sales demonstrated a recovery trend. Sales increased to $15,264 million in 2017, $17,408 million in 2018, and further to $18,372 million in 2019. While sales recovered, they did not return to the levels observed in 2014 and 2015.

The relationship between economic profit margin and net sales appears complex. The substantial decline in net sales in 2016 coincided with the lowest economic profit margin during the period. While sales recovered in subsequent years, the economic profit margin did not fully recover, indicating that factors beyond revenue generation influenced economic profitability.