General Mills Inc. (NYSE:GIS)

The period between May 2014 and May 2019 demonstrates considerable fluctuation in economic profit. Net operating profit after taxes (NOPAT) and invested capital exhibit differing trends, while the cost of capital remains relatively stable with a notable decrease in later years. These factors combine to create a volatile economic profit performance.

Economic Profit Trend

Economic profit began at US$170,221 thousand in May 2014, indicating value creation. However, a substantial decline occurred in May 2015, resulting in an economic loss of US$-410,398 thousand. A slight recovery to a near-breakeven position was observed in May 2016 (US$-11,591 thousand), followed by a return to positive economic profit in May 2017 (US$122,401 thousand). The final two years, May 2018 and May 2019, both reflect economic losses of US$-556,855 thousand and US$-357,774 thousand, respectively.

NOPAT Analysis

Net operating profit after taxes peaked in May 2014 at US$2,219,325 thousand, then decreased significantly to US$1,616,844 thousand in May 2015. NOPAT recovered to US$2,028,941 thousand in May 2016 and continued to US$2,079,159 thousand in May 2017. A decrease was then noted in May 2018 (US$1,920,512 thousand), before a final increase to US$2,274,308 thousand in May 2019, reaching a new high for the period.

Cost of Capital Analysis

The cost of capital remained relatively consistent between May 2014 and May 2017, fluctuating between 10.31% and 11.09%. A significant decrease was observed in May 2018 (8.97%), followed by a slight increase to 9.61% in May 2019. This reduction in the cost of capital did not translate into improved economic profit in the later years, suggesting other factors were more influential.

Invested Capital Analysis

Invested capital remained relatively stable between May 2014 and May 2017, fluctuating around US$19,000 thousand. A substantial increase occurred in May 2018, reaching US$27,608,082 thousand, and remained high in May 2019 at US$27,385,340 thousand. This increase in invested capital, coupled with fluctuating NOPAT, appears to be a primary driver of the negative economic profit observed in May 2018 and May 2019.

In summary, while NOPAT demonstrated an overall upward trend across the period, the significant increases in invested capital, particularly in the final two years, coupled with fluctuations in cost of capital, resulted in inconsistent economic profit performance. The period was characterized by alternating years of economic profit and loss.

The financial data shows the annual performance of the company over a six-year period from 2014 to 2019. Two key metrics are presented: net earnings attributable to the company and net operating profit after taxes (NOPAT).

Net Earnings Attributable to the Company

The net earnings exhibit fluctuations throughout the period. Starting from $1,824,400 thousand in 2014, there is a notable decline to $1,221,300 thousand in 2015. This is followed by a recovery phase where net earnings increase to $1,697,400 thousand in 2016 but then slightly dip to $1,657,500 thousand in 2017. The peak is observed in 2018 at $2,131,000 thousand, representing the highest net earnings in this timeframe. However, the following year, 2019, shows a decline to $1,752,700 thousand, reflecting a decrease of approximately 17.8% from the previous year’s peak.

Net Operating Profit After Taxes (NOPAT)

NOPAT also shows variability but with a generally increasing trend. It begins at $2,219,325 thousand in 2014 and declines in 2015 to $1,616,844 thousand, mirroring the net earnings pattern. Thereafter, NOPAT steadily recovers and increases, reaching $2,029,941 thousand in 2016 and continuing its ascent with minor fluctuation to $2,079,159 thousand in 2017 and $1,920,512 thousand in 2018. The highest value is recorded in 2019 at $2,274,308 thousand, representing a strong recovery and the highest operational efficiency in terms of post-tax profits over the period.

Overall, both net earnings and NOPAT show an initial decline from 2014 to 2015, likely indicating a challenging year or adverse conditions. Despite this, the company demonstrates resilience with a recovery phase from 2016 onward. Net earnings reach their peak in 2018 but experience a downturn in 2019. Conversely, NOPAT recovers more robustly, peaking in 2019 and displaying stronger operational profitability relative to net earnings. This divergence in the final year may suggest changes in non-operating items, tax impacts, or other factors affecting net earnings differently than operating profit.

The financial data reveals a fluctuating trend in the income taxes and cash operating taxes over the six-year period.

Income Taxes

Income taxes decreased significantly from 883,300 thousand US dollars in May 2014 to 586,800 thousand US dollars in May 2015, representing a notable reduction.

Subsequently, there was an increase to 755,200 thousand US dollars in May 2016, followed by a decline to 655,200 thousand US dollars in May 2017.

In May 2018, income taxes declined sharply to 57,300 thousand US dollars, marking the lowest point in the period analyzed, before rising to 367,800 thousand US dollars in May 2019.

Cash Operating Taxes

Cash operating taxes exhibited a more stable but variable trend, starting at 821,360 thousand US dollars in May 2014 and decreasing to 676,323 thousand US dollars in May 2015.

There was a slight increase to 745,707 thousand US dollars in May 2016, followed by a decrease to 579,670 thousand US dollars in May 2017.

The value rose again to 674,791 thousand US dollars in May 2018 before declining sharply to 383,900 thousand US dollars in May 2019.

Overall, both income taxes and cash operating taxes show substantial volatility over the years. Income taxes show a steep decline around 2018, while cash operating taxes, although variable, remain generally higher than income taxes except for 2018. The trends suggest potential changes in tax obligations or tax planning strategies impacting these financial items during the examined period.

Total Reported Debt & Leases

The total reported debt and leases showed a fluctuating trend over the six-year period. Initially, there was a moderate increase from approximately $9.13 billion in 2014 to $9.58 billion in 2015, followed by a decline to about $8.79 billion in 2016. In 2017, the debt level rose again to roughly $9.93 billion. A significant increase occurred in 2018, reaching approximately $16.32 billion, the highest level in the period analyzed. This peak was followed by a slight reduction to $14.93 billion in 2019, indicating a partial deleveraging but maintaining a relatively high debt position compared to earlier years.

Stockholders’ Equity

Stockholders’ equity experienced a downward trajectory between 2014 and 2017, decreasing from approximately $6.53 billion to around $4.33 billion. This decline suggests a reduction in the net value attributable to shareholders during this period. However, equity started to recover in 2018, increasing notably to $6.14 billion, and continued to grow in 2019, reaching about $7.05 billion. The recovery indicates a strengthening of the company’s equity base in the latter years analyzed.

Invested Capital

Invested capital exhibited relative stability from 2014 to 2017, ranging between approximately $18.4 billion and $19.4 billion. In 2018 there was a marked increase to roughly $27.61 billion, which was sustained in 2019 with a slight decrease to $27.38 billion. This sharp increase in invested capital parallels the rise in total reported debt and leases during the same period, suggesting significant capital allocation or asset acquisition financed largely through debt.

Overall Analysis

The financial data indicates that the company increased its leverage significantly in 2018 and maintained a higher debt load in 2019 relative to the earlier years. This period also coincides with a substantial jump in invested capital, signaling possibly intensified investment activity or expansion. Meanwhile, stockholders’ equity contracted from 2014 through 2017 but recovered afterward, possibly reflecting improved profitability or capital injections. The trends suggest a strategic phase of investment funded by increased debt, with signs of balance sheet strengthening towards the end of the period.

The economic spread ratio exhibited considerable fluctuation over the observed period. Initially positive, it transitioned to negative values and demonstrated volatility throughout the years examined.

Economic Spread Ratio Trend

The economic spread ratio began at 0.88% in May 2014, indicating a positive spread between return on invested capital and the cost of capital. However, this shifted dramatically to -2.13% in May 2015, signifying that the company’s returns were not covering its cost of capital. A slight recovery to -0.06% occurred in May 2016, but this was short-lived. The ratio increased to 0.64% in May 2017, before declining sharply to -2.02% in May 2018 and further to -1.31% in May 2019. This suggests increasing difficulty in generating returns exceeding the cost of invested capital in the later years of the period.

The economic spread ratio’s negative values in most years suggest potential concerns regarding value creation. While a brief period of positive spread was observed, the predominant trend indicates that invested capital was not consistently generating returns sufficient to cover its cost. The magnitude of the negative spread increased in 2018 and remained substantial in 2019, potentially warranting further investigation into the underlying drivers of profitability and capital efficiency.

Relationship to Economic Profit

The economic spread ratio’s movement closely mirrors that of economic profit. Years with positive economic spread ratios (2014, 2017) correspond with positive economic profit. Conversely, years with negative economic spread ratios (2015, 2016, 2018, 2019) align with negative economic profit. This correlation reinforces the interpretation that the company struggled to generate value from its invested capital in the majority of the observed years.

The invested capital figures show an overall increasing trend, particularly noticeable from 2017 onwards. Despite this increase in capital employed, the economic spread ratio did not consistently improve, suggesting that simply increasing the scale of operations did not translate into improved profitability relative to the cost of capital.

The economic profit margin exhibited considerable fluctuation over the observed period. Initial profitability, as measured by economic profit, was positive in 2014, but subsequently declined into negative territory for the following three years before recovering in 2017, and then declining again in 2018 and 2019.

Economic Profit Margin Trend

The economic profit margin began at 0.95% in 2014, indicating a relatively small but positive economic profit relative to net sales. A substantial decrease was observed in 2015, with the margin falling to -2.33%, signifying an economic loss. This negative trend continued in 2016, albeit with a lessened magnitude at -0.07%. A recovery occurred in 2017, with the margin returning to positive territory at 0.78%. However, this improvement was short-lived, as the margin declined sharply to -3.54% in 2018 and remained negative in 2019 at -2.12%.

Net sales generally decreased from 2014 to 2017, before showing a slight increase in 2018 and a more substantial increase in 2019. Despite the increase in net sales in 2019, the economic profit margin remained negative, suggesting that the increase in sales was not sufficient to offset the cost of capital or other factors impacting economic profit.

Relationship between Net Sales and Economic Profit Margin

While net sales decreased between 2014 and 2017, the economic profit margin experienced a more dramatic shift from positive to negative. The subsequent increase in net sales in 2019 did not translate into a positive economic profit margin, indicating that factors beyond revenue generation were significantly influencing profitability. This suggests potential issues with cost control, capital efficiency, or the cost of capital itself.

The volatility in the economic profit margin suggests underlying instability in the company’s ability to generate returns exceeding its cost of capital. The consistent negative margins in 2015, 2016, 2018, and 2019 warrant further investigation to identify the root causes and implement corrective measures.