General Mills Inc. (NYSE:GIS)

The period between May 2014 and May 2019 demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) fluctuates, it does not consistently reach levels sufficient to overcome the cost of capital when considering the invested capital base. A review of the individual components reveals some key trends.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced a decrease from US$2,219,325 thousand in 2014 to US$1,616,844 thousand in 2015. It then recovered to US$2,028,941 thousand in 2016 and further increased to US$2,079,159 thousand in 2017. A slight decline was observed in 2018, with NOPAT reaching US$1,920,512 thousand, before increasing again to US$2,274,308 thousand in 2019, representing the highest value within the observed period.

Cost of Capital

The cost of capital initially decreased from 11.96% in 2014 to 11.66% in 2017. A more substantial decrease occurred between 2017 and 2018, falling to 10.08%. It then rose slightly to 10.82% in 2019. Despite these fluctuations, the cost of capital remained a significant factor impacting economic profit.

Invested Capital

Invested capital remained relatively stable between 2014 and 2016, fluctuating around US$19,000,000 thousand. A significant increase was observed in 2018, reaching US$27,608,082 thousand, and remained high in 2019 at US$27,385,340 thousand. This substantial increase in invested capital, coupled with NOPAT levels, contributed to the larger negative economic profit figures in 2018 and 2019.

Economic Profit

Economic profit was negative throughout the entire period. The largest negative economic profit occurred in 2018, at US$-861,468 thousand, coinciding with the peak in invested capital. 2019 also showed a substantial negative economic profit of US$-688,006 thousand. The least negative economic profit was observed in 2017, at US$-133,794 thousand, which corresponded with a relatively lower invested capital and a decreasing cost of capital.

The consistent negative economic profit suggests that, despite generating positive NOPAT, the returns generated were insufficient to cover the cost of the capital employed. The increase in invested capital in 2018 and 2019 appears to have exacerbated this issue, leading to larger economic losses. While the cost of capital decreased overall, it was not enough to offset the impact of the increased capital base and, at times, fluctuating NOPAT.

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 period between May 2014 and May 2019 demonstrates a volatile performance in economic profit and the economic spread ratio. Economic profit consistently registers as negative across all observed years, indicating the company’s returns are not exceeding its cost of capital. Invested capital fluctuates, with a notable increase in the later years of the period.

Economic Profit

Economic profit exhibits substantial year-over-year variation. It begins at -96,294 (in thousands of US dollars) in 2014, then experiences a significant decline to -675,744 in 2015. A partial recovery is seen in 2016 (-281,367), followed by further improvement to -133,794 in 2017. However, economic profit deteriorates sharply again in 2018 (-861,468) and remains negative in 2019 (-688,006). This pattern suggests inconsistent ability to generate returns above the cost of capital.

Invested Capital

Invested capital remains relatively stable between 2014 and 2016, fluctuating around 19,000,000 (in thousands of US dollars). A substantial increase is observed in 2018, reaching 27,608,082, and remains high in 2019 at 27,385,340. This increase in invested capital, coupled with consistently negative economic profit, suggests that capital allocation may not be effectively translating into value creation.

Economic Spread Ratio

The economic spread ratio mirrors the volatility observed in economic profit. It begins at -0.50% in 2014, plunges to -3.51% in 2015, and then shows improvement to -1.53% in 2016 and -0.70% in 2017. Similar to economic profit, the ratio worsens considerably in 2018 (-3.12%) and remains negative in 2019 (-2.51%). The consistently negative values indicate that the company’s return on invested capital is less than its weighted average cost of capital throughout the period. The trend suggests a weakening ability to generate returns exceeding the cost of capital, particularly in the later years.

Overall, the analysis reveals a pattern of negative economic profit and a declining economic spread ratio, despite fluctuations in invested capital. This suggests potential challenges in effectively deploying capital to generate returns that exceed the cost of capital.

The economic profit margin demonstrates a volatile performance over the observed period. Initially negative, the margin experienced significant fluctuations before stabilizing at a consistently negative level. A review of the economic profit alongside the net sales figures reveals insights into the drivers of this performance.

Economic Profit Margin Trend

The economic profit margin began at -0.54% in May 2014. It deteriorated substantially to -3.83% in May 2015, representing the most significant decline within the period. A partial recovery was noted in May 2016, with the margin improving to -1.70%. Further improvement occurred in May 2017, reaching -0.86%. However, the margin worsened considerably again in May 2018, reaching -5.47%, the lowest point in the observed timeframe. The final year presented, May 2019, showed a slight improvement to -4.08%, though remaining substantially negative.

Relationship to Net Sales

Net sales generally decreased from 2014 to 2017, moving from $17,909.6 million to $15,619.8 million. A slight increase was observed in 2018 to $15,740.4 million, followed by a more substantial increase to $16,865.2 million in 2019. Despite the sales increase in 2019, the economic profit margin remained negative, indicating that the cost of capital exceeded the returns generated from sales.

Economic Profit

Economic profit itself exhibited a similar pattern of volatility. The largest negative economic profit occurred in May 2015 at -$675,744 thousand, coinciding with the most negative economic profit margin. May 2018 also showed a substantial negative economic profit of -$861,468 thousand, aligning with the lowest margin observed. The economic profit in May 2019 was -$688,006 thousand, a decrease from the prior year’s -$861,468 thousand, but still representing a significant shortfall.

The consistent negativity of the economic profit margin across all observed years suggests an ongoing challenge in generating returns that exceed the cost of capital. The fluctuations in both the margin and the absolute economic profit indicate sensitivity to underlying economic factors or company-specific performance drivers. Further investigation into the components of economic profit – net operating profit after tax and the cost of capital – would be necessary to pinpoint the specific causes of this performance.