General Mills Inc. (NYSE:GIS)

The period between May 2014 and May 2019 demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, while the cost of capital generally decreased, though not consistently. Invested capital showed a significant increase in later years. These factors combined to produce a varied economic profit performance over the observed timeframe.

Economic Profit Trend

Economic profit began at US$205,235 thousand in May 2014, indicating value creation. However, a substantial decline occurred in May 2015, resulting in an economic loss of US$-375,537 thousand. A modest recovery followed in May 2016, with economic profit reaching US$23,852 thousand. Further improvement was seen in May 2017, achieving US$156,060 thousand. Subsequently, economic profit decreased significantly in May 2018 to US$-516,835 thousand, and remained negative in May 2019 at US$-314,389 thousand. This suggests a weakening ability to generate returns exceeding the cost of capital in the latter part of the period.

NOPAT Analysis

Net operating profit after taxes decreased from US$2,219,325 thousand in May 2014 to US$1,616,844 thousand in May 2015. It then recovered to US$2,028,941 thousand in May 2016 and US$2,079,159 thousand in May 2017. A slight decrease was observed in May 2018 to US$1,920,512 thousand, followed by a substantial increase to US$2,274,308 thousand in May 2019. This indicates operational profitability experienced periods of both decline and growth.

Cost of Capital Observations

The cost of capital started at 10.40% in May 2014, decreased to 10.35% in May 2015, and then increased to 10.90% in May 2016. A decrease to 10.13% was noted in May 2017, followed by a more significant decline to 8.83% in May 2018. It then rose again to 9.45% in May 2019. The overall trend suggests a generally decreasing cost of capital, although fluctuations were present.

Invested Capital Changes

Invested capital remained relatively stable between May 2014 and May 2016, 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 significant rise in invested capital, without a corresponding sustained increase in economic profit, likely contributed to the negative economic profit results in the later years.

In summary, while NOPAT showed some growth over the period, the substantial increase in invested capital, coupled with fluctuations in the cost of capital, resulted in a decline in economic profit, particularly in the final three years examined. The company’s ability to generate returns exceeding its cost of capital diminished as invested capital grew.

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 before showing a brief recovery, followed by a return to negative territory. This suggests inconsistency in the company’s ability to generate returns exceeding its cost of capital.

Economic Spread Ratio

In May 2014, the economic spread ratio stood at 1.06%, indicating that the company generated returns exceeding its cost of capital. However, a substantial decline occurred in May 2015, with the ratio falling to -1.95%. This signifies that returns were insufficient to cover the cost of capital. A modest recovery was observed in May 2016, with the ratio reaching 0.13%, but this improvement was short-lived.

The ratio increased to 0.82% in May 2017, but then experienced a significant downturn in May 2018, plummeting to -1.87%. This decline continued into May 2019, with the ratio settling at -1.15%. The consistent negative values in the later years suggest a persistent challenge in achieving profitable returns relative to invested capital.

The economic profit mirrored the fluctuations in the economic spread ratio. Positive economic profit was recorded in 2014 and 2016, aligning with the positive spread ratios during those periods. Conversely, substantial economic losses were reported in 2015, 2018, and 2019, corresponding with the negative economic spread ratios.

Invested Capital

Invested capital generally increased over the period, rising from US$19,362,635 in May 2014 to US$27,608,082 in May 2018, before decreasing slightly to US$27,385,340 in May 2019. This increase in invested capital, coupled with the declining economic spread ratio in later years, suggests that the company was deploying more capital into ventures that were not generating sufficient returns.

The interplay between economic profit, economic spread ratio, and invested capital indicates a weakening financial performance over time. While the company initially demonstrated an ability to generate economic profit, this advantage diminished as invested capital grew and the economic spread ratio consistently trended downwards, ultimately resulting in sustained economic losses.

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 showing a slight recovery in 2019. This volatility is reflected in the economic profit margin, which demonstrates a similar pattern of instability.

Economic Profit Margin Trend

In 2014, the economic profit margin stood at 1.15%. This decreased substantially to -2.13% in 2015, indicating a shift from economic profit to economic loss. A marginal recovery to 0.14% occurred in 2016, but this was followed by a further decline to -3.28% in 2018, representing the lowest margin during the period. The final year observed, 2019, showed a slight improvement to -1.86%, though still representing an economic loss.

The economic profit margin’s movement appears loosely correlated with net sales. While net sales generally decreased from 2014 to 2017, the economic profit margin did not consistently follow this trend. The largest drop in margin occurred in 2015, despite a relatively small decrease in net sales compared to subsequent years. The increase in net sales in 2019 did not translate into a positive economic profit margin, suggesting factors beyond revenue generation impacted profitability.

Economic Profit and Margin Relationship

The negative economic profit values in 2015, 2018, and 2019 directly contributed to the negative economic profit margins in those years. The magnitude of the economic profit loss significantly influenced the margin, with the largest loss in 2015 resulting in the most negative margin. The positive economic profit in 2014 and 2016 resulted in positive, albeit small, margins.

Overall, the period under review demonstrates a challenging profitability profile. The consistent oscillation between positive and negative economic profit margins suggests underlying operational or financial factors requiring further investigation to ensure sustainable economic value creation.