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 cover the cost of capital employed. Invested capital exhibits a notable increase in later years, contributing to the sustained negative economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT began at US$2,219,325 thousand in 2014, decreased to US$1,616,844 thousand in 2015, and then recovered to US$2,028,941 thousand in 2016. It experienced a slight increase to US$2,079,159 thousand in 2017 before declining to US$1,920,512 thousand in 2018. A final increase is observed in 2019, reaching US$2,274,308 thousand. Despite this final increase, NOPAT remains variable throughout the period.

Cost of Capital

The cost of capital generally decreased over the period. Starting at 11.96% in 2014, it decreased to 11.66% in 2017, reaching a low of 10.08% in 2018, before increasing slightly to 10.82% in 2019. This decreasing trend suggests a potentially improving risk profile or lower financing costs.

Invested Capital

Invested capital remained relatively stable between 2014 and 2016, fluctuating around US$19,000,000 thousand. A significant increase occurred between 2017 and 2018, rising to US$27,608,082 thousand, and remained high in 2019 at US$27,385,340 thousand. This substantial growth in invested capital, without a corresponding increase in NOPAT sufficient to offset the cost of that capital, is a key driver of the negative economic profit.

Economic Profit

Economic profit was negative in each year of the observed period. The losses ranged from US$-675,578 thousand (2015) to US$-96,128 thousand (2014). The largest losses occurred in 2015 and 2018, reaching US$-675,578 thousand and US$-861,278 thousand respectively. The negative economic profit indicates that the company’s returns on invested capital were consistently below its cost of capital.

The increasing invested capital, coupled with a cost of capital that remained relatively stable or decreased, suggests that the company was undertaking investments that, while potentially strategically sound, did not generate sufficient returns to cover their cost. The observed fluctuations in NOPAT further contribute to the overall pattern of economic 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 period between May 2014 and May 2019 demonstrates a consistently negative economic profit, indicating that the company’s returns are not exceeding its cost of capital. While economic profit fluctuates in absolute terms, the economic spread ratio provides a standardized measure of this performance, revealing a concerning trend over the observed timeframe.

Economic Spread Ratio Trend

The economic spread ratio exhibits volatility but generally worsens from 2014 to 2019. Initially at -0.50% in May 2014, the ratio declines significantly to -3.51% in May 2015. A partial recovery is seen in May 2016 at -1.53%, followed by a further improvement to -0.70% in May 2017. However, this improvement proves temporary, as the ratio deteriorates sharply to -3.12% in May 2018 and remains elevated at -2.51% in May 2019.

The substantial decline in the economic spread ratio from 2014 to 2015, and its subsequent resurgence to 2017, suggests potential shifts in operational efficiency or capital allocation strategies. The renewed decline in 2018 and 2019 indicates these positive changes were not sustained. The consistently negative values across all periods signify that, regardless of these fluctuations, the company is failing to generate returns sufficient to cover its cost of capital, as measured by this ratio.

Relationship to Invested Capital

Invested capital increased substantially between 2017 and 2018, rising from US$18,984,610 thousand to US$27,608,082 thousand. While invested capital remained relatively stable between 2018 and 2019, the economic spread ratio did not improve proportionally, suggesting that the increased capital deployment did not translate into improved profitability relative to the cost of that capital. The negative economic profit figures, coupled with the increasing invested capital, contribute to the worsening economic spread ratio observed in later years.

In summary, the economic spread ratio consistently indicates underperformance relative to the cost of capital. The observed trends suggest a potential inability to effectively deploy capital and generate sufficient returns, despite fluctuations in invested capital levels. Further investigation into the drivers of these trends is warranted.

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 in May 2018 to -5.47%, the lowest point in the series. The final year observed, 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 consistently remained negative throughout the period. The largest negative economic profit occurred in May 2015 at -$675,578 thousand, coinciding with the most substantial decline in the economic profit margin. The second largest negative economic profit was recorded in May 2018 at -$861,278 thousand, aligning with the lowest economic profit margin. The magnitude of the negative economic profit generally tracked the fluctuations in the economic profit margin.

The consistent negativity of the economic profit margin suggests that, despite fluctuations in net sales, the company consistently failed to generate returns sufficient to cover its cost of capital during the analyzed timeframe. The substantial volatility in the margin indicates sensitivity to underlying economic factors or internal operational changes.