Kellanova (NYSE:K)

The period between 2019 and 2023 demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) initially increased substantially before declining, while the cost of capital generally trended upward. Invested capital also exhibited variability, with a notable decrease in the most recent year. These factors combined to create a dynamic pattern in economic profit over the five-year period.

NOPAT Trend

NOPAT increased from US$1,016 million in 2019 to US$1,566 million in 2020, representing a substantial gain. Further growth was observed in 2021, reaching US$1,799 million. However, NOPAT decreased significantly in 2022 to US$1,089 million and experienced a smaller decline in 2023, settling at US$1,013 million. This suggests a weakening of operational profitability in the latter part of the period.

Cost of Capital Trend

The cost of capital remained relatively stable between 2019 and 2021, fluctuating around 7.7% to 7.9%. An increase was noted in 2022, reaching 8.24%, and remained elevated at 8.05% in 2023. This indicates a rising cost of funding for the company’s operations.

Invested Capital Trend

Invested capital showed a modest increase from US$13,101 million in 2019 to US$13,587 million in 2021. It then decreased to US$13,188 million in 2022, followed by a more substantial decrease to US$11,675 million in 2023. This reduction in invested capital could be due to asset sales, reduced investment in working capital, or other strategic decisions.

Economic Profit Analysis

Economic profit was negative in 2019, at -US$4 million. A significant positive economic profit of US$560 million was recorded in 2020, followed by an even higher value of US$730 million in 2021. Economic profit then declined sharply to US$2 million in 2022, before increasing to US$74 million in 2023. The fluctuations in economic profit closely mirror the changes in NOPAT, but are also influenced by the cost of capital and invested capital. The substantial increase in economic profit in 2020 and 2021 suggests the company was generating returns exceeding its cost of capital during those years, while the decline in 2022 indicates a narrowing of that margin.

The interplay between NOPAT, cost of capital, and invested capital significantly impacted economic profit. While the company demonstrated an ability to generate substantial economic profit, the recent trends suggest increasing challenges in maintaining profitability and efficient capital allocation.

The financial data reveals that net income attributable to the company exhibited notable fluctuations over the five-year period. Starting at 960 million US dollars in 2019, net income increased substantially to 1,251 million in 2020 and further to a peak of 1,488 million in 2021. However, this upward trend reversed in the subsequent years, with net income declining sharply to 960 million in 2022 and slightly decreasing again to 951 million in 2023, essentially returning to near the initial 2019 level by the end of the period.

Similarly, net operating profit after taxes (NOPAT) showed strong growth in the first three years, rising from 1,016 million US dollars in 2019 to a high of 1,799 million in 2021. This represents a compound growth phase with substantial improvement in operational profitability. Following this peak, NOPAT saw a marked decline in 2022 to 1,089 million and continued to decrease moderately to 1,013 million in 2023, reaching a figure close to the starting point of 2019.

Net Income Trends

Initial growth through 2021 followed by a reversion to earlier levels by 2023.

NOPAT Trends

Strong operational profit growth until 2021, then a significant decline over the last two years.

Overall Pattern

Both net income and NOPAT peaked in 2021 and subsequently declined, erasing much of the gains made during the growth phase. This suggests challenges in sustaining profitability post-2021.

The analysis of the annual financial data over the period from the end of 2019 through the end of 2023 reveals certain fluctuations in tax-related cash outflows.

Income Taxes

The amount of income taxes paid has exhibited variability throughout the periods. Starting at 321 million USD at the end of 2019, amounts remained relatively stable in 2020 with 323 million USD. However, there was a significant increase in 2021 to 474 million USD. Subsequently, income taxes declined sharply in 2022 to 244 million USD, followed by a slight increase to 258 million USD in 2023. This pattern suggests a peak in income tax obligations in 2021, with a marked reduction in the following years.

Cash Operating Taxes

Cash operating taxes experienced a notable decline from 536 million USD in 2019 to 317 million USD at the end of 2020. Following this dip, there was a gradual increase over the next three years, rising to 399 million USD in 2021, 340 million USD in 2022, and finally 365 million USD in 2023. Despite the upward trajectory from 2020 onwards, the cash operating taxes in 2023 remained below the 2019 level.

Overall, the data indicates a divergent trend between income taxes and cash operating taxes. Income taxes peaked in 2021 but decreased significantly afterwards, whereas cash operating taxes dropped sharply in 2020 but then experienced gradual recovery. This could reflect changes in taxable income, operational performance, or tax policies affecting the timing and amount of tax payments across the years.

Debt and Leases

There is a clear downward trend in the total reported debt and leases over the analyzed periods. From approximately 8.47 billion USD at the end of 2019, the debt load steadily decreased each year, reaching about 6.53 billion USD by the end of 2023. This suggests a consistent effort toward deleveraging or reducing liabilities during this timeframe.

Equity

Total equity exhibited growth from 2019 to 2022, increasing from roughly 2.75 billion USD to around 3.94 billion USD. However, in the final period ending 2023, there is a noticeable decline to approximately 3.18 billion USD. This drop could indicate either a return of capital to shareholders, losses, or other equity-reducing events experienced in that year.

Invested Capital

The invested capital values show relative stability but with a downward move in the most recent period. From about 13.1 billion USD in 2019, invested capital slightly increased to a peak near 13.59 billion USD by the end of 2021, before modestly declining to roughly 11.68 billion USD by the end of 2023. This decline may reflect asset sales, reduced capital expenditure, or other adjustments in company investments or assets employed.

Overall Insights

The company appears to have focused on reducing its financial leverage throughout the examined years, improving its debt profile. Despite an increase in equity until 2022, the sharp reduction in 2023 warrants attention as it contrasts with prior growth trends. The decline in invested capital in 2023 aligns with lower equity, suggesting a contraction in the company's operational or investment base. These patterns indicate strategic financial restructuring or responses to external market conditions that have impacted the company's capital structure and asset base in recent years.

The economic spread ratio exhibited significant fluctuations over the five-year period. Initially negative in 2019, it demonstrated substantial improvement through 2021, followed by a decline in 2022 and a partial recovery in 2023. This pattern is closely linked to the performance of economic profit and the level of invested capital.

Economic Spread Ratio

In 2019, the economic spread ratio was -0.03%, indicating that the company’s return on invested capital was less than its cost of capital, resulting in economic loss. A dramatic increase was observed in 2020, reaching 4.24%, and continued to rise to 5.38% in 2021. This signifies a period of strong value creation, where returns exceeded the cost of capital. However, the ratio decreased sharply to 0.01% in 2022, suggesting a near-breakeven situation in terms of value creation. A modest recovery to 0.63% occurred in 2023, indicating a return to positive, albeit limited, economic spread.

The economic spread ratio’s movement mirrors the trend in economic profit. The substantial increases in the ratio during 2020 and 2021 correspond with the significant positive economic profit reported for those years. The near-zero ratio in 2022 aligns with the minimal economic profit of US$2 million. The 2023 ratio reflects the improved, but still relatively modest, economic profit of US$74 million.

Invested Capital

Invested capital remained relatively stable between 2019 and 2021, fluctuating between US$13,101 million and US$13,587 million. A noticeable decrease occurred in 2023, with invested capital falling to US$11,675 million. This reduction in invested capital may have contributed to the improved economic spread ratio in 2023, despite the relatively modest economic profit, as a lower capital base requires a smaller return to achieve a given spread.

The interplay between economic profit and invested capital is crucial. While economic profit drives the direction of the economic spread ratio, changes in invested capital can amplify or moderate the effect. The decline in invested capital in 2023 likely cushioned the impact of the relatively small economic profit, preventing a further decline in the economic spread ratio.

The economic profit margin exhibited significant fluctuation between 2019 and 2023. Initial observations reveal a substantial improvement in profitability followed by a period of decline and subsequent modest recovery.

Economic Profit Margin Trend

In 2019, the economic profit margin was negative at -0.03%, indicating the company’s return on capital employed was less than its cost of capital. A dramatic increase was observed in 2020, reaching 4.07%, signifying a considerable improvement in value creation. This positive trend continued into 2021, with the margin further increasing to 5.15%, representing the peak value within the observed period. However, 2022 saw a sharp contraction, with the margin falling to 0.01%, nearly returning to a breakeven position. The most recent year, 2023, shows a partial recovery to 0.56%, though remaining considerably below the 2020 and 2021 levels.

The economic profit margin’s movement closely mirrors the trend in economic profit. The negative economic profit in 2019 corresponds with the negative margin, while the substantial increases in economic profit in 2020 and 2021 are reflected in the higher margin values. The decline in economic profit in 2022 is similarly mirrored by the near-zero margin, and the modest increase in economic profit in 2023 is reflected in the slight margin improvement.

Relationship to Net Sales

Net sales generally increased from 2019 to 2022, reaching a high of US$15,315 million. However, net sales decreased in 2023 to US$13,122 million. Despite the sales increase between 2019 and 2021, the economic profit margin did not consistently rise, suggesting that factors beyond revenue growth, such as cost of capital or operational efficiency, significantly influenced value creation. The decrease in net sales in 2023 did not result in a proportional decrease in the economic profit margin, indicating potential cost management or efficiency gains partially offset the revenue decline.

Overall, the economic profit margin demonstrates a volatile pattern. While the company achieved substantial value creation in 2020 and 2021, the subsequent decline in 2022 and only partial recovery in 2023 suggest potential challenges in sustaining profitability and generating returns exceeding the cost of capital.