Kellanova (NYSE:K)

The period between 2019 and 2023 demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) initially increased significantly 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 produce a volatile economic profit figure over the five-year span.

NOPAT Trend

NOPAT increased substantially from US$1,016 million in 2019 to US$1,566 million in 2020, and continued to rise to US$1,799 million in 2021. However, a significant decrease was observed in 2022, with NOPAT falling to US$1,089 million, followed by a slight decrease to US$1,013 million in 2023. This suggests a potential weakening of operational profitability in the latter part of the period.

Cost of Capital Trend

The cost of capital experienced a minor decrease from 7.77% in 2019 to 7.61% in 2020. It then increased to 7.85% in 2021, and further to 8.23% in 2022, before decreasing slightly to 8.04% in 2023. The overall trend indicates a rising cost of funding, potentially due to macroeconomic factors or changes in the company’s risk profile.

Invested Capital Trend

Invested capital remained relatively stable between 2019 and 2021, fluctuating between US$13,101 million and US$13,587 million. A decrease to US$13,188 million was seen in 2022, but a more substantial decline occurred in 2023, with invested capital falling to US$11,675 million. This reduction could be attributed to asset sales, reduced investment, or other capital structure adjustments.

Economic Profit Analysis

Economic profit was negative in 2019 at -US$2 million. A substantial improvement occurred in 2020 and 2021, with economic profit reaching US$562 million and US$732 million respectively. However, economic profit declined sharply in 2022 to US$4 million, before increasing to US$75 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 significant decrease in invested capital in 2023, coupled with a relatively stable NOPAT, contributed to the increase in economic profit from 2022 to 2023.

In summary, the company experienced a period of strong economic profit generation in 2020 and 2021, but this was followed by a decline in 2022. While economic profit improved slightly in 2023, it remained significantly below the levels achieved in the prior two years. The interplay between NOPAT, cost of capital, and invested capital is critical to understanding these fluctuations.

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 demonstrates significant fluctuation over the five-year period. Initially negative in 2019, it experienced substantial growth through 2021 before declining again in 2022 and showing modest improvement in 2023. This pattern is closely linked to the performance of economic profit and changes in invested capital.

Economic Spread Ratio

In 2019, the economic spread ratio was -0.02%, 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 4.26%, followed by further growth to 5.39% in 2021. This signifies a period of strong value creation, where returns exceeded the cost of capital. The ratio decreased substantially to 0.03% in 2022, suggesting a near-breakeven situation in terms of value creation. A slight recovery to 0.64% occurred in 2023, indicating a return to modest value creation, though still considerably lower than the levels seen in 2020 and 2021.

The economic spread ratio’s movement mirrors the trend in economic profit. The negative economic profit in 2019 corresponds with the negative spread ratio. The substantial economic profits reported in 2020 and 2021 are reflected in the high spread ratios for those years. The low economic profit in 2022 resulted in a minimal spread ratio, and the modest economic profit in 2023 corresponds to the slightly improved, but still relatively low, spread ratio.

Invested Capital

Invested capital remained relatively stable between 2019 and 2021, with a gradual increase. A decrease in invested capital was observed in 2023, reaching 11,675 US$ millions. This reduction in capital employed may have contributed to the improved economic spread ratio in 2023, despite the lower absolute economic profit compared to 2020 and 2021. The relationship between invested capital and the economic spread ratio suggests that efficient capital allocation is a key driver of value creation.

Overall, the period demonstrates a volatile performance in value creation. While significant improvements were achieved in 2020 and 2021, the subsequent decline in 2022 and only partial recovery in 2023 suggest potential challenges in sustaining strong economic returns.

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 recovery.

Economic Profit Margin Trend

In 2019, the economic profit margin was negative at -0.02%, indicating the company’s return on capital employed was less than its cost of capital. A dramatic increase was observed in 2020, reaching 4.08%, signifying a considerable improvement in value creation. This positive trend continued into 2021, with the margin further increasing to 5.16%, representing the peak performance within the observed period. However, 2022 saw a sharp contraction, with the margin falling to 0.02%, nearly returning to breakeven. The most recent year, 2023, demonstrates a partial recovery, with the economic profit margin rising to 0.57%.

The economic profit margin’s movement closely mirrors the trend in economic profit. The substantial increase in economic profit from a loss of US$2 million in 2019 to US$562 million in 2020 directly correlates with the increase in the economic profit margin. The decline in economic profit in 2022 to US$4 million is reflected in the corresponding decrease in the margin. The 2023 economic profit of US$75 million indicates a return to positive value creation, though at a level below the 2020 and 2021 peaks.

Relationship to Net Sales

Net sales increased from US$13,578 million in 2019 to US$15,315 million in 2022, but decreased to US$13,122 million in 2023. While increased sales generally contribute to higher economic profit, the economic profit margin suggests that improvements in operational efficiency and capital allocation were more significant drivers of profitability in 2020 and 2021. The decline in margin in 2022, despite higher sales, suggests increased costs or less efficient capital utilization. The 2023 results indicate a partial offset of these factors.

Overall, the period under review demonstrates a volatile performance in value creation. While the company achieved substantial improvements in economic profit margin in 2020 and 2021, the subsequent decline in 2022 highlights potential vulnerabilities. The partial recovery in 2023 suggests ongoing efforts to improve profitability, but further monitoring is warranted to assess the sustainability of this trend.