Monsanto Co. (NYSE:MON)

The period under review demonstrates fluctuating economic profit performance. Net operating profit after taxes (NOPAT) exhibited initial growth followed by declines and a subsequent recovery. The cost of capital remained relatively stable, while invested capital showed an increasing trend overall, with some year-over-year variation. These factors combined to produce significant swings in economic profit.

Economic Profit Trend

Economic profit began at a negative value in 2012, at -64 US$ million, indicating the company’s returns were less than its cost of capital. A substantial improvement occurred in 2013, with economic profit rising to 219 US$ million. This positive trend continued into 2014, reaching 245 US$ million. However, 2015 saw a return to negative economic profit, at -212 US$ million, and this worsened considerably in 2016, falling to -431 US$ million. A recovery was observed in 2017, with economic profit increasing to 190 US$ million.

NOPAT Analysis

NOPAT increased from 2,247 US$ million in 2012 to 2,743 US$ million in 2013, contributing to the improved economic profit. A slight decrease was noted in 2014 (2,633 US$ million), followed by a more pronounced decline in 2015 (2,361 US$ million) and 2016 (1,816 US$ million). The final year reviewed, 2017, showed a significant rebound in NOPAT to 2,582 US$ million, driving the positive economic profit for that period.

Cost of Capital

The cost of capital experienced minor fluctuations throughout the period. It began at 15.88% in 2012, rose to 16.00% in 2013, and then generally decreased to 14.04% in 2015. It remained relatively stable at 14.08% in 2016 before increasing slightly to 14.61% in 2017. These changes in the cost of capital had a moderate influence on economic profit calculations.

Invested Capital

Invested capital generally increased over the period, moving from 14,553 US$ million in 2012 to 16,366 US$ million in 2017. The largest increase occurred between 2014 and 2015 (from 16,260 US$ million to 18,327 US$ million). A decrease was observed between 2015 and 2016 (to 15,963 US$ million), but it recovered somewhat in the final year. The growth in invested capital, coupled with fluctuating NOPAT, significantly impacted economic profit.

The substantial volatility in economic profit suggests a sensitivity to changes in NOPAT and, to a lesser extent, the cost of capital. The increasing invested capital base likely requires higher NOPAT levels to generate positive economic profit.

The financial data reveals certain trends in profitability for the analyzed company over a six-year period ending August 31, 2017.

Net Income Attributable to the Company

Net income shows an overall fluctuating pattern across the years. It increased steadily from 2045 million US dollars in 2012 to a peak of 2740 million in 2014. Subsequently, it experienced a decline to 2314 million in 2015 and a more pronounced decrease to 1336 million in 2016, indicating a significant setback in profitability during that year. However, the net income rebounded sharply to 2260 million in 2017, signaling recovery but not reaching the earlier peak levels.

Net Operating Profit After Taxes (NOPAT)

NOPAT similarly experienced variations over the examined period. It rose from 2247 million USD in 2012 to 2743 million in 2013, before slightly declining to 2633 million in 2014. The value then decreased further to 2361 million in 2015 and took a more substantial fall to 1816 million in 2016. In 2017, NOPAT saw a notable recovery to 2582 million. This suggests operational efficiency or profitability challenges during 2015 and 2016 with improvement thereafter.

Overall, both net income and NOPAT indicate a peak generally around 2013-2014, followed by declines in 2015 and notably in 2016. The recovery in 2017 reflects a positive turnaround. The inconsistency observed in both metrics suggests volatility in profitability and operational performance during these years, highlighting a period of financial challenges mid-cycle with subsequent recovery efforts yielding results by the final year reported.

Income Tax Provision from Continuing Operations

The income tax provision from continuing operations exhibited a fluctuating trend over the six-year period. Starting at 901 million USD in 2012, a slight increase to 915 million USD was observed in 2013. This upward movement continued more notably in 2014, reaching a peak of 1,078 million USD. However, the subsequent years showed a declining pattern: it decreased to 864 million USD in 2015, further dropped to 695 million USD in 2016, and reached its lowest point at 626 million USD in 2017. Overall, despite an initial rise until 2014, the income tax provision has generally declined in the latter part of the timeframe.

Cash Operating Taxes

Cash operating taxes demonstrated more volatility relative to the income tax provision. Beginning at 708 million USD in 2012, there was a steady increase to 821 million USD in 2013, followed by a substantial spike to 1,179 million USD in 2014. The upward trend continued into 2015, peaking at 1,272 million USD. However, unlike income tax provision, cash operating taxes experienced a sharp decrease in 2016, falling to 801 million USD, and then a further decline to 719 million USD by 2017. Despite the fluctuations, the values at the end of the period remained higher than the initial 2012 figures.

Comparative Observations

Both income tax provision and cash operating taxes display a pattern of increasing values through the early years, reaching peaks around 2014 or 2015, followed by a notable decline in the last two years. The cash operating taxes showed more pronounced increases and decreases compared to the income tax provision, suggesting greater variability in actual tax cash outflows relative to the accounting provisions. The consistent decline in both items after 2015 might indicate changes in tax strategy, operational performance, or tax regulations affecting the company's tax liabilities.

The financial data reveals several important trends and shifts over the six-year period ending August 31, 2017.

Total reported debt & leases

This metric shows a notable increase from 2012 through 2015, rising sharply from approximately $2.4 billion to $9.5 billion. The peak occurs in 2015 with a slight decline thereafter, dropping to $8.6 billion by 2017. This suggests a significant increase in leverage or borrowing activities during the mid-period, followed by some reduction in debt levels.

Total Monsanto Company shareowners’ equity

Shareowners’ equity exhibits a declining trend over the years. Starting at about $11.8 billion in 2012, equity increases slightly in 2013 but then declines steadily to a low of $4.5 billion in 2016. A partial recovery to $6.4 billion in 2017 is observed. This decreasing equity position alongside rising debt levels in the earlier years indicates possible financial restructuring or share buybacks impacting the equity base.

Invested capital

Invested capital shows a general upward trend from 2012 through 2015, rising from approximately $14.6 billion to $18.3 billion before declining to around $16.0 billion in 2016. A slight increase to $16.4 billion in 2017 occurs. The growth in invested capital up to 2015 parallels the increases in both debt and equity during that period, suggesting expansion or acquisition initiatives. The subsequent decrease and stabilization may reflect a period of consolidation or reevaluation of capital investment.

Overall, the data suggest that the company experienced increased leverage with a peak in debt around 2015, accompanied by declining shareholders’ equity after 2013. Despite fluctuations, invested capital remained relatively high, implying continued commitment to the company's operational base or growth efforts. The partial recovery in equity and reduction in debt post-2015 could indicate a strategic shift towards strengthening the balance sheet and deleveraging.

The economic spread ratio exhibited considerable fluctuation between 2012 and 2017. Initially negative, it demonstrated improvement before declining again, ultimately recovering to a positive value by the end of the period. This variability suggests inconsistent profitability relative to the capital employed.

Economic Spread Ratio Trend

In 2012, the economic spread ratio was -0.44%, indicating that the company’s return on invested capital was less than its cost of capital. A substantial increase was observed in 2013, reaching 1.39%, signifying a positive economic spread and improved value creation. This positive trend continued into 2014, with the ratio reaching 1.51%, representing the highest value within the observed timeframe. However, the ratio turned negative again in 2015 at -1.16%, and experienced a further decline in 2016 to -2.70%, indicating a significant deterioration in economic profitability. The ratio recovered to 1.16% in 2017, suggesting a return to value creation, though not to the levels seen in 2013 and 2014.

The economic spread ratio’s movements correlate with the fluctuations in economic profit. Years with positive economic profit (2013, 2014, and 2017) correspond with positive economic spread ratios, while negative economic profit (2012, 2015, and 2016) align with negative ratios. This relationship confirms that the economic spread ratio accurately reflects the company’s ability to generate returns exceeding its cost of capital.

Invested Capital

Invested capital generally increased from 2012 to 2015, rising from US$14,553 million to US$18,327 million. A decrease was then observed in 2016 to US$15,963 million, followed by a slight increase to US$16,366 million in 2017. The changes in invested capital do not appear to directly drive the fluctuations in the economic spread ratio, as the ratio’s movements are more closely tied to the economic profit.

The significant swings in the economic spread ratio highlight the importance of consistent profitability. The company experienced periods of strong value creation, followed by periods of value destruction. Maintaining a consistently positive economic spread ratio should be a key objective.

The economic profit margin exhibited considerable fluctuation between 2012 and 2017. Initial observations reveal periods of both value creation and destruction. A review of the economic profit margin alongside adjusted net sales provides insight into the company’s financial performance during this timeframe.

Economic Profit Margin Trend

In 2012, the economic profit margin was negative at -0.48%, indicating the company did not generate returns exceeding its cost of capital. A substantial improvement occurred in 2013, with the margin rising to 1.47%, and further increasing to 1.56% in 2014. This suggests improved profitability and efficient capital utilization during these years.

However, the economic profit margin declined sharply in 2015 to -1.42%, and experienced a more significant decrease in 2016, reaching -3.15%. This indicates a period where the company’s returns fell considerably short of its cost of capital. A recovery was observed in 2017, with the margin returning to positive territory at 1.28%, though remaining below the levels achieved in 2013 and 2014.

Relationship to Adjusted Net Sales

Adjusted net sales generally increased from 2012 to 2014, coinciding with the improvement in the economic profit margin. While sales decreased in 2015 and 2016, the economic profit margin experienced a more dramatic decline, suggesting factors beyond revenue volume were significantly impacting profitability. The increase in adjusted net sales in 2017 was accompanied by a return to positive economic profit margin, but the margin did not reach the prior peak levels, indicating that while revenue recovered, profitability efficiency did not fully rebound.

The volatility in the economic profit margin suggests the company’s ability to generate economic profit is sensitive to underlying business conditions or strategic decisions. The periods of negative margins warrant further investigation to understand the specific factors contributing to returns falling below the cost of capital.