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Hewlett Packard Financial Analysis Essay

Hewlett Packard Financial Analysis

Abstract

Hewlett Packard Company is a global company operating in the market from 1939. Its policy is aggressive marketing and hence its results are not comparable with other cautious players in the industry. Due to its aggressive marketing, the HP ranks first among its competitors. The Working Capital ratios indicate efficient working capital management and P/E Ratio is comparable to the industry average.  

Introduction

Key ratios worked out and shown in the annexure 1, are explained hereunder for their relevance in understanding the company’s financial performance. (Annual Report 2008).

Current Ratio

Year 2008, 0.98, Year 2007 1.21 against industry averages 1.63, 2.43, for computer hardware, technology. sectors.  This ratio is to test liquidity position of a company for its day to day working capital management. If the current liabilities are more than current assets, it would show a negative ratio of less than 1. The optimum ratio is 1.5 and in this case, 0.98 i.e less than 1 for the year 2008 and 1.21 for the year 2007. Just being less than 1 by 0.02 for the year 2008 is not an alarming situation, though it is an indication that the company must tighten its belt or arrange for working capital loan from bank to meet the shortfall.

Quick Ratio

It is an acid test ratio calculated by excluding inventory to find out the company’s liquidity position. Hence it is also known as liquidity ratio. In this case, the ratio is 0.83 and 0.80 for the years 2008 and 2007 respectively against the industry average of 1.16, 1.98 as per the respective sectors. Here also, it is less than industry average and hence it should be assumed that company’s liquidity position must be improved even though it is not alarming. .

Inventory Turnover Ratio

This indicates the number of times the company sells its inventory. Although strictly speaking, cost of goods sold should be taken for the purpose, here sales data has been taken and it shows that inventory turns 11.63 times and 10.49 times in a year for  2008 and 2007 respectively as against the industry’s average of 29.45 for hardware & 12.28 for technology. The ratio shows an improvement from the year 2007.

Debt Ratio

It is debt equity ratio signifying the proportion of long term debt to equity of the company. In this respect, the ratio for the years 2008 and 2007 are 55.08 % and 28.33 % respectively against the industry average of 27.2 & 35.2. Long term debt has only increased from the year 2007. It is a healthy sign if the long term debt decreases each successive year but if there is an increase it may be due to expansion.

Net Profit Margin Ratio

The ratio for the years 2008 and 2007 is 7.04 and 6.97 respectively as against the industry average of 9.08 and 15.74 for computer hardware and technology respectively. The company being the market leader, the profit margin naturally has been kept very competitively. The company has more than compensated the lesser profitability by achieving more volume in sales.  .

Return On Investment

The profit earned is compared to the total investment on both current and long term assets to justify the investment. It is 7.35 % and 8.19 % for the years 2008 and 2009 as against the industry average of 18.25 and 16.77 for hardware and technology respectively. It is far below the industry average though the company is the market leader. It only shows that company has to sacrifice considerably to stay on top.

Return On Equity

ROE is the ratio by which an investor is prompted to invest on a company’s shares. The net profit earned for the year is compared with the amount of shareholders’ equity disclosed by the balance sheet. It signifies the profitability of the company vis-à-vis the money invested by the shareholders. The shareholders’ equity would not include preferred stocks It is useful for comparison with other companies operating in the same field of activity. ROE in the case of HP is 21.40 % and 18.87 % for the years 2008 and 2007 respectively, the industry average being 27.27% and 22.13% for computer hardware and technology respectively. This is also less than the average indicating that company has to sacrifice lot to retain its market leader position.

P/E Ratio

P/E ratio of the company is 11.4 and 18.56 for the years 2008 and 2007 respectively against the industry average of 12.54 and 12.71 for hardware and technology respectively. This ratio is significant as the earning per share is compared against the prevailing market price of the share. For new investor, it is an expensive investment if the P/E ratio is higher. In this case, ratio for the year 2008 is far less than that 2007 indicating downward trend of market price. However on comparison with the industry average, it appears that the difference is not much and that 2007 price was abnormal.

Working capital management

The current ratio, quick ratio and inventory turnover ratio are the indicators of working capital management of the company. The analysis shows that that there are no idle current assets. The currents assets are fully covered by the liabilities and there is no question of further optimization of its working capital. The inventory turnover is seen efficient enough though it is not on par with industry’s average. The HP being the first ranking company, should be the trend setter and the industry average showing more efficient ratios may be due to their relatively smaller sizes.

Long-term debt

The company held $ 10,350  millions as borrowings by way of U.S.Dollar Global Notes and EDS Senior Notes and lease obligations shown in the Balance Sheet as $ 7,676 as long-term debt (minus current portion of debt at $ 2674million & Fair value adjustment to SFAS No 133 $ 78 million )as at the end of the fiscal 2008. (Annual Report 2008 p 129)The details are furnished in annexure 2 below.

Stocks issued

Common Stock

As on 31.10.2008 total number of shares outstanding was 2,415,303 at the original value of $ 24 million.

Current selling price is $ 35.72 as at 10.24 Am ET. And 52 week range is $ 28.23-49.97. (Finance.Yahoo.com)

Weighted Average Cost of Capital (WACC)

It is the return expected by the prospective investors and existing shareholders. There are different sources of capital for a company and cost of these sources will be dependant upon the risks involved. Weighted average of the costs of each such capital is known as WACC. The weights are the percentage of each such capital. In a simple case, WACC is calculated as follows. (Value Based Management.net)

WACC= D/ (D+E) x I + E/ (D+E) x r

Where I is the interest rate

r is the expected return on equity

D is the value of debt capital

And E is the value of equity capital

Brief Analysis

In most of the ratios calculated, company does not compare favorably although HP is the top ranking company in the industry. The phenomenon is due to the nature of its aggressive marketing and the need to stay ahead of others. Through the volumes of sales, it has been able to meet the share holders‘s expectations. Read about HP competitive advantage

Recommendations

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Opinions are mixed among the analysts from ‘buy’, ‘hold’ ‘neutral’ in the past three years. The latest opinion of Kaufman Bros recorded on 9 January 2009 is ‘buy’. (Finance.yahoo.com) The company is more than 69 years old and has stood the test of times. The working capital management of the company is efficient and long-term debt is kept at the minimum. The company believes in meeting its obligations from internal generation rather than from outside borrowings. Hence, the company is best suited for long term investment

References

Annual Reports, Hewlett Packard, accessed 27 January 2009<http://media.corporate-ir.net/media_files/irol/71/71087/HewlettPackard_2008_AR.pdf>

Finance Yahoo.com, Hewlett-Packard Company (HPQ) Analyst Opinion, accessed 27 January, 2009< http://finance.yahoo.com/q/ao?s=HPQ>

Finance.Yahoo.com, Hewlett-Packard Company (NYSE:HPQ), accessed 27 January 2009 <http://finance.yahoo.com/q?s=HPQ>

Value Based Management.net, Weighted Average Cost of Capital, accessed <27 January 2009>

Annexure 1

Computation of ratios with their significance

Sl no
Name of Ratio
Working 2008  in millions
Working 2007 in millions
2008
2007
Industry average (source: Factiva)

Computer hardware, technology, S & P(Standard & Poor)
1
Current Ratio

Current assets $ 51,728: Current liabilities $ 52,939
$ 47,402: $ 39,260
0.98
1.21
1.63, 2.43, 1.64
2
Quick Ratio

Current assets less inventory =$ 43,849/ Current liabilities $ 52,939
$ 31,227: $ 39,260
0.83
0.80
1.16, 1.98,1.13
3
Inventory Turnover Ratio
Products turnover  $ 91,697: Inventory $ 7,879
$84,229: $ 8,033
11.63 *
10.49
29.45,12.28,11.85
4
Debt Ratio
Total long term liabilities $ 21450: Net worth$ 38,942
$10,913 : $ 38,526
55.08%**
28.33%
27.20 , 35.20, 72.10
5
Net Profit Margin Ratio
Net earnings $8,329/ Net revenue  $ 118,364×100
Net earnings $ 7,264/ Net revenue $ 104,286×100
7.04%
6.97%
9.08, 15.74, 12.37
6
ROI
Net earnings $ 8,329/Assets $ 113,331
$ 7,264/ $ 88,699
7.35%***
8.19%
18.25,16.77,13.14
7
ROE
Net Earnings $ 8,329/ Equity $ 38,942less $ 24 preferred stock
$ 7,264/ $ 38,526 less $26
21.40%****
18.87 %
27.27,22.13,21.48
8
Price-to-Earnings Ratio (P/E) Ratio

$ 38.19/3.35
$ 51.22/2.76
11.4*****
18.56
12.54 computer hardware,

12.71 Technology,

11.4 S & P

All 5 yr Low
* 11.30 TTM as per Factiva.com (Inventory Turnover Ratio)
**45.84 % as per Factiva.com (Debt Ratio)
***15.17 TTM as per Factiva.com(Return on Investment)
**** 21.50 TTM on average equity as per Factiva.com (Return on Equity)
***** 10.96  five year low as per Factiva.com (P.E. ratio)
*****10.71 excluding extraordinary items as per Factiva.com

Annexure 2

Sl
Date of issue
particulars
Date of maturity
Amount in

millions $
Grand Total
1
June 2002
US Dollar Global Notes $ 500 @ 6.5%
July 2012
499

2
February 2007
$ 600 @ three month USD LIBOR plus 0.11%
March 2012
600

3
February 2007
$ 900 @ 5.25%
March 2012
900

4
February 2007
$ 500 @5.4%
March 2017
499

5
June 2007
$ 1000 @ three month USD LIBOR plus 0.01%
June 2009
1000

6
June 2007
$ 1000 @ three month UDS LIBOR plus 0.06%
June 2010
1000

7
March 2008
$ 750 three-month USD LIBOR plus 0.40%
September 2009
750

8
March 2008
$ 1,500 @ 4.5 %
March 2013
1499

9
March 2008
$ 750 @ 5.5 %
March 2018
750

Total
7497
7497
10
October 1999
EDS Senior Notes $ 700 @ 7.125%
October 2009
712

11
June 2003
$1,100 @ 6 %
August 2013
1150

12
October 1999
$ 300 @ 7.45%
October 2029
316

Total
2178
2178
13

Other including capital lease obligations at 3.75%-8.63%, due 2007-2029

597
597
14

Fair value adjustment related to SFAS No 133

78
78
15

Total

10350
16

Less current portion

2674
17

Long term debt  per balance sheet

7676

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