Hewlett Packard Financial Analysis

Hewlett Packard Financial Analysis
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, HP ranks first among its competitors. The Working Capital ratios indicate efficient working capital management and the 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
The year 2008, 0.98, the year 2007 – 1.21 against industry averages 1.63, 2.43, for computer hardware, technology. sectors.  This ratio is to test the 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 loans from the 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 the industry average and hence it should be assumed that the 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, the 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 a 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 is 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 for the lesser profitability by achieving more volume in sales.
Return on Investment
The profit earned is compared to the total investment in 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 the company has to sacrifice considerably to stay on top.
Return on Equity
ROE is the ratio by which an investor is prompted to invest in 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 the company has to sacrifice a 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 investors, it is an expensive investment if the P/E ratio is higher. In this case, the ratio for the year 2008 is far less than that of 2007 indicating a downward trend of the market price. However, in 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 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 the industry’s average. The HP is the first ranking company, should be the trendsetter, 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 the current portion of the debt at $ 2674million & Fair value adjustment to SFAS No 133 $ 78 million) as at the end of fiscal 2008. (Annual Report 2008 p 129). The details are furnished in Annexure 2 below.
Stocks Issued
Common Stock
As of 31.10.2008 total number of shares outstanding was 2,415,303 at the original value of $ 24 million.
The current selling price is $ 35.72 as at 10.24 am ET. And the 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 the cost of these sources will be dependant upon the risks involved. The 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, the 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 shareholders’ expectations. Read about HP competitive advantage.
Recommendations
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 the 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>