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Financial Analysis for HP Incorporation

FINANCIAL ANALYSIS FOR HP INCORPORATION 1

Established in 1939 by Dave Packard and Bill Hewlett and incorporatedin 1948, HP has developed from manufacturing oscillators togenerating personal computing and access devices, printers, softwareproducts, support and consultancy services, enterprise IT, andinvestment services (HP Inc., 2016). Today, the company is one of thelargest PC makers in the world and to contend with rivals, such as,Lenovo, Apple, Dell, and Asus, it has devoted billions of dollars toacquiring assets. Some of the ventures have helped the firm whileothers have not been transformed into profits. Thus, it is imperativeto analyze HP’s 10-k report for the 2015 accounting report to seehow it has performed financially. The report will utilize ahorizontal analysis of 3 years to provide a comprehensive report byshowing how sales, profitability, revenue, and growth rates havechanged. Furthermore, an analysis of the company’s share value willhelp in determining its brand worth and investors’ confidence. Tobetter comprehend the declining revenues of HP, the report will offera financial position comparison with J.B. Hunt. The contrast willalso help show the trends in the PC market and proffer suggestionsfor future improvements.

Overview of the financial analysis from 2013 to 2015

In 2015, the firm’s total assets increased to US$106.882 billionfrom US$103.206 billion in 2014. In 2013, the assets stood atUS$105.676 billion while in 2012, they were US$108.768 billion (HPInc., 2016). The company reported a net revenue of US$103.355billion, US$114.454, US$112.298, US$120.357, and US$127.245 in 2015,2014, 2013, 2012, and 2011 respectively. The company reported adecline in the net revenue in 2015 because of unfavorable currencyeffects in all its sectors. In 2015, total sales of PCs, printers,and related products decreased thus, the diminished sales translatedto a low net revenue in 2015 as compared to preceding years.Moreover, HP the enterprise service unit and key accounts performpoorly leading to a low net revenue. However, during the period, thecompany realized a growth in its enterprise group due to increasedsales of ISS servers. In 2015, the company reported a decrease in itsgross profit (US$24.759 billion) from US$26.615 in 2014 and US$25.918in 2013. The company’s cost of sales stood at US$78.596 billion,US$84.839billion and US$86.380 billion in 2015, 2014, and 2013. Thedecrease in COGS (cost of goods sold) helped HP realize an increasein the gross margin from 23.9% (26.6 billion) in 2014 to 24% (24.8billion) in 2015. The rise was attributed to improvements in servicedelivery and increased efficiency. However, according to the 10-kreport, pricing forces in the printing segment and the trade of IP(intellectual property) in the preceding financial year offset thegross margin.

A comparison analysis between HP and JBHT (J.B. Hunt)

J.B. Hunt is an American transportation and trucking firm thatprovides delivery and carriage services in Canada, Mexico, and theUSA. The firm operates integrated solutions, truck services, contractservices, intermodal, and logistic services. Currently, the firm isone of the largest trucking companies in America employingapproximately 21,000 workers with annual revenues of around US$6billion (NASDAQ, 2016a). Although the firm generates a low incomethan HP, it is important to carry out a comparison of the two firmsto understand how different financial ratios mean to firms operatingin different markets. The evaluation of the firms’ balance sheet,financial ratios, and income statements will help in showing theirprofitability and growth.

Balance sheet analysis

Figure 1

Consolidated balance sheet for HP

Assets

2015

2014

In dollar (millions)

In %

In dollar (millions)

In %

Current Assets

Cash and cash equivalents

17,433

16.31

15,133

14.66

Accounts receivable

13,363

12.5

13,832

13.4

Financial receivables

2,918

2,946

Inventory

6,485

6.07

6,415

6.22

Other current assets

11,588

7.62

11,819

7.26

Total current assets

51,787

48.45

50,145

48.59

Property and equipment

11,090

24.77

11,340

25.44

Long term receivables and other

9,050

8,454

Goodwill

32,941

30.82

31,139

30.17

Intangible assets

2,012

1.88

2,128

2.06

Total assets

$106,882

100

$103,2016

100

Liabilities and stockholders’ equity

Current liabilities

Notes and short tern debts

2,885

2.7

3,486

3.38

Accounts payable

15,956

14.93

15,903

15.41

Compensation and benefits

3,608

4,209

Taxes on earnings

830

2.99

1,017

3.18

Deferred revenue

6,199

5.8

6,143

5.95

Accrued restructuring

689

898

Other accrued liabilities

12,024

12,079

Total current liabilities

42,191

39.47

43,735

42.38

Long term debt

21,780

20.38

16,039

15.54

Other liabilities

14,760

4.17

16,305

4.72

Total stockholders’ equity

28,151

25.98

27,127

25.90

Total liabilities and equity

$106,882

100

$103,206

100

Adapted from the 10-k report

The figure above shows the comprehensive balance sheet of HP. Thecompany had total assets of US$106.882 billion in 2015, US$103.206billion in 2014, US$105.676 billion in 2013, and US$108.768 billionin 2012. Total equity stood at $27.768 billion and $26.731 in 2015and 2014 while total current liabilities stood at $42.191 and $43.735during the same period. On the other hand, JBHT had total assets ofUS$3.636, US$3.378, and US$2.819 billion in 2015, 2014, and 2013while equity stood at $1.300 billion and $1.2014 billion. This meansthat HP has more assets, equity, and liabilities than JBHT thus, itis the largest company between the two. The high level of assets andequity for HP means that it is in a better position than JBHT togenerate more income and profit and engage in extensive activities,as evidenced by its financial reports. The two firms realizedincreased assets, equity, and liabilities from between 2014 and 2015.

Income statement analysis

Figure 2:

Statements of comprehensive income

Figure 3:

HP income statement analysis

HP Inc.

2013 (values in millions)

2014 (values in millions)

2015 (values in millions)

&nbsp

&nbsp

&nbsp

Net revenue

112298

114454

103355

Gross Profit

25918

26615

24759

Net income

5113

5013

4554

Operating income

6510

6557

4732

Figure 4:

JBHT income statement analysis

J.B Hunt

2013 (values in 000`s)

2014 (values in 000`s)

2015 (values in 000’s)

&nbsp

&nbsp

&nbsp

Revenue

5584

6165

6187

Gross Profit

2013

2267

2522

Net income

342

374

427

Operating income

576

631

715

JBHT income analysis (NASDAQ, 2016a)

From the figures above, HP generated higher revenues during the threeperiods than JBHT. However, JBHT realized increased gross profit, netincome, operating income, and revenue from 2013 to 2015 while HPrealized an increase in net revenue between 2013 and 2014, whichdecreased in 2015. HP reported increased net revenue, gross profit,and operating income and a decrease in net income from 2013 to 2014,but reported a decrease in all the aspects between 2014 and 2015.This means that in 2015, HP realized a decreased financialperformance, which was caused by diminished sales, unfavorablecurrency impacts, and operation costs associated with the split ofenterprise computing technology and PC unit. Moreover, the decreasein net income and gross profit may point to a failure by HP to managesuitably costs linked with sales, for example, marketing activities,competitive pricing pressures, labor costs, currency exchange, andglobal activities. HP cost of sales stood at $78.596 (76%) in 2015,$84.839 (76.1%) in 2014, and $86.380 (76.9%) in 2013. This turnovershows that HP had a high gross revenue probably through acquiring rawmaterials cheaply hence, enhancing its profit margins.

Financial ratios

Figure 5:

Profitability and liquidity ratios

HP Inc.

JBHT

Liquidity and profitability ratios

2013 (in percentage)

2014 (in percentage)

2015 (in percentage)

2013 (in percentage)

2014 (in percentage)

2015 (in percentage)

Liquidity

Current ratio

111

115

123

95

112

161

Quick ratio

97

100

107

92

108

157

Cash ratio

27

35

41

1

1

1

Profitability

Gross margin

23

24

24

36

37

41

Operating margin

6

6

5

10

10

12

Pre-tax margin

6

6

5

10

10

11

Profit margin

5

4

4

6

6

7

Pre-tax ROE

24

25

17

55

50

53

After tax ROE

19

19

16

34

31

33

HP and JBHT profitability and liquidity ratios (NASDAQ, 2016aNASDAQ, 2016b)

Liquidity ratios

The current ratio evaluates a company’s ability to pay off itsdebts in the short and long term. HP had a current ratio of 1.11 in2013, which increased to 1.15 and 1.23 in 2014 and 2015 respectivelywhile JBHT had a current ratio of 0.95 in 2013, which increased to1.12 in 2014, and 1.61 in 2015. A proportion of less than 100% showsthat a firm’s assets are less than the liabilities while a ratio ofmore than 100% indicate that the assets are more than theliabilities. This means that during financial years under review, HPwas in a position to pay its obligations while JBHT was in a badfinancial position in 2013, which improved in 2014 and 2014. A quickratio evaluates a company’s liquidity by contrasting its cash,accounts receivables, and marketable securities. The ratio assessesthe liquid assets available to meet current liabilities. A firm thatcan meet its obligations fully should have a ratio greater than 1.Both companies had a quick ratio of less than 1 in 2013: HP had 0.97while JBHT had 0.92, but the ratios improved in 2014 and 2015. Thismeans that the firms were not in a position to pay fully theircurrent liabilities during the period, but they managed to do so in2014 and 2015.

Profitability ratios

The gross margin ratio compares a company’s revenue to its COGS(cost of sales). The margin metric evaluates a firm’s financialhealth and business process by revealing the quantity of the incomeleft after accounting for the cost of sales. It is an important toolfor measuring the performance of a business including the net income,gross profit, and operating profit thus, it measures how profitablea company sells its inventory. The ratio is the pure return from thesale of goods that goes to pay operating expenses. This means that ahigh ratio shows that a business is making enough profit from sellingits goods. During the three periods, HP had gross margin proportionsof 23%, 24%, and 24% while JBHT had ratios of 36%, 37%, and 41%. Thismeans that HP retained a lower proportion of revenue to pay off itsexpenses than JBHT did. For example, HP had a ratio of 24% in 2015,which means that after paying the inventory costs, it had only 24% ofthe sales revenue to cover operating costs. The low ratio of HPcompared to that of JBHT shows that either HP buys inventories or rawmaterials at an expensive price or it marks its goods lower than JBHTdoes. The operating margin, pre-tax margin, and profit margin forJBHT increased between 2013 and 2015 while for HP, the marginsdecreased. Moreover, JBHT had higher margins than HP did, which showsthat it was in a better financial position. HP’s profits were nothealthy especially in 2015 where it recorded a decrease in profitsand profit margins from compared to 2013. On the other hand, the ROEbefore and after tax for HP were lower in the three periods comparedto JBHT. The ROE before tax for HP stood at 24%, 25%, and 17% whileafter tax it stood at 19%, 19%, and 16% compared to JBHT, whichrecorded a before-tax ROE of 55%, 50%, and 53% and after-tax ROE of34%, 31%, and 33% during 2013, 2014, and 2015 respectively. Thismeans that JBHT returned a higher value of the money invested byshareholders. JBHT used its shareholders’ money more effectivelythan HP, which shows that investing in HP is very risky.

Opportunities for cost controls and improved profits

Firms usually cultivate considerable efforts to revolutionize theirproducts and processes to attain revenue growth and preserve orenhance profit margins. Nonetheless, these innovations are frequentlytime-consuming and expensive, demanding a substantial ventureincluding R&ampD, new equipment, and plants, specialized businessunits and resources. The firm’s internal controls will continue toplay a major part in the auditing process and assessing costs. HP’sinternal controls are developed effectively hence, they will allowin evaluating budget and manage risks by detecting fraud or threats.The company has managed to regulate, monitor, guard, and assess itsresources effectively (HP Inc., 2016). At the organizational level,HP reports financial results and statements timely and efficientlyand offer applicable feedback to shareholders on the achievement ofstrategic objectives. At the transactional level, it ensures that allpayments planned and prepared are for rendered services only. On theother hand, the company should adopt an asset-based strategy toinitiate projects for the profit motive. The firm can utilize itsassets to generate more income by laying off or selling assets thatdo not contribute to operational efficiency. The revenue reports ofHP shows that the company is experiencing decreased desktop sales andincreased notebook sales thus, it can increase production ofnotebooks especially premium ones to increase its market share.Although the firm realized a positive gross margin for the threeperiods, its profit and margins decreased in 2015, which means itneeds to ensure that all units operate efficiently. The increasedsales of printers in 2015 offset the decline in unit volumes of PCssold, but given the competition that the company is experiencingespecially in the 3D printing sector, it is difficult to determinesales for printers in future.

Pricing and sales

During 2015, HP sold personal systems including desktop PCs,workstations, and notebook PCs worth US$31.469 billion while in 2014,it recorded a net revenue of US$34,303 billion thus, it reported adecrease of 8.3% in 2015. The company had a net revenue of US$32.179in 2013, which means revenue from PCs sales increased by 6.6% in2014. Furthermore, the company realized decreased total sales for itsproducts since it recorded sales of US$103.355, US$114.454, andUS$112.298 in 2015, 2014, and 2013 respectively. The figures showthat the company’s records were healthy in 2014 when it reportedincreased sales. Data from the 10-k report shows that HP reported adecline of 3% in unit volumes and 5% in ASP (average selling prices)(HP In., 2016). This means that the company decreased its ASP for2015, but still it did not manage to match 2014 sales. The extendedrefresh cycles may have hurt revenue for HP in 2015, as clients heldonto their PCs for longer. Moreover, it is important to note thatinternational demand for computers is falling due to worseningeconomic circumstances and competition from smartphones and tablets.The decrease in ASPs was attributed to a change in personal computersto low-end PCs, unfavorable currency effects, and an inferiorcombination of business PCs. In 2015, desktops units shippeddecreased, but the decline was offset by an increase in unit volumesof notebooks. Increased operating expenses and reduced gross marginsaffected the earnings of the company. A decreased net revenue, higheradministrative costs, and increased R&ampD investments in immersivecomputing products and commercial caused the increased operatingexpenses in 2015.

The company competes with Lenovo, Asus, Acer, and Dell for a share ofthe low-end market and the Windows platform thus, to reportincreased sales it must charge a low price for its products. It isdifficult for HP to compete favorably with Apple in the high-end tiermarket since Apple owns both hardware and software platforms for itsproducts. The PC market is greatly competitive and categorized byrivalry in setting prices and given the shifts in mobility productsand decline in the PC market, HP should extensively use itscompetitive advantage to increase future sales. The firm’scompetitive advantage comprises R&ampD capacities, innovation,comprehensive product range, extensive support and service offerings,accessibility of products through extensive channels, and procurementadvantage. The company should use these advantages to push sales andcompete favorably with other competitors. The 10-k report shows thatthe company has an uneven sales cycle, which makes it hard toforecast earnings, revenue, working capital, and cash flows. Theirregular cycle puts stress on stock administration and planningstructures and increases the risk of unexpected variations infinancial results. Moreover, the PC market experiences seasonaltrends with third and fourth quarters reporting stronger sales thanfirst and second quarters because of sales to governments and theholiday demand. This means that HP might continue to report decreasedsales in the future.

Gross profit and net income changes

During the three periods, HP had gross margin proportions of 23%,24%, and 24% thus, it reserved a lower percentage of revenue to payoff its expenses. Moreover, the firm’s operating margin, pre-taxmargin, and profit margin decreased for the period. The change in themargins shows that HP reported negative net income changes during2015 financial year. It is critical to point out that change in salesresulted in changes in gross profit and net income in the samedirection. A decrease in sales led to a decrease in net income andprofit in the periods under review. However, an increase in netrevenue in 2014 did not translate to a rise in net income. This isbecause the company had effective tax rates of 21.5%, 23.5%, and 3.8%in 2013, 2014, and 2015, which increased the provision for taxes inthe period 2014 hence, a decline in the net income. In 2015, despitea decrease in net revenue, the gross margin rose by 0.1% compared to2014 due to enhanced efficiencies in service delivery and profitperformance. The decline in ASPs contributed to a low margin profitsince a decrease in the price of units sold affects total sales.Diminished sales, especially in desktop and printers, led to adecline in net income and gross profit.

Conclusion

In 2015, HP realized decreased sales, gross margin, and net incomebecause of shifts in consumer demands and preferences, currencyimpacts, and competition. However, the company can use its extensivedistribution channels and service or product diversification toincrease sales and market share. The decrease in the net revenue for2015 shows that HP has failed to identify strong means of incomegeneration or it has failed to invest its assets in efficient areas.The company should develop an innovative business model in orderconsolidate debts, sell unused assets, advance marketing processes,and reduce operating costs to improve its gross margin.

References

HP Inc. (2016). HP Inc. form 10-k for the fiscal year endedOctober 31, 2015. Retrieved 17 November 2016 fromhttps://www.sec.gov/Archives/edgar/data/47217/000104746915009251/a2226745z10-k.htm

NASDAQ. (2016a). JBHT Company financials. NASDAQ. Retrieved 18November 2016 from http://www.nasdaq.com/symbol/jbht/financials

NASDAQ. (2016b). HPQ company financials. NASDAQ. Retrieved 18November 2016 fromhttp://www.nasdaq.com/symbol/hpq/financials?query=ratios