HP Inc. (NYSE:HPQ)

The financial performance over the analyzed six-year period is characterized by a transition from significant economic value destruction to marginal value creation. Although operational profitability declined over time, a drastic reduction in the invested capital base enabled a shift toward positive economic profit starting in 2016.

Net Operating Profit After Taxes (NOPAT)

A downward trend in operational profitability is observed. After reaching a peak of US$ 4,693 million in 2014, NOPAT declined steadily, ending at US$ 2,027 million in 2018. This represents a contraction in the absolute earnings available to cover the cost of capital.

Invested Capital

A substantial structural shift occurred between 2015 and 2016, during which invested capital dropped from US$ 71,569 million to US$ 9,027 million. This sharp contraction suggests a significant divestiture or restructuring of the asset base, which fundamentally altered the company's economic profit calculation by reducing the capital charge.

Cost of Capital

The cost of capital exhibited volatility, reaching a minimum of 13.39% in 2015 before entering a period of consistent increase, peaking at 22.57% in 2018. The rising cost of capital indicates an increasing hurdle rate for investments, adding pressure to maintain positive economic value.

Economic Profit

Economic profit was deeply negative between 2013 and 2015, with the largest deficit of US$ -9,041 million occurring in 2014. A pivot to positive economic profit was achieved in 2016 at US$ 1,092 million, primarily driven by the reduction in invested capital rather than an increase in NOPAT. However, this positive trend deteriorated in subsequent years, falling to US$ 320 million by 2018 due to the combined effects of diminishing operational profits and a rising cost of capital.

Net earnings

Net earnings displayed a downward trend from 2013 through 2016, decreasing from 5,113 million US dollars in 2013 to a low of 2,496 million US dollars in 2016. This was followed by a period of relative stability with a slight increase to 2,526 million US dollars in 2017. In 2018, net earnings sharply rebounded to 5,327 million US dollars, surpassing the 2013 figure.

Net operating profit after taxes (NOPAT)

NOPAT witnessed a decline during the same initial period, dropping from 4,258 million US dollars in 2013 to 2,997 million US dollars in 2016. There was a modest recovery in 2017, reaching 3,064 million US dollars. However, contrary to net earnings, NOPAT decreased significantly in 2018 to 2,027 million US dollars, marking the lowest value in the observed range.

Overall Analysis

The data reveals diverging trends between net earnings and NOPAT in 2018. While net earnings showed a strong recovery, more than doubling relative to the previous year, NOPAT declined sharply, indicating potential changes in operational efficiency, tax effects, or non-operating income components affecting the profitability metrics differently. The earlier period from 2013 to 2016 demonstrates a consistent decline in both metrics, possibly pointing to operational challenges or adverse market conditions during those years.

Provision for (benefit from) taxes on earnings

The provision for taxes on earnings exhibits significant volatility over the observed period. Starting at $1,397 million in 2013, it increased to $1,544 million in 2014, followed by a sharp decline to $178 million in 2015. In 2016, the amount rose again to $1,095 million, then decreased to $750 million in 2017, before turning into a substantial tax benefit of -$2,314 million in 2018. This fluctuation indicates variability in the company's taxable income or changes in tax strategy and tax regulations over the years.

Cash operating taxes

Cash operating taxes show a general downward trend from 2013 to 2017, decreasing from $1,924 million to $612 million. However, there is a notable rebound in 2018 with an increase to $1,398 million. This trend suggests a gradual reduction in actual cash tax payments over the first five years, possibly due to tax planning or changes in profitability, followed by a significant rise in the final year, which could reflect an increase in taxable cash flows or changes in tax payments timing or policies.

Total reported debt & leases

The total reported debt and leases exhibited a fluctuating pattern over the analyzed period. Starting at 25,193 million US dollars in 2013, the figure decreased to 22,206 million in 2014, followed by an increase to 27,126 million in 2015. Subsequently, there was a sharp decline to 7,737 million in 2016, with minor increases to 8,855 million in 2017 and a decrease again to 7,247 million in 2018. This indicates a significant reduction in debt levels from 2015 onwards, possibly reflecting a strategic deleveraging or asset restructuring effort.

Total HP stockholders’ equity (deficit)

Stockholders’ equity showed stability and slight growth from 27,269 million in 2013 to 27,768 million in 2015. However, from 2016 onwards, the equity balance turned negative, indicating a deficit position of -3,889 million in 2016. This deficit slightly improved but remained negative at -3,408 million in 2017 and -639 million in 2018. The transition to negative equity suggests significant losses or charges affecting retained earnings or valuation adjustments during this period.

Invested capital

Invested capital remained relatively stable and showed a mild upward trend from 67,461 million in 2013 to 71,569 million in 2015. Beginning in 2016, there was a sharp and substantial drop to 9,027 million followed by a slight increase to 9,763 million in 2017 and a decrease again to 7,561 million in 2018. The dramatic decline post-2015 aligns with reduced debt levels and negative equity, possibly reflecting a divestiture of significant assets or a fundamental change in capital structure.

The financial data indicates a significant transition in value creation from 2013 to 2018, characterized by an initial period of value destruction followed by a recovery and a subsequent gradual decline in efficiency.

Economic Profit Trends

Economic profit exhibited a volatile trajectory, beginning with substantial negative values of -8,485 million USD in 2013 and peaking at a loss of -9,041 million USD in 2014. A recovery phase began in 2015, culminating in a pivot to positive economic profit in 2016, which reached 1,092 million USD. However, this positive momentum decelerated in the following years, with profit declining to 959 million USD in 2017 and further dropping to 320 million USD by 2018.

Invested Capital Dynamics

A stark contraction in invested capital is observed between 2015 and 2016. Capital levels remained relatively stable between 65,787 million USD and 71,569 million USD from 2013 to 2015, before plummeting to 9,027 million USD in 2016. This drastic reduction in the capital base persisted through 2018, where invested capital reached a period low of 7,561 million USD.

Economic Spread Ratio Analysis

The economic spread ratio mirrors the volatility of economic profit but highlights the impact of the capital base reduction. The ratio reached its lowest point in 2014 at -13.74%, indicating significant value destruction. The shift to a positive spread of 12.10% in 2016 suggests a successful realignment of returns relative to the cost of capital, heavily influenced by the reduced invested capital. Following this peak, the ratio entered a consistent downward trend, falling to 9.82% in 2017 and ending at 4.23% in 2018, signaling a diminishing margin of economic value creation.

Overall, the analysis reveals a corporate turnaround in 2016 that shifted the organization from negative to positive economic spread. However, the downward trajectory of both economic profit and the spread ratio from 2016 to 2018 suggests a reduction in the effectiveness of capital utilization in the latter part of the period.

The analysis of economic value added reveals a significant structural transition between 2013 and 2018, characterized by a shift from consistent value destruction to the generation of positive economic profit.

Economic Profit Trends

From 2013 to 2015, economic profit remained negative, reaching a trough of -9,041 million US dollars in 2014. A pivotal recovery occurred in 2016, when the figure transitioned to a positive 1,092 million US dollars. However, this positive trajectory decelerated in subsequent years, with economic profit declining to 959 million US dollars in 2017 and further decreasing to 320 million US dollars by 2018.

Adjusted Net Revenue Analysis

Adjusted net revenue remained relatively stable between 2013 and 2015, consistently exceeding 100,000 million US dollars. A sharp contraction was observed in 2016, where revenue fell to 48,159 million US dollars, indicating a major structural change or reorganization. Following this period, a gradual recovery in revenue occurred, climbing to 58,639 million US dollars by 2018.

Economic Profit Margin Dynamics

The economic profit margin mirrored the trend of absolute economic profit. The margin reached its lowest point of -8.13% in 2014 before improving to -5.43% in 2015. Following the transition to positive economic profit in 2016, the margin peaked at 2.27%. A subsequent downward trend was observed, with the margin contracting to 1.84% in 2017 and reaching 0.55% in 2018.

In summary, although the entity successfully reversed the trend of negative economic profit by 2016, the subsequent decline in both absolute economic profit and the profit margin indicates a diminishing capacity to generate returns exceeding the cost of capital toward the end of the analyzed period.