Hewlett Packard Enterprise Co. (NYSE:HPE)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, beginning at US$2,346 million, increasing to US$2,514 million, then experiencing a substantial decline to US$77 million before recovering to US$3,529 million, subsequently decreasing to US$818 million, and finally rising to US$2,752 million. Concurrently, the cost of capital generally increased over the period, moving from 11.11% to 12.15%, with a temporary decrease to 9.48% in 2020. Invested capital showed a gradual decreasing trend from US$44,277 million to US$41,543 million, followed by an increase to US$43,254 million in the most recent year.

Economic Profit Trend

Economic profit consistently remained negative throughout the observed period. The largest negative economic profit occurred in 2020 at US$-3,945 million, coinciding with the lowest NOPAT. While economic profit improved in 2021 to US$-1,091 million, it deteriorated again in 2022 to US$-4,034 million before showing a slight improvement to US$-2,502 million in the latest year. This suggests that, despite fluctuations in NOPAT, the cost of capital consistently exceeded returns generated from invested capital.

Relationship between NOPAT and Economic Profit

A clear correlation exists between NOPAT and economic profit. Years with higher NOPAT, such as 2019 and 2021, generally corresponded with less negative economic profit figures. Conversely, the substantial decline in NOPAT in 2020 resulted in the most significant negative economic profit. The increase in NOPAT in 2023 led to a less negative economic profit compared to 2022, but still remained negative.

Impact of Cost of Capital

The increasing cost of capital appears to have exacerbated the negative economic profit. Even with improvements in NOPAT in certain years, the rising cost of capital limited the potential for positive economic profit. The lowest cost of capital in 2020 did not translate into positive economic profit due to the exceptionally low NOPAT that year.

Invested Capital Considerations

The gradual decrease in invested capital from 2018 to 2022, followed by a slight increase in 2023, did not appear to significantly alter the overall trend of negative economic profit. The consistent inability to generate returns exceeding the cost of capital suggests that the scale of invested capital, while changing, was not the primary driver of the observed economic performance.

Net Earnings (Loss) Attributable to HPE

The net earnings of the company demonstrate a fluctuating but generally volatile pattern over the six-year period. Starting at 1,908 million USD in 2018, earnings decreased significantly to 1,049 million USD in 2019. The company then recorded a loss in 2020 of -322 million USD, marking the only year in the dataset with a negative result.

Following this downturn, net earnings rebounded sharply in 2021 to reach 3,427 million USD, which represents the highest figure in the period examined. However, in the subsequent years, earnings again moderated to 868 million USD in 2022 before increasing to 2,025 million USD in 2023.

This pattern suggests considerable volatility in profitability, likely influenced by operational or external factors during the timeframe.

Net Operating Profit After Taxes (NOPAT)

NOPAT trends show a somewhat different trajectory but align with net earnings to reflect variability in operational efficiency and profitability. Beginning at 2,346 million USD in 2018, NOPAT increased modestly to 2,514 million USD in 2019.

Significantly, 2020 experienced a dramatic drop to just 77 million USD, indicating a steep decline in core operating profitability likely linked to the loss experienced the same year.

Subsequently, there was a robust recovery by 2021, reaching a peak of 3,529 million USD, the highest level in the series. NOPAT then decreased substantially to 818 million USD in 2022 before rising again to 2,752 million USD in 2023.

The NOPAT figures reinforce the indication of operational challenges and recovery phases over the period, with 2020 standing out as an exceptional downturn year.

The analysis of the provision and cash operating taxes over the six-year period reveals notable fluctuations that merit attention.

Provision (benefit) for taxes

The provision for taxes exhibited significant volatility. In 2018, a substantial tax benefit was recorded, evidenced by a large negative figure of -1744 million USD. This shifted in 2019 to a provision of 504 million USD, indicating a move to a tax expense. Subsequently, the year 2020 showed another negative figure (-120 million USD), denoting a tax benefit once again. The trend reversed in 2021 and 2023 with positive provisions of 160 million USD and 205 million USD, respectively, with 2022 showing a minimal provision of 8 million USD. Overall, the provision for taxes oscillated between benefits and expenses, reflecting considerable year-to-year variability possibly due to changes in taxable income, tax legislation, deferred tax assets or liabilities, or extraordinary tax events.

Cash operating taxes

Cash operating taxes also demonstrated wide variability during the period. The years 2018 and 2019 recorded negative cash taxes of -1594 million USD and -483 million USD respectively, suggesting cash tax refunds or benefits. However, starting 2020, cash operating taxes turned positive and increased somewhat steadily: 249 million USD in 2020, rising to 394 million USD in 2021, then slightly decreasing to 318 million USD in 2022 before increasing again to 350 million USD in 2023. This pattern indicates a shift from receiving tax refunds to consistently paying cash taxes, albeit with some fluctuations in the amounts paid. The earlier negative cash taxes could relate to tax credits, refunds, or adjustments, whereas the subsequent positive payments suggest more stable taxable income or changes in tax payment strategies.

In summary, both tax provisions and cash operating taxes showed marked fluctuations over the six years. The early years highlight strong tax benefits and refunded cash taxes, which shifted toward more consistently positive tax provisions and payments in more recent years. This pattern suggests evolving tax circumstances, potentially impacted by operational profitability, tax policy changes, or adjustments in deferred tax accounting.

Total Reported Debt & Leases

The total reported debt and leases exhibited a general declining trend from October 31, 2018, to October 31, 2023. Starting at 15,530 million USD in 2018, the debt increased to a peak of 17,169 million USD in 2019. However, from 2019 onward, a notable downward trend is observed, reaching a low of 13,484 million USD by 2022. A slight uptick occurred in 2023, increasing marginally to 13,515 million USD. Overall, the data indicate a reduction in leverage over the five-year period following the 2019 peak.

Total HPE Stockholders’ Equity

Stockholders’ equity showed a more fluctuating pattern over the observed years. It started at 21,239 million USD in 2018, then declined sharply to 17,098 million USD in 2019 and further to 16,049 million USD in 2020. This reduction suggests a contraction in equity or potentially share repurchases or losses affecting the equity base. Nevertheless, from 2020 onwards, equity values rebounded significantly, climbing to 19,971 million USD in 2021 and maintaining a steady state near 19,800 million USD in 2022. By 2023, equity increased again to 21,182 million USD, nearing the 2018 level. This resurgence indicates potential retained earnings growth, capital injections, or asset revaluations enhancing the equity position.

Invested Capital

The invested capital followed a slightly decreasing trend with minor fluctuations. The figure begins at 44,277 million USD in 2018 and gradually decreases to 43,287 million USD in 2019 and subsequently to 42,440 million USD in 2020. From 2020 to 2021, there was a marginal increase to 42,837 million USD, followed by a decline to 41,543 million USD in 2022. The final figure in 2023 increases again to 43,254 million USD. These variations suggest moderate adjustments in the company’s total capital base used for operations, with a slight overall decrease but some recovery in the most recent year.

Summary Insights

The data collectively reveal a company managing its capital structure with a focus on reducing debt levels after 2019 while recovering stockholders’ equity after a significant dip by 2020. The modest fluctuations in invested capital imply adjustments in financing or operational investments. The decreasing trend in debt combined with the recovery of equity may indicate strengthening financial stability and an effort to optimize capital costs through deleveraging. The rebound in equity over the latter years supports the notion of improved profitability or capital management actions.

The economic spread ratio exhibited considerable fluctuation over the observed six-year period. Initially negative, the ratio demonstrated some improvement before declining again, ultimately showing a degree of recovery in the most recent year. A consistent pattern of negative economic profit is also apparent throughout the period.

Economic Spread Ratio

The economic spread ratio began at -5.81% in 2018 and improved to -4.84% in 2019, indicating a lessening of the gap between the return on invested capital and the cost of capital. However, this improvement was short-lived, as the ratio deteriorated significantly to -9.29% in 2020, representing the lowest value within the examined timeframe. A substantial positive shift occurred in 2021, with the ratio increasing to -2.55%. This positive trend did not sustain, as the ratio fell back to -9.71% in 2022, before partially recovering to -5.78% in 2023. This final value suggests a return towards the initial levels observed in 2018.

Economic Profit

Economic profit remained negative across all years. The largest negative economic profit occurred in 2020, at -3,945 US$ millions. While fluctuations were present, with a decrease in the loss to -1,091 US$ millions in 2021, the overall trend indicates a consistent inability to generate returns exceeding the cost of capital. The most recent year, 2023, shows a negative economic profit of -2,502 US$ millions, representing an improvement over 2020 and 2022, but still a substantial loss.

Invested Capital

Invested capital generally decreased from 44,277 US$ millions in 2018 to 41,543 US$ millions in 2022. However, a slight increase was observed in 2023, bringing the invested capital to 43,254 US$ millions. This suggests a potential reinvestment or a change in capital structure towards the end of the period, though the impact on economic profit remains negative.

The interplay between the economic spread ratio and economic profit suggests that while the company has attempted to improve its efficiency in capital allocation, it has consistently failed to achieve positive economic profit. The partial recovery in the economic spread ratio in 2023, coupled with a reduced economic loss, may indicate early signs of improvement, but sustained positive performance remains to be demonstrated.

The economic profit margin exhibited considerable fluctuation between 2018 and 2023. While adjusted net revenue demonstrated relative stability, economic profit consistently remained negative throughout the observed period, impacting the economic profit margin.

Economic Profit Margin Trend

The economic profit margin began at -8.28% in 2018 and decreased to -14.50% in 2020, representing the most significant decline within the analyzed timeframe. A substantial improvement was noted in 2021, with the margin increasing to -3.91%. However, this improvement was short-lived, as the margin deteriorated again in 2022 to -14.14%, before moderating slightly to -8.43% in 2023. This pattern suggests volatility in the company’s ability to generate returns exceeding its cost of capital.

Relationship to Adjusted Net Revenue

Adjusted net revenue experienced a decline from US$31,060 million in 2018 to US$27,212 million in 2020. It then showed a recovery, reaching US$29,668 million in 2023. Despite this revenue recovery, the economic profit margin remained negative across all years, indicating that revenue increases alone were insufficient to offset the cost of capital and generate positive economic profit. The largest negative margin occurred in 2020, coinciding with the lowest revenue figure.

Economic Profit

Economic profit itself followed a fluctuating pattern. The largest negative economic profit was recorded in 2020 at -US$3,945 million. While the figure improved significantly to -US$1,091 million in 2021, it subsequently worsened to -US$4,034 million in 2022, before decreasing to -US$2,502 million in 2023. This suggests that the underlying factors contributing to economic profit, such as operational efficiency and capital allocation, have been inconsistent.

Overall, the analysis reveals a consistent inability to generate economic profit, coupled with significant year-over-year variations in both economic profit margin and the absolute value of economic profit. The relationship between revenue and economic profit margin suggests that factors beyond revenue generation are significantly impacting the company’s financial performance.