HP Inc. (NYSE:HPQ)

A transition from value destruction to value creation is evident over the analyzed six-year period. The organization shifted from significant negative economic profit between 2013 and 2015 to consistently positive economic profit from 2016 through 2018.

Net Operating Profit After Taxes (NOPAT)

A consistent downward trend is observed in NOPAT, which decreased from US$ 4,258 million in 2013 to US$ 2,027 million in 2018. This indicates a steady decline in absolute operating profitability over the period.

Invested Capital

A drastic reduction in the capital base occurred between 2015 and 2016, where invested capital fell from US$ 71,569 million to US$ 9,027 million. Following this sharp contraction, the capital base remained low, ending at US$ 7,561 million in 2018.

Cost of Capital

The cost of capital exhibited volatility, with a notable decline to 13.40% in 2015 followed by a steady increase to 22.60% by 2018. The rising cost of capital in the later years increased the financial hurdle required to achieve positive economic value.

Economic Profit

Economic profit remained negative from 2013 to 2015, reaching a low of negative US$ 9,057 million in 2014. A reversal occurred in 2016, with economic profit turning positive at US$ 1,090 million, although this figure trended downward to US$ 318 million by 2018.

The shift to positive economic profit was primarily driven by the massive reduction in invested capital rather than operational growth. By significantly lowering the capital base, the associated capital charge was reduced to a level below the NOPAT, thereby transforming the economic profit from a deficit into a surplus despite the simultaneous decline in operating income.

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 trajectory from 2013 to 2018 exhibits a significant transition from economic value destruction to value creation, characterized by a sharp structural shift in the capital base.

Economic Profit

A period of substantial negative economic profit is observed between 2013 and 2015, reaching a trough of -9,057 million US dollars in 2014. A pivotal reversal occurred in 2016, where economic profit shifted to a positive 1,090 million US dollars. While the company maintained positive economic profit through 2018, a declining trend is evident in the latter years, with the figure dropping to 318 million US dollars by the end of the period.

Invested Capital

Invested capital remained relatively high between 2013 and 2015, peaking at 71,569 million US dollars. A drastic reduction occurred between October 2015 and October 2016, where invested capital fell to 9,027 million US dollars, representing a contraction of approximately 87%. This lower capital base remained relatively stable through 2018, ending at 7,561 million US dollars.

Economic Spread Ratio

The economic spread ratio mirrors the volatility observed in economic profit and invested capital. Between 2013 and 2015, the ratio remained negative, indicating that returns did not exceed the cost of capital, with the lowest point recorded at -13.77% in 2014. The ratio shifted sharply to a peak of 12.07% in 2016, coinciding with the reduction in invested capital. Following this peak, the spread ratio entered a downward trend, declining to 9.79% in 2017 and further to 4.21% in 2018.

The correlation between the precipitous drop in invested capital and the shift to positive economic profit suggests that the improvement in the economic spread ratio was driven primarily by a reduction in the capital charge. However, the subsequent decline in the spread ratio from 2016 to 2018 indicates a diminishing margin of value creation relative to the remaining invested capital.

The financial performance between October 2013 and October 2018 is characterized by a transition from significant economic value destruction to a period of positive economic profit, followed by a gradual decline in value creation efficiency.

Economic Profit Trend

A period of substantial negative economic profit was observed from 2013 to 2015, reaching a trough of negative 9,057 million US dollars in 2014. A critical reversal occurred in 2016, where economic profit shifted to a positive 1,090 million US dollars. However, this positive momentum decelerated in subsequent years, falling to 956 million US dollars in 2017 and further decreasing to 318 million US dollars by 2018.

Adjusted Net Revenue Dynamics

Revenue remained relatively stable above 100 billion US dollars between 2013 and 2015. A sharp contraction is evident in 2016, with revenue dropping to 48,159 million US dollars, representing a reduction of over 50% from the previous year. Following this contraction, a recovery trend emerged, with revenue increasing to 52,205 million US dollars in 2017 and 58,639 million US dollars in 2018.

Economic Profit Margin Analysis

The economic profit margin mirrored the volatility of the absolute profit figures, starting at negative 7.60% in 2013 and dipping to negative 8.15% in 2014. The margin turned positive in 2016, peaking at 2.26%, which coincided with the significant reduction in adjusted net revenue. Despite the recovery in revenue from 2017 onward, the economic profit margin experienced a consistent downward trend, closing at 0.54% in 2018.

The correlation between the sharp decline in revenue in 2016 and the immediate shift to positive economic profit suggests a fundamental structural change or divestiture of underperforming assets. While the company successfully moved beyond value destruction, the subsequent decline in the economic profit margin indicates that the growth in revenue between 2016 and 2018 did not translate into proportional increases in economic value creation.