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. The cost of capital generally remained in a relatively narrow range, with a slight upward trend observed towards the end of the period. Invested capital showed a gradual decline over the majority of the period, with a modest increase 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, reaching -US$4,477 million. While economic profit improved in 2021 to -US$1,736 million, it deteriorated again in 2022 to -US$4,723 million before showing a slight improvement to -US$3,233 million in the final year. This indicates that the company’s returns on invested capital have consistently fallen short of its cost of capital.

Relationship between NOPAT and Economic Profit

The substantial decline in NOPAT in 2020 directly correlated with the most significant negative economic profit for that year. The recovery in NOPAT in 2021 contributed to a lessened negative economic profit. However, the subsequent decrease in NOPAT in 2022 resulted in a worsening of economic profit. The latest year shows a positive correlation, with increased NOPAT leading to a less negative economic profit.

Cost of Capital Impact

The cost of capital increased from 12.65% in 2018 to 13.84% in 2023. This increase in the cost of capital, coupled with the fluctuating NOPAT, likely contributed to the consistently negative economic profit. Even during periods of higher NOPAT, the rising cost of capital presented a challenge to achieving positive economic profit.

Invested Capital Considerations

The gradual decrease in invested capital from 2018 to 2022 may have been a strategy to improve returns, but it did not translate into positive economic profit. The slight increase in invested capital in 2023 did not sufficiently offset the negative economic profit, suggesting that the issue lies more with profitability relative to the cost of capital than with the absolute level of investment.

In summary, the company experienced consistent negative economic profit throughout the period, driven by fluctuations in NOPAT and a generally increasing cost of capital. While invested capital decreased over much of the period, this did not lead to improved 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 to its lowest point and then experiencing a partial recovery. Economic profit consistently remained negative throughout the period, while invested capital showed a generally decreasing trend with a slight increase in the most recent year.

Economic Spread Ratio

The economic spread ratio began at -7.35% in 2018 and improved to -6.29% in 2019. A significant decline followed in 2020, reaching -10.55%, representing the most substantial negative spread during the analyzed timeframe. The ratio improved to -4.05% in 2021, but deteriorated again in 2022 to -11.37%, its lowest value. The most recent year, 2023, saw a partial recovery to -7.48%.

Economic Profit

Economic profit was negative for each year presented. The largest negative economic profit occurred in 2020 at -4,477 US$ millions. The figures for 2018 and 2019 were -3,253 and -2,724 US$ millions, respectively. In 2021, economic profit improved to -1,736 US$ millions, but then worsened to -4,723 US$ millions in 2022 before slightly improving to -3,233 US$ millions in 2023.

Invested Capital

Invested capital generally decreased from 44,277 US$ millions in 2018 to 41,543 US$ millions in 2022. A slight increase was observed in the most recent year, with invested capital reaching 43,254 US$ millions in 2023. The overall trend suggests a reduction in the capital employed by the entity, although this trend was interrupted in the final year of the period.

The consistent negative economic profit, coupled with the fluctuating economic spread ratio, suggests the entity has not consistently generated returns exceeding its cost of capital. The decline in invested capital may indicate strategic adjustments or divestitures, but the continued negative economic profit raises concerns about the entity’s ability to create value for its investors.

The economic profit margin exhibited considerable fluctuation over the observed six-year period. While generally negative, indicating economic profit consistently below the cost of capital, the magnitude of the shortfall varied significantly year to year.

Economic Profit Margin Trend

The economic profit margin began at -10.47% in 2018 and improved to -9.30% in 2019. However, 2020 saw a substantial decline to -16.45%, representing the most negative margin within the period. A recovery occurred in 2021, with the margin increasing to -6.21%. This improvement was not sustained, as the margin deteriorated again in 2022 to -16.56%, mirroring the low seen in 2020. The most recent year, 2023, showed a moderate improvement to -10.90%, but remained negative.

The economic profit margin’s movement appears loosely correlated with adjusted net revenue. While revenue generally remained within a relatively narrow band between 2019 and 2022, the largest margin declines coincided with periods of revenue stagnation or slight decrease. The 2023 increase in revenue was accompanied by a slight improvement in the economic profit margin, though the margin remained in negative territory.

Economic Profit and Margin Relationship

Economic profit itself followed a similar pattern of fluctuation. Beginning at a loss of US$3,253 million in 2018, it decreased to US$4,477 million in 2020, before improving to US$1,736 million in 2021. The loss then increased again to US$4,723 million in 2022, and decreased slightly to US$3,233 million in 2023. The economic profit margin reflects these absolute profit changes relative to revenue, amplifying the percentage impact of larger profit swings.

The consistent negativity of the economic profit margin suggests that, despite generating substantial revenue, the company’s returns have not consistently exceeded its cost of capital throughout the analyzed period. The pronounced volatility in the margin indicates sensitivity to changes in profitability and/or the cost of capital.