Hewlett Packard Enterprise Co. (NYSE:HPE)

The financial data indicates varying performance trends over the six-year period ending October 31, 2023. Several key metrics such as net operating profit after taxes (NOPAT), cost of capital, invested capital, and economic profit provide insights into operational efficiency, capital utilization, and value creation.

Net Operating Profit After Taxes (NOPAT)

NOPAT shows significant fluctuations, beginning at $2,346 million in 2018 and increasing slightly to $2,514 million in 2019. However, 2020 experiences a dramatic decline to $77 million, indicating a sharp downturn in operating profitability. This is followed by a strong recovery in 2021, with NOPAT rising to $3,529 million, the highest in the period observed. The subsequent two years display volatility again, with NOPAT falling to $818 million in 2022 before climbing back to $2,752 million in 2023.

Cost of Capital

The cost of capital shows a trend of gradual increase over the years. Starting at 10.95% in 2018, there is a slight reduction to 10.49% in 2019 and a further dip to 9.34% in 2020, coinciding with the lowest profit year. From 2021 onwards, the cost of capital steadily rises, reaching 11.97% by 2023. This upward trend may reflect changes in market risk, interest rates, or company-specific factors affecting the expected return on capital.

Invested Capital

Invested capital remains relatively stable throughout the period, ranging from $41,543 million to $44,277 million. There is a gradual decline from $44,277 million in 2018 to $41,543 million in 2022, followed by a slight increase to $43,254 million in 2023. This stability suggests limited changes in the company's asset base or capital structure over the years.

Economic Profit

Economic profit consistently shows negative values across all years, indicating that the company's returns did not exceed its cost of capital during the entire period. The economic loss narrows somewhat from -$2,501 million in 2018 to -$2,029 million in 2019. However, it worsens significantly in 2020, reaching -$3,888 million, concurrent with the steep decline in NOPAT and the lowest cost of capital. The economic profit improves in 2021 to -$1,023 million but again deteriorates in 2022 and 2023, with losses of -$3,961 million and -$2,424 million, respectively. This reflects ongoing challenges in creating shareholder value despite fluctuating operational profits.

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.

Economic Profit

The economic profit has fluctuated significantly over the observed period from October 31, 2018, to October 31, 2023. It started with a substantial negative value of -2501 million USD in 2018, improved to a less negative level in 2019 at -2029 million USD, but deteriorated sharply in 2020 reaching -3888 million USD. The following year, 2021, showed a notable recovery with economic profit climbing to -1023 million USD, the least negative in the timeframe. However, this improvement was short-lived as the figure plummeted again in 2022 to -3961 million USD and improved somewhat in 2023 to -2424 million USD. This pattern indicates high volatility and persistent negative economic profit, suggesting challenges in generating returns above the cost of capital.

Invested Capital

Invested capital has shown a gradual declining trend between 2018 and 2022, decreasing from 44,277 million USD in 2018 to 41,543 million USD in 2022. In 2023, there was a modest increase to 43,254 million USD. Overall, this reflects a relatively stable investment base with slight contraction followed by a partial rebound, indicating steady but cautious capital deployment during the period.

Economic Spread Ratio

The economic spread ratio remained consistently negative throughout the period, ranging from -2.39% to -9.54%. The ratio mirrored the fluctuations in economic profit, with a notable deepening of negative spread in 2020 (-9.16%) and again in 2022 (-9.54%). The most favorable point was observed in 2021 at -2.39%, aligning with the temporary improvement in economic profit. The persistence of negative economic spread suggests that returns on invested capital have consistently fallen short of the cost of capital, highlighting ongoing difficulties in value creation.

Adjusted Net Revenue

The adjusted net revenue exhibited a general downward trend from 2018 to 2020, declining from approximately $31.06 billion to $27.21 billion. However, from 2021 onward, there was a slight recovery with revenues increasing steadily to $29.67 billion by 2023, though the level remained below that of 2018.

Economic Profit

The economic profit showed consistently negative values throughout the period analyzed, indicating a sustained economic loss. The figure fluctuated significantly, with the smallest loss recorded in 2021 at approximately -$1.02 billion. In contrast, 2020 and 2022 saw more substantial losses, with economic profit declining to nearly -$3.89 billion and -$3.96 billion respectively. By 2023, the loss decreased compared to the previous two years but remained markedly negative at approximately -$2.42 billion.

Economic Profit Margin

The economic profit margin followed a trend similar to economic profit, consistently negative across all years. The margin improved somewhat in 2021, reaching around -3.66%, which was the least negative during the period. Nonetheless, the margin worsened again in 2022 to nearly -13.89%, reflecting decreased profitability relative to revenue. In 2023, the margin improved to about -8.17%, indicating some recovery but remaining significantly below zero.

Overall Trends and Insights

The analyzed financial data indicate persistent challenges in achieving economic profitability, as evidenced by the negative economic profit and margin throughout the observed years. Despite a moderate recovery in adjusted net revenue from 2021, economic profit volatility suggests that the company faced difficulties in converting revenues into positive economic returns. The year 2021 represents a relative peak in economic performance, although this was not sustained in the following year. The improvement in economic profit margin in 2023 compared to 2022 is a positive sign but does not yet represent a return to profitability. These patterns suggest an ongoing need for strategic focus on improving operational efficiency and economic value creation.