Hewlett-Packard Company is considered to be the world largest producer of infrastructures related to information technology. These IT infrastructures involve such products as software, IT services and solutions which are provided to both individuals as well as organizations irrespective of their sizes. In the effort to cut-down on competition, the company has embarked on deploying both low-cost provider and product differentiation strategies. In the low cost provider strategy, the company has ensured that the prices for its products are availed to consumers at an affordable price. These products are manufactured at a higher-quality-level and sold to potential consumers at a price which match the aforesaid quality (Malone, 2007).
In product differentiation, the company has embarked on producing a substantial volume of such products as commercial PCs, Consumer PCs and Work-stations. Furthermore, the Hewlett Packard provides vast levels of services like consultation, outsourcing as along with technological services which constitutes business process domains. Product differentiation strategy as a methodology for cutting down on competition ensures that the company remains relevant in the sector in terms of products and accessories (Iwatani, 2011).
Accounting Analysis: The Summary of Significant Accounting Practices
Principles of Consolidation: in the Consolidated Financial Statements of the company, both the accounts of the wholly and partially owned subsidiaries are represented fairly. The Hewlett Packard has also skipped the capacity to conduct significant influence on those companies which it holds a controlling ability as required in the equity methodology. In the effort to maintain substantial levels of privacy, HP has reduced its inter-company accounts as well as trade transactions (Hewlett Packard, 2010).
Reclassification and Segment Reorganization.
In the effort to incorporate its business operational structures to the unique manner of financial reporting, the company has embarked on significant reorganizational model. It should be noted that the reorganizational model showcases fairly immense repositioning together with shifts in revenues between different departments of the firm (Hewlett Packard, 2010).
Furthermore, HP has redesigned its presentation models of the Cash Flows to allow for easier visibility as well as comparability for the purpose of potential shareholders.
Uses of Estimates.
Hewlett Packard management has embarked on deploying relevant and reliable estimates as well as assumptions which concur with the United States GAAPs. These estimates are well-structured in order to provide a fair representation of the Consolidated Financial Statements. Notes are also provided to ensure that users of financial statements comprehend to the fact that actual results could significantly differ from the aforementioned estimates (Hewlett Packard, 2010).
The company ensures that its trading activities which generate revenue are only recognized whenever there is existence of sales deal, delivery prospects, rendering of services as well as when collection of products is guaranteed wholly. Both software and products are represented in the consolidated financial statements at their respective fair values. In the effort to minimize the possibility of absurd revenue recognition, Hewlett Packard eliminates the option of reporting transactions to wrong accounts through exercising much care on such accounting facets as potential consumer credit background, consumer deals as well as the period in days which the transactions skips the due dates agreed upon initially (Hewlett Packard, 2010).
I) Return on Assets= Profit before interest and tax/Average Total Assets
= 0.075 * 100 %, 7.5 %
= 0.092 * 100 %, 9.2 %
II) Return on Equity= Net Profit/Average Ordinary Equity
III) Net Profit Margin= Net Profit/Net Sales
2011= 7,074/ 127,245
= 0.056 * 100 %, 5.6 %
2010= 8,671/ 126,033
= 0.069 * 100 %, 6.9 %
IV) Gross Profit Margin = Gross Profit/ Sales or Revenue
2011= 9,677/ 127,245
= 0.076 * 100 %, 7.6 %
2010= 11,479/ 126,033
= 0.91 * 100 %, 9.1 %
I) Current Ratio= Total Assets/Total Liabilities
II) Quick Ratio = (Total Current Assets-Inventory)/Total Current Liabilities
= 0.86: 1
= 0.97: 1
III) Cash Flow Ratio= Net Cash flows from Operating activities/Total Current Liabilities
2011 = 12,639/50,442
I) Asset Turnover= Sales or Revenue/Total Assets
= 1.01 times
= 0.98 times
II) Inventory Turnover= (Average Inventory * 365)/ COGS
= 28 days
= 24 days
III) Times debtors turnover= Net Sales/ Average Accounts Receivables
2011=127,245/ 18,224 2010=126,033/18,481
= 6.98 times = 6.82 times
I) Debt To Equity= Total Liabilities/ Total Equity
2011= 90,513/ 39,004 2010= 83,722/ 40,781
= 2.32 * 100 % = 2.05 * 100 %
= 232 % = 205 %
II) Debt Ratio= Total Liabilities/ Total Assets
2011=90,513/129,517 2010= 83,722/124,503
= 0.699* 100 %, 699 % =0.672 *100 %, 672 %
I) Operating cash flow per share = ( net cash flows from operating activities- preference dividends/ weighted average no of ordinary shares)
2011= (12,639-0)/ 20 2010= (11,922-0)/22
= $ 631.95 = $ 541.91
II) Earnings per share= Profit for shareholders/number of ordinary shares
2011=7,074/ 20 2010= 8,671/22
= $ 353.7 = $ 394.1
III) Price / Earnings Ratio= Current Market Price/ Earnings per share
2011= 14.41/ 353.7 2010= 14.41/394.1
= $ 0.041 = $ 0.037
There is a significant drop of the Return on Assets ratio from 9.2 % in 2010 to 7.5 % in 2011. The assumption derived from this drop is that the company is utilizing most of its assets in order to post profits. This is not a positive attribute since with time the amount of profits derived from such assets will decrease over time resulting in consumption of assets wholly.
The Return on Equity ratio drops from 394.14 % in 2010 to 353.7 in 2011. This drop is assumed to be as a result of increased consumption of the amounts of shareholders equity in the effort to record profits. This phenomenon might lead to full consumption of the assets altogether.
Net Profit Margins reduces from 6.9 % in 2010 to 5.6 % in 2011. This reduction points the assumption that the company’s ability to translate a substantial volume of sale into immense profits is reducing. This scenario represents the diminishing inability of the company to attract potential customers needed for the translation process.
There is a slightly insignificant increase in the Current Ratio of the company from 1.43:1 in 2010 to 1.49 in 2011 financial period. This insignificant increment is assumed to reflect a slight increase in the volume of assets utilized in respect to meeting the obligations of the firm. It also means that the HP is trying to widen the gap between assets held to its present liabilities portfolio.
The Quick Ratio of the company slightly reduces from 0.97: 1 in 2010 to 0.86:1 in 2011. A company with normal quick ratios is supposed to be of 1:1 ratio. Therefore, these lower scores of the ratio are assumed to portray the fact that the Hewlett Packard is incapacitated in terms of its operating activities as a whole.
The Cash Flow Ratio is also perceived to be reducing slightly from a ratio of 0.251:1 in 2010 to 0.241:1 in 2011. This slight change in the ratios is significantly enough to influence investment decisions. The main assumption which can be derived from this change is that the firm’s capacity to translate revenue from operating activities to pay for its obligation is diminishing over time.
There is a slight improvement in the Asset Turnover Ratio from a ratio of 0.98 times in 2010 to 1.01 in 2011. In financial analysis, the ratio is used to establish the capacity of a firm’s assets placed in crucial position which can be translated into sales revenue. In this case, this capacity is perceived to be improving although at an insignificant rate.
Inventory Turnover Ratio in days is perceived as having increased from a period of 24 days in 2010 to 28 days in 2011. The four days difference between these ratios is significant enough to affect the normal operations of the firm in a manner through which inventories are translated to sales revenue. Usually, a firm which operates at an efficient platform possesses a shorter inventory period, thus, in this case, this period is perceived to be increasing.
The Debt Ratio of the company increases from 672 % in 2010 to 699 % in 2011. In this case, there is 27 % difference between these ratios, therefore, it is safe to indicate that the HP’s liabilities are slowly catching up with the assets and in the near future, possibilities of these assets being consumed to pay for its obligations cannot be ruled out. This is a negative financial matter since it depicts the possibility of the company to utilize its assets in order to meet its financial obligations as an immense threat to the Going–Concern concept.
There is an insignificant increment in the price/earnings ratio from $ 0.037 in 2010 to $ 0.041 in 2011. This increment is insignificant to influence investors into purchasing the stocks of Hewlett Packard Company.
To sum up, the financial analysis conducted seems to reproduce insignificant negative changes in the operations of the firm. There are mixed results since in some cases the company is depicted as having increased its operational flow of activities while in other case reduction in its capacity to posts relevant profits is witnessed.
The choice on whether or not to invest in a particular stock lies solely on individual investors, since stock market investments is considered to be a matter of accepting to engage on the risks involved with these forms of investments. However, most investors use financial analysis tools to decide on whether or not to invest in stocks. In our case, I would not advise to invest in the Stocks of Hewlett Packard because of the following reasons:
I) There is substantial evidence to believe that the company has reached its optimal operating level: HP is experiencing redundant growth and there is no possibility of its shares to attract potential investors.
II) If I choose to invest in the shares of the Company, then there is a possibility that the equity I put in inform of shares is going to be used to meet the company’s financial obligations. In that case, it will be impossible to expect reliable dividends from the firms’ operations. This scenario is clearly depicted by the significant reduction in the debt to equity ratio.
III) According to Forbes.Com (2012), the statistical analysis of both the accounting and governance risk facets assumes scores of fewer than 50 %. This is a true indication of a possibility of class action court cases as well as misrepresentation of the financial reports in respect to equity performances. This is a negative facet which can prevent potential investments since it negatively affects Hewlett Packard operations.