Declining Stock and Decent Financials: Is The Market Wrong About Hewlett Packard Enterprise Company (NYSE:HPE)?

With its stock down 4.6% over the past month, it is easy to disregard Hewlett Packard Enterprise (NYSE:HPE). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Hewlett Packard Enterprise's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Hewlett Packard Enterprise

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hewlett Packard Enterprise is:

9.5% = US$2.0b ÷ US$21b (Based on the trailing twelve months to October 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.10.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Hewlett Packard Enterprise's Earnings Growth And 9.5% ROE

When you first look at it, Hewlett Packard Enterprise's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.5%. Moreover, we are quite pleased to see that Hewlett Packard Enterprise's net income grew significantly at a rate of 24% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Hewlett Packard Enterprise's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is HPE fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Hewlett Packard Enterprise Making Efficient Use Of Its Profits?

Hewlett Packard Enterprise's three-year median payout ratio is a pretty moderate 31%, meaning the company retains 69% of its income. So it seems that Hewlett Packard Enterprise is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Hewlett Packard Enterprise is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. Accordingly, forecasts suggest that Hewlett Packard Enterprise's future ROE will be 11% which is again, similar to the current ROE.

Summary

In total, it does look like Hewlett Packard Enterprise has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.