There are a number of reasons that attract investors towards large-cap companies such as Hewlett Packard Enterprise Company (NYSE:HPE), with a market cap of US$19b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to their continued success lies in its financial health. Today we will look at Hewlett Packard Enterprise’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HPE here.
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How does HPE’s operating cash flow stack up against its debt?
HPE’s debt levels have fallen from US$14b to US$12b over the last 12 months , which also accounts for long term debt. With this debt payback, HPE currently has US$4.9b remaining in cash and short-term investments for investing into the business. On top of this, HPE has generated cash from operations of US$3.0b over the same time period, resulting in an operating cash to total debt ratio of 24%, indicating that HPE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HPE’s case, it is able to generate 0.24x cash from its debt capital.
Can HPE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$17b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1x. Usually, for Tech companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can HPE service its debt comfortably?
With a debt-to-equity ratio of 57%, HPE can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether HPE is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HPE, the ratio of 4.54x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like HPE are considered a risk-averse investment.
At its current level of cash flow coverage, HPE has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure HPE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Hewlett Packard Enterprise to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HPE’s future growth? Take a look at our free research report of analyst consensus for HPE’s outlook.
- Valuation: What is HPE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HPE is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.