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Hewlett Packard Enterprise vs. Cisco Systems

Introduction

Hewlett Packard Enterprise (HPE) is a leading information technology company located in the US and operating globally. The company was formed in 2015 after the split of The Hewlett-Packard Company. It manufacturers personal computers, printers, servers, and other IT systems and equipment. HPE is also providing cloud-based solutions to its customers. The company’s revenue was $28.677 billion, and its net income was $1.049 billion in 2019. Its total assets were $51.803 billion in 2019, and its market capitalization is $11.667 billion (HPE, 2020). The purpose of this analysis paper is to perform the financial ratio analysis of HPE by calculating the values of four key ratios and comparing them to those of its competitor, Cisco Systems (Cisco). The calculation of financial ratios is based on the last three years (2017-19) and their averages.

Analysis

Liquidity & Efficiency

The current ratio is a useful measure of the company’s ability to settle its current liabilities by using its current assets (Anwar, Marliani, & Gunawan, 2016). This ratio uses current assets value, including inventory, which is not a highly liquid asset. The following table provides values of the current ratio of HPE and Cisco and their averages.

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Table 1. Current Ratio.

2019 2018 2017 Average
HPE 0.79 1.00 1.13 0.98
Cisco 1.51 2.29 3.03 2.28

Table 1 indicates that the current ratio value of HPE declined in the last three years, and its value was less than 1 in 2019. On the other hand, Cisco had a stronger liquidity position as its ratio value was more than 1, and its average was 2.28 as compared to 0.98 of HPE.

Solvency

The company’s solvency measures the proportion of its assets financed by debt (Anwar et al., 2016). Although low solvency is not a positive indicator, the company could use debt to finance its business plans that would generate high positive returns in the future (Pilbeam, 2018). The following table provides values of the debt-to-equity ratio of HPE and Cisco and their averages.

Table 2. Debt-to-Equity Ratio.

2019 2018 2017 Average
HPE 0.81 0.57 0.66 0.68
Cisco 0.73 0.59 0.78 0.70

Table 2 shows that the debt-to-equity ratio value of HPE increased in the last three years, which means that its short and long-term borrowings increased (HPE, 2020). On the other hand, Cisco’s ratio value declined significantly in 2018 and then increased in 2019 (Cisco, 2020). However, it was lower than that of HPE. This implies that Cisco had a stronger solvency position than HPE.

Profitability

A business must generate growing profits every year to keep shareholders confident about their investments in its equity. The profit margin is the ratio of the firm’s net income to total sales, which determines its ability to generate income for shareholders. The following table provides values of the profit margin of HPE and Cisco and their averages.

Table 3. Profit Margin.

2019 2018 2017 Average
HPE 3.66% 6.28% 1.21% 3.71%
Cisco 29.79% 0.30% 26.91% 19.00%

Table 3 shows that the profit margin of HPE increased in 2018 and then declined in 2019. The company had weak profit margins in the last three years, which suggests that it operated in the low-price computer market and was also unable to manage its costs and expenses effectively (HPE, 2020). Cisco’s ratio value declined significantly in 2018 and then increased in 2019. Furthermore, its ratio value was much higher than that of HPE. This implies that Cisco had a stronger profitability position than HPE.

Another profitability ratio calculated in this paper is Return on Total Assets (ROA), which measures net income generated from the effective use of the firm’s assets. The following table provides values of the ROA of HPE and Cisco and their average.

Table 4. Return on Total Assets.

2019 2018 2017 Average
HPE 2.02% 3.44% 0.56% 2.01%
Cisco 11.88% 0.10% 7.40% 6.46%

Table 4 indicates that the ROA value of HPE increased in 2019, but declined in 2019. The low return on assets means that the company was not managing its assets efficiently to generate a high return (HPE, 2020). Cisco’s ratio value declined significantly in 2018 and then increased in 2019. HPE’s average value was just 2.01%, which is less than that of Cisco. This implies that Cisco had stronger profitability than HPE.

Market Prospects

Price-Earnings (P/E) ratio indicates the sentiments of investors about the firm’s equity. If there is a positive view of the company, then investors would be willing to pay a higher price for its shares, which implies that the P/E ratio would have a higher value. The following table provides values of the return on total assets of HPE and Cisco and their average.

Table 5. Price-Earnings Ratio.

2019 2018 2017 Average
HPE 20.32 11.29 60.52 30.71
Cisco 20.97 2006.00 15.15 680.71

Table 2 shows that the P/E multiples of both companies were almost equal in 2019, which suggests that there were indifferent to investors. However, there were significant fluctuations in the ratio value of HPE and Cisco in the last three years due to changes in their net income.

Conclusion

The analysis shows that HPE’s financial performance was weaker than its competitor, Cisco. There were indications of problems faced by the company based on the significant, unfavorable changes in its ratio values. It is recommended that investors should sell HPE’s shares and invest in Cisco.

References

Anwar, K., Marliani, G., & Gunawan, C. (2016). Financial ratio analysis for increasing the financial performance of the company at Bank Bukopin. International Journal of Sciences: Basic and Applied Research (IJSBAR), 29(2), 231-236.

Cisco. (2020). SEC filings. Cisco Systems. Web.

HPE. (2020). SEC filings. Hewlett Packard Enterprise. Web.

Pilbeam, K. (2018). Finance & financial markets (4th ed.). Macmillan International Higher Education.

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