Hewlett-Packard Financial Ratio Analysis: Profitability & Risk
This paper presents a detailed financial ratio analysis of Hewlett-Packard (HP), examining the company's performance across two broad categories: profitability ratios and risk ratios. Using industry averages from MSN Moneycentral as benchmarks, the paper evaluates HP's gross margin, net margin, return on assets, return on equity, and return on capital, finding consistent underperformance relative to industry peers. The risk analysis covers short-term liquidity, working capital activity ratios, and long-term solvency measures. The paper concludes with a review of material changes on HP's financial statements, attributing much of the company's declining performance to the economic downturn and its corporate customer base, while noting that some negative trends predated the recession.
- Profitability Ratio Analysis: HP's margin ratios compared to industry averages
- Return Ratios and Equity Structure: ROA, ROE, and HP's capital structure analysis
- Short-Term Liquidity and Working Capital Ratios: Current ratio, quick ratio, and receivables turnover
- Long-Term Solvency Risk: Debt ratio trends and times interest earned
- Material Changes on Financial Statements: Significant line-item shifts on HP's statements
- Conclusion and Stability Assessment: HP's overall financial stability and outlook
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What makes this paper effective
- Consistently benchmarks HP's ratios against industry averages, giving every data point meaningful context rather than presenting figures in isolation.
- Uses multi-year trend data (five-year averages and year-by-year comparisons) to distinguish temporary from structural performance issues.
- Acknowledges confounding factors — such as the economic downturn and HP's legacy cost structure — without using them as blanket excuses, maintaining analytical balance.
Key academic technique demonstrated
The paper demonstrates disaggregation analysis: rather than simply reporting that return on assets declined, it breaks the decline into its component drivers — falling profit margin and asset turnover — to isolate the root causes. This technique shows how a single ratio can mask multiple underlying issues and is a hallmark of rigorous financial analysis.
Structure breakdown
The paper is organized into three functional blocks. The first covers profitability (margin ratios, then return ratios), the second covers risk (short-term liquidity and working capital, then long-term solvency), and the third examines material changes on HP's financial statements. Each block moves from ratio presentation to trend analysis to interpretation, creating a consistent and readable analytical rhythm throughout.
Profitability Ratio Analysis
The industry in which Hewlett-Packard competes, according to MSN Moneycentral, is "diversified computer systems," and contains most of the major computer system manufacturers listed on the Nasdaq and the NYSE. This website also provides industry averages for a range of financial ratios. There are a number of different profitability ratios that can be analyzed. The first major set consists of the margin ratios, while the second major set consists of the return ratios.
HP's gross margin is 23.5%, compared with an industry average of 39.2%. This lag has been consistent over the past five years, with HP recording a five-year average gross margin of 23.8% and the industry recording a five-year average gross margin of 37.8%. While the industry has become slightly more profitable in recent years, HP has not. There has been only a slight decrease in the gross margin at HP over the course of the past five years. Four years ago it was 24.1%, so the decline is noticeable but not catastrophic.
The net margin for HP is 7.0%, compared with an industry average of 12.2%. The five-year average net margin for HP is 6.9%, compared with 10.6% for the industry. In this case, HP's average has improved only marginally while the industry has seen its net margins improve to a larger degree. Despite the slight decline in pricing power evidenced by the shift in gross margin, HP has improved its operating and net margins over the same time period. Operating margin has increased steadily from 7.1% five years ago to 9.1% at the end of the last fiscal year. The net margin has increased from 6.7% to 6.95% over that same period. This indicates that HP has been able to adjust its cost structure to meet the demands of its current operating environment. The company's selling, general, and administrative expense has fluctuated, but HP has steadily reduced its research and development expenditures over the past five years. More recent figures, despite being better for operating and net margin, were actually harmed by a writedown of $1.437 billion in fiscal 2010.
Works Cited
MSN Moneycentral: HPQ. (2011). Retrieved February 12, 2011, from
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