Yahoo Finance Is Hewlett Packard Enterprise Company’s (NYSE:HPE) 7.7% Return On Capital Employed Good News?
Today we'll look at Hewlett Packard Enterprise Company (NYSE:HPE) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Hewlett Packard Enterprise:
0.077 = US$2.6b ÷ (US$52b - US$19b) (Based on the trailing twelve months to January 2020.)
Therefore, Hewlett Packard Enterprise has an ROCE of 7.7%.
See our latest analysis for Hewlett Packard Enterprise
Is Hewlett Packard Enterprise's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Hewlett Packard Enterprise's ROCE is around the 8.7% average reported by the Tech industry. Setting aside the industry comparison for now, Hewlett Packard Enterprise's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
In our analysis, Hewlett Packard Enterprise's ROCE appears to be 7.7%, compared to 3 years ago, when its ROCE was 4.6%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Hewlett Packard Enterprise's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hewlett Packard Enterprise.
Do Hewlett Packard Enterprise's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Hewlett Packard Enterprise has current liabilities of US$19b and total assets of US$52b. As a result, its current liabilities are equal to approximately 36% of its total assets. Hewlett Packard Enterprise's middling level of current liabilities have the effect of boosting its ROCE a bit.
Our Take On Hewlett Packard Enterprise's ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Hewlett Packard Enterprise. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
