What financial metrics can indicate to us that a company is maturing or even in decline? A business that’s potentially in decline often shows two trends, a return on capital employed (ROCE) that’s declining, and a base of capital employed that’s also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Hewlett Packard Enterprise (NYSE:HPE), we’ve spotted some signs that it could be struggling, so let’s investigate.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hewlett Packard Enterprise, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.064 = US$2.3b ÷ (US$60b – US$24b) (Based on the trailing twelve months to April 2024).
So, Hewlett Packard Enterprise has an ROCE of 6.4%. In absolute terms, that’s a low return and it also under-performs the Tech industry average of 8.3%.
Check out our latest analysis for Hewlett Packard Enterprise
In the above chart we have measured Hewlett Packard Enterprise’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Hewlett Packard Enterprise .
What Can We Tell From Hewlett Packard Enterprise’s ROCE Trend?
There is reason to be cautious about Hewlett Packard Enterprise, given the returns are trending downwards. To be more specific, the ROCE was 8.0% five years ago, but since then it has dropped noticeably. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Hewlett Packard Enterprise becoming one if things continue as they have.
Our Take On Hewlett Packard Enterprise’s ROCE
In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. However the stock has delivered a 73% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.
One more thing to note, we’ve identified 3 warning signs with Hewlett Packard Enterprise and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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