152. Hewlett-Packard Company (HP) designs, manufactures, and services computers and related products for a variety of industries worldwide. Economic characteristics of the computer industry include:
1.
High rate of research and development spending and technological change.
2.
Increasing use of outsourcing for the manufacture of computer components.
3.
Reduced levels of product differentiation on computer hardware, with companies attempting to differentiate themselves on software, networking capabilities, service, and other capabilities.
4.
Low financial leverage.
HP maintains a major presence in the engineering workstation segment of the market. This segment requires high quality graphics and networking capabilities to assist in computer-aided design of construction and similar projects. HP uses its own staff to sell and service these computers. An increasing proportion of the sales mix of HP in recent years has come from its LaserJet and DeskJet printers as opposed to its engineering workstations. HP distributes its printers primarily through independent distributors and retailers.Below are the various financial ratios for HP for Year 3 to Year 5.
Exhibit 4Financial Statement Ratios for Hewlett-Packard
Year 3
Year 4
Year 5
Rate of Return on Assets (ROA)
8.0%
9.1%
11.4%
Profit Margin for ROA (before interest effects)
6.2%
6.8%
8.1%
Total Assets Turnover
1.3
1.3
1.4
Rate of Return on Common Shareholders’ Equity (ROCE)
14.7%
17.3%
22.4%
Profit Margin for ROCE (after interest effects)
5.8%
6.4%
7.7%
Leverage Ratio
2.0
2.0
2.1
Cost of Goods Sold/Sales
59.7%
62.0%
63.5%
Selling & Admin. Expense/Sales
22.4%
19.7%
17.9%
Research & Development Expense/Sales
8.7%
8.1%
7.3%
Income Tax Expense (excluding tax effects of interest)/Sales
3.2%
3.5%
4.0%
Accounts Receivable Turnover
5.3
5.4
5.4
Days Accounts Receivable Outstanding
69
68
68
Inventory Turnover
3.9
3.9
3.9
Days Inventory Held
94
94
94
Plant Asset Turnover
4.5
5.2
6.2
Current Ratio
1.5
1.5
1.5
Quick Ratio
.9
.9
.9
Accounts Payable Turnover
12.2
11.8
11.1
Days Accounts Payable Outstanding
30
31
33
Cash Flow from Operations/Average
Current Liabilities
19.1%
29.5%
16.8%
Long-term Debt Ratio
13.1%
9.5%
9.3%
Debt-Equity Ratio
51.0%
50.5%
52.6%
Cash Flow from Operations/Average
Total Liabilities
14.7%
23.4%
13.9%
Times Interest Charges Earned
15.7
16.6
18.6
Sales Growth Rate
23.8%
23.0%
26.1%
Capital Expenditures Growth Rate
40.2%
(18.8%)
35.3%
Required:Each of these questions can be answered in two to three sentences.
153. Financial statement analysis often assess the profitability and risk of an organization. Specific ratios target each of these areas to answer questions such as “How profitable is this company?” or “How risky (liquid) is an investment in this company?”Required:
a.
Discuss three ratios that address how profitable a company might be.
b.
Discuss three ratios that address how risky (liquid) a company might be.
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