Question : 152. Hewlett-Packard Company (HP) designs, manufactures, and services computers and related : 1230597

 

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.