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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Hewlett Packard Enterprise Company (NYSE:HPE) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at Hewlett Packard Enterprise’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HPE here.
Does HPE Produce Much Cash Relative To Its Debt?
Over the past year, HPE has reduced its debt from US$14b to US$13b , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$3.8b to keep the business going. On top of this, HPE has produced cash from operations of US$3.2b in the last twelve months, leading to an operating cash to total debt ratio of 26%, meaning that HPE’s operating cash is sufficient to cover its debt.
Can HPE pay its short-term liabilities?
With current liabilities at US$16b, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$15b, leading to a current ratio of 0.94x. The current ratio is calculated by dividing current assets by current liabilities.
Is HPE’s debt level acceptable?
With a debt-to-equity ratio of 68%, HPE can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For HPE, the ratio of 4.88x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as HPE is a safe investment.
HPE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven't considered other factors such as how HPE has been performing in the past. You should continue to research Hewlett Packard Enterprise to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HPE’s future growth? Take a look at our free research report of analyst consensus for HPE’s outlook.
- Valuation: What is HPE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HPE is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.