What financial indicators indicate a company is maturing or in decline? Potentially declining businesses often exhibit two trends: a declining return on invested capital (ROCE) and a declining invested capital base. This indicates that a company is generating less profit from its investments and its total assets are declining. With that in mind, a quick glance at Hewlett Packard Enterprise (NYSE:HPE) reveals some signs that the company is struggling, so let’s investigate.
Understanding Return on Invested Capital (ROCE)
For those unfamiliar, ROCE is a metric that assesses how much pre-tax profit (as a percentage) a company earned on the capital invested in its business. For Hewlett Packard Enterprise, the formula for calculating this metric is:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.064 = $2.3B ÷ ($60B – $24B) (Based on the trailing twelve months to April 2024).
So Hewlett Packard Enterprise has an ROCE of 6.4%. In absolute terms, this is a low return, below the Technology industry average of 8.3%.
Read our latest analysis for Hewlett Packard Enterprise
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In the chart above we’ve measured Hewlett Packard Enterprise’s prior ROCE against its previous performance, but the future is arguably more important: if you want to see what analysts are predicting going forward you can take a look at this free analyst report on Hewlett Packard Enterprise.
What can we learn from Hewlett Packard Enterprise’s ROCE trends?
There are reasons to be cautious about Hewlett Packard Enterprise given that its returns are trending downwards. Specifically, five years ago its ROCE was 8.0% but has declined significantly since then. In addition to that, it is also worth noting that the amount of capital employed within the business has remained relatively stable. Companies that exhibit these characteristics tend not to be in a state of contraction, but are mature and may be facing pressure on margins from competition. Therefore, these trends are not usually conducive to creating multi-baggers, so we cannot expect Hewlett Packard Enterprise to become a multi-bagger if the situation continues as it is.
Our take on Hewlett Packard Enterprise’s ROCE
After all, a trend towards lower returns on the same amount of capital is not usually indicative of a growth stock. But since this stock has returned 73% to shareholders over the past five years, investors may be hoping the trend will turn for the better. Either way, we’re not too comfortable with the fundamentals, so we’ll avoid this stock for now.
The story continues
One other thing to note is that we’ve discovered 3 warning signs with Hewlett Packard Enterprise , and understanding them should be part of your investment process.
If you’d like to find solid companies with profitable returns, check out this free list of companies with strong balance sheets and high return on equity.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
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