hewlett-packard company financial performance analysis

Introduction

Hewlett-Packard Company is the leading American producer of computer and software services and the major brand in the history of computer and computer-based products. It was split in 2015 into two corporations – HP Inc. and Hewlett Packard Enterprise (Yost 2017). The headquarters of the corporation is located in California. It was founded by David Packard and William R. Hewlett in 1939. The company offers technologies, products, services and solutions to individual customers, medium and small business firms, including consumers in the health, government and teaching sectors. It carries out operations via 7 business segments, namely, enterprise services, personal systems, printing, HP financial facilities, software, Enterprise Group and Corporate Investments. The individual systems segment offers viable personal computers, workstations, PCs, calculators and other linked items for customer and commercial markets. The Enterprise Group segment offers storage, servers, technology and networking services. 

The mission of the company is to earn the respect and loyalty of customers by continuously offering the highest value and quality. It accomplishes sufficient profit to fund the growth, fetch value for the shareholders and accomplish its corporate objectives (Khalifa et al. 2016). Its vision statement is all about designing groundbreaking technologies with lasting impacts on society. The strategy of the company is engrossed on progressing its headship in personal systems and print, unsettling the industries with advance technologies wide across Graphics, Digital Manufacturing and 3D printing, and renovating the path it works to endure to maximize its cost structure (Loy et al. 2021). 

The main purpose of the document is to analyze the financial performance of the company and management philosophies, and pertinent accounting policies applicable to the company. 

Application of Theory to Practice 

Accounting policies and standards and their impact on financial and macro-environment 

Accounting policies are methods and principles that any company chooses to prepare the financial statements to offer a clear overall picture of the finances of the corporation. On the other hand, accounting standards are commanding standards for financial broadcasting and are a fundamental source of GAAP. These specify how the dealings and other events are to be identified, measured, accessible and released in financial statements (Weygandt et al. 2018). 

It has been analyzed that greater quality accounting standards are hypothetical to positively impact the reporting quality of the company and to be of higher value to the users of financial reports (Barth et al. 2017). Accounting policies essentially offer corporations the outline to report their financial reports, so the companies follow a consistent format all over. The corporations must make a complete disclosure of accounting policies being followed by them. These policies consist of discrete rules on how to reveal information to companies and investors that must conform with appropriate revelation requirements. By adequately mentioning to the investors which particular accounting policies, the company has followed, the investors tend to gain added confidence in the corporation and its various figures and statement can easily be compared with the financial reports of other corporations. 

The consolidated financial statements of HP are prepared as per the US GAAP that need management to undertake estimates, judgements and conventions that impact the reported sum of liabilities, assets, expenses and net proceeds and revelation of contingent obligations (HP annual report 2019). It is believed that accounting estimations employed and resulting figures are rational, however, actual outcomes might differ from such estimates. Making judgements and estimates regarding future events is inherently non-predictable and is subject to substantial reservations. HP identifies revenue when any influential evidence of the management exists, the delivery has happened or services have been extracted, the sales fee or price is static or determinable and collectability is sensibly assured. The HP company values inventory at lesser of market or cost. Cost is calculated with the help of standard cost that approaches actual cost on a first-in and first-out basis. 

Effectiveness of planning and execution strategy 

Planning and execution help the company in keeping track of the income, expenses and investments the company so that it can better manage its finances. The past year's financial statements are regarded as historical revenue. The numbers from past balance sheet can help the company in knowing where it has succeeded, and areas it improved or still have space to enhance (Langerwalter 2020). This financial planning offers the context necessary to assess the current situation and observe the areas where the company is succeeding or falling short. An effective financial plan makes the right estimates of the available and prospective funds. Plans are also made to make sure that funds are used in an effective way, making sure that fund surpluses and shortages are avoided. In addition, it also estimates the fund needs of distinct functional areas and assigns funds accordingly. It prevents extravagance and facilitates financial control. 

Ratio analysis and financial interpretation 

The liquidity position of the companies has been evaluated with the help of the current ratio and quick ratio. The current ratio of both companies has remained lower than 1 indicating that both HP and Lenovo do not have sufficient amount of current assets to pay off the current liabilities. Similarly, the quick ratio has also remained less than 1 showing an insufficiency of quick assets (HP annual report 2019: 2018). 

The net profit margin of HP has reduced from 9.11% in 2018 to 5.36% in 2019 indicating that the overall expenses of the company have increased in larger proportion as compared to the revenues. On the other hand, this ratio has been computed as negative for Lenovo in 2018 and then it increased to 1.29% in 2019 (Lenovo annual report 2019: 2018). Return on equity has substantially reduced in the case of HP from 8.03% to 3.77% due to a fall in net income. This indicates that HP is not making effective or optimum use of equity capital to produce significant returns. However, the competitor firm, Lenovo is undertaking substantial steps to restore its profitability position as its return on equity increased from -2.79% in 2018 to 16.04% in 2019. The major challenge for the computing and printer corporation, HP is that globally, the trend is increasingly mobile and shifting away from computers and printers. Moreover, in such contracting marketing, the competitive pricing environment is also acting as a daunting challenge. Overall, it can be claimed that Lenovo has performed better in terms of return on equity and HP is generating higher net profits. 

The inventory turnover ratio has slightly increased from 7.89 in 2018 to 8.30 in 2019 for HP and that of Lenovo increased from 10.31 to 12.71. A higher inventory turnover ratio at Lenovo indicates strong sales and a lower ratio at HP signifies weak sales. HP has sold off its complete inventory 8.30 times in the year while Lenovo has sold 12.71 times its entire inventory. This signifies that Lenovo is selling its inventory at a good rate and that it is efficiently managing its inventory (Sunjoko and Arilyn 2016). The asset turnover ratio has remained at almost sales for both companies 1.70. This signifies that both companies are well efficient in generating enough revenue for themselves. However, there is a need to undertake significant measures to derive efficient use of assets to derive higher revenue. Overall, it can be claimed that efficiency ratios have been computed better for Lenovo. 

The debt-to-equity ratio has slightly reduced for HP from 6.82 in 2018 to 5.72 in 2019. But then also, it is using a higher proportion of debt in its capital structure as compared to equity proportion. A higher proportion of debt leads to higher interest expenses which directly affect the profitability of the firm (Zuhroh 2019). On the other hand, Lenovo is making use of the lower proportion of debt in its capital structure as compared to equity. This signifies lower interest expenses. The debt ratio decreases from 15.28 in 2018 to 0.28 in 2019 in the case of HP showing that a lower proportion of debt has been used to fund the assets. Similarly, this ratio is computed as 0.18 showing the lower proportion of debt is used to fund the assets. 

The growth of sales in 2019 in the case of HP has shown 0.49% growth whereas in 2018, the sales increased by 12.33%. This signifies that sales have increased by a lower proportion in 2019. However, the sales growth for Lenovo has shown substantial growth of 12.54% in 2019 and 5.38% growth in 2018 (HP annual report 2019: 2018). The EPS growth in HP has indicated negative growth of 36.97% in 2019 while 2018 indicated 120% growth in EPS. Lenovo has indicated negative growth in EPS of 2% in 2019 and a 65.64% negative growth in 2018. The negative EPS growth rate indicates that the corporation is spending more money as compared to what it is earning. While the negative EPS indicates that the corporation is losing money, it does not essentially indicate that the company is not experiencing any growth. In order to grow, both companies are making investments in updated software, and tools and producing new gadgets that are in high demand by customers. 

Recommendations for future strategies 

The major challenge being encountered by HP is the industry competition that has raised to the point of decreasing the market share of HP over the past few years (Mclntyre and Ortiz 2016). The future growth plans of HP completely rely on hybrid work, a world where each individual has a PC, printing subscriptions and making use of 3D printing systems to build packaging as highly sustainable. Over 2/3^rd of the office, employees expect to work from home. This aligns with the approach that HP can take. The IT market of today is all regarding innovation and HP must plan to remain at the forefront of the market. It must place real cash behind such efforts, and increase its Research and Development expenses by approximately 10%. In connection to the debt proportion in its capital structure, it must reduce it to positively impact its profitability (Poulfelt et al. 2017). It must aim at developing highly direct supplier relationships and long-term contracts for critical commodities. It is significant so that one can orchestrate among suppliers in a highly effective manner. HP can optimize systems and consolidate them into 1 ERP system. The corporation must also leverage analytics and data science to maximize its supply chain. 

Literature review on budgeting practices 

Traditional budgets vs modern age kinds of budgeting techniques 

The budgeting procedure is a central component of management control structures, as it offers a system of planning, direction and control for management. Incremental budgeting is the traditional budgeting method wherein the budget is prepared by undertaking the budget of the present period or actual presentation as the base, with incremental amounts then being added to a new budget (Nwosu et al. 2020). It is intended to have various benefits like it takes less preparation time which direct to lowering the costs of preparation. It also averts conflict between departmental changes as a steady approach is acquired throughout the company. However, old-style budgets are inflexible and fixed. Once organized, such budgets cannot be altered. Several factors such as the new participant in the market, changes in policy, changes in market situations, etc. might take place, yet the budget remains identical. Traditional budgets are formulated by top administration by undertaking just a few variations to last year's budget. Thus, it endorses bureaucracy. So other individuals in the company might feel unnoticed. It acts against the inspiration of personnel of the company. The formation of these budgets relies unreasonably on previous year budgets that can show fatal at times. If past budgets are organized inaccurately, the same would be agreed to the present year's budget and various years to come (Popesko et al. 2017). It will direct to the grounding of improper budgets for the company that can damage the progress of the corporation in the long run. 

The modern methods of budgeting include zero-based budgeting, value proposition accounting, activity-based planning and many others. Zero-based budgeting is a methodology that starts fresh. It begins by presuming that all departmental budgets are without any base and also should be restored from scratch every financial period. Every division needs to plan and also validate each dollar invested to construct the spending from the ground up (Coyte et al. 2022). This budgeting method ultimately permits firm leaders to focus on their top objectives and also prevent unnecessary costs. It also helps in avoiding misallocation of sources as it is extremely easy to see where one can save and invest at a granular degree. 

Moreover, activity-based budgeting is the approach that links the activities to cost. It enables businesses to see where their funds are being spent and how it is being used to produce revenue (Cidav et al. 2020). It is specifically helpful for firms that have a complex array of goods and services. It can help the firm in setting better financial objectives and monitoring their progress and undertaking necessary adjustments. However, this approach can be time-consuming and resource intensive to execute. It can be complex and might need specialized training for those that will be responsible for creating and managing the budget. 

Value proposition budgeting is the allocation of funds particularly to make and sustain the value proposition. This budget is used to fund activities like product development, market research and marketing campaigns (Barr et al. 2016). The objective of a value proposition budget is to build a return on investment by producing more revenue than the cost of a value proposition. It acts as the tool that enables firms to prioritize their spending on the value proposition. It makes sure that resources are assigned to areas that will have the largest impact on the goals of the company. 

Budgeting tactics to link performance management to enhanced operational planning and management approaches 

Rolling forecasts are helpful in updating the budget estimations, instead of relying on a single annual forecast. Rolling forecasts is the budgeting approach wherein the budget is constantly updated on the basis of market condition and actual performance (Henttu-Aho 2018). It enables firms to adjust their budget estimations throughout the year instead of relying on a single annual forecast. As an outcome of this, rolling forecasts allow firms to respond more to market changes and undertake better-informed decisions. 

Driver-based budgeting is the budgeting approach wherein appropriations are made on the basis of key drivers of expenses and income. It enables firms to focus on the most critical aspects that drive their financial performance and to assign funds accordingly.  Furthermore, flexible budgeting is the budgeting approach wherein budgets are adjusted on the basis of actual performance and market conditions. It enables firms to respond quickly towards market changes and undertake better decisions (Menon and Thomas 2021). 

Scenario planning is the budgeting technique wherein manifold budget estimates are developed on the basis of other potential business scenarios. It enables firms to be prepared for distinct possible outcomes. Moreover, scenario planning aids corporations to evaluate distinct options, recognise potential risks and opportunities and prepare contingency plans. 

Smart technologies in budgeting processes 

Smart budgeting means implementing the influence of technology and accessible financial intelligence. It enables businesses to make a budgeting and estimating process that is extremely competent with shared possession that decreases uncertainty and risk. The business environment of today is extremely dynamic (Valle-Cruz et al. 2022). Administration teams and key decision makers require to spot both opportunities and challenges and perform on them rapidly. Undertaking these hasty decisions becomes more stimulating without on-demand access to&