Hewlett Packard Enterprise (NYSE:HPE) stock has increased by 8.7% over the past three months. Since a company’s long-term fundamentals typically drive market outcomes, we wonder what role, if any, a company’s financials play in price movements. I think so. Specifically, in this article we decided to examine Hewlett Packard Enterprise’s ROE.
Return on equity or ROE is a key measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. In other words, ROE shows the return that each dollar of a shareholder’s investment generates.
Check out our latest analysis for Hewlett Packard Enterprise.
How do you calculate return on equity?
The formula for calculating return on equity is as follows:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Hewlett Packard Enterprise’s ROE is:
10% = USD 2.6 billion ÷ USD 25 billion (based on trailing 12 months to October 2024).
“Return” is the profit over the past 12 months. Another way to think of it is that for every $1 worth of shares, the company earned $0.10 in profit.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE is a measure of a company’s profitability. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company’s growth potential. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Hewlett Packard Enterprise’s revenue growth and ROE 10%
At first glance, Hewlett Packard Enterprise’s ROE does not seem to be very promising. However, upon closer inspection, we find that the company’s ROE is in line with the industry average of 9.2%. Additionally, we’re pleased to see that Hewlett Packard Enterprise’s net income has grown by a significant 22% over the past five years. Considering the moderately low ROE, it’s quite possible that other aspects are positively impacting the company’s earnings growth. For example, a company with a low dividend payout ratio or a company with efficient management.
We then compared Hewlett Packard Enterprise’s net income growth rate with the industry and found that the company’s reported growth rate is similar to the industry average growth rate of 22% over the past few years.
Earnings growth is an important metric to consider when evaluating a stock. Investors should check whether expected earnings growth or decline has been factored in in any case. By doing so, you can find out if the stock is headed for clear blue waters or if a swamp awaits. Is the market pricing in HPE’s future prospects? Find out with the latest Intrinsic Value infographic research report.
Is Hewlett Packard Enterprise using its profits efficiently?
Hewlett Packard Enterprise’s median three-year payout ratio is 33%, which is rather low. The company will hold the remaining 67%. This suggests that the company’s dividend is well covered, and given the high growth discussed above, it looks like Hewlett Packard Enterprise is reinvesting its earnings efficiently.
Furthermore, Hewlett-Packard Enterprise is determined to continue sharing its profits with shareholders, as can be gleaned from its long history of paying dividends over nine years. According to our latest analyst data, the company’s future dividend payout ratio is expected to decline to 25% over the next three years. Although the expected dividend payout ratio will decline, ROE is not expected to change significantly.
summary
Overall, there appear to be some positive aspects to Hewlett Packard Enterprise’s business. Despite low profit margins, the company recorded impressive revenue growth as a result of significant reinvestment in the business. That said, the company’s revenue growth is expected to slow, as predicted by current analyst forecasts. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
Evaluation is complex, but we will simplify it here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
