In the world of investing, the concern over permanent loss rather than stock price volatility is a common sentiment among practical investors, according to Howard Marks. When evaluating the risk level of a stock, it is important to consider the impact of debt, as excessive debt can potentially lead to the downfall of a company. Hewlett Packard Enterprise, listed on the New York Stock Exchange as HPE, is a company that utilizes debt in its operations. The amount of debt a company carries can be a cause for concern for shareholders, as it may impact the company’s ability to meet financial obligations.
Debt becomes a problem for a company when it struggles to fulfill its obligations, either by generating enough cash flow or by raising capital at reasonable rates. In extreme cases, lenders can take control of the business. A more common occurrence is when a company is forced to issue shares at low prices to raise funds, which can dilute the ownership of existing shareholders. It is crucial to evaluate a company’s debt levels by considering both its cash reserves and debt together.
As of January 2024, Hewlett Packard Enterprise had $12.9 billion in debt, a figure similar to the previous year. The company also held $2.99 billion in cash, resulting in a net debt of approximately $9.92 billion. The company’s balance sheet revealed liabilities of $22.6 billion due within a year, with additional liabilities of $14.5 billion due after that. Offsetting these obligations were $2.99 billion in cash and $3.78 billion in receivables due within 12 months. The company’s liabilities exceeded its cash and receivables by $30.4 billion, raising concerns about its ability to manage its debt effectively.
Analyzing debt levels in relation to earnings is essential for understanding a company’s financial health. Hewlett Packard Enterprise’s net debt was 2.0 times its EBITDA, indicating a manageable level of debt. However, its interest coverage ratio was relatively low, with EBIT covering interest expenses only 4.6 times. The company’s significant depreciation and amortization charges may impact its debt burden, highlighting the importance of evaluating debt relative to various earnings metrics.
While Hewlett Packard Enterprise demonstrated the ability to generate strong free cash flow in recent years, concerns remained about its total liabilities and interest coverage. The company’s debt levels posed risks to its business, and further leveraging could increase profitability but also bring additional challenges. Investors should closely monitor the company’s balance sheet and other risk factors to make informed decisions.
In conclusion, while debt is an essential aspect of investment analysis, it is not the sole determinant of a company’s financial health. Investors should consider a comprehensive range of factors when evaluating a company’s debt and its impact on overall performance. The future profitability of Hewlett Packard Enterprise will ultimately determine its ability to strengthen its balance sheet over time. To access a detailed analysis of the company’s valuation, risks, and financial health, interested individuals can refer to the free analysis provided by Simply Wall St.
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