HP Inc. & Apple Inc.: Rivals Setting the Pace in the Computer Hardware Industry

Both HP Inc. and Apple Inc. are American publicly owned and traded companies in the computer hardware industry. Both companies are involved in the provision of computing and other related computer and communication products and services throughout the world (Forbes, 2019). Despite having been created at different times, the two companies have continued to compete with each other in their industry thus setting the pace for other companies in the industry. Apple Inc. has been reported to have a market value of over 904.4 billion US dollars while HP Inc. has a market value of 36.1 billion US dollars (Forbes, 2019). This paper involves a comparison of the ratio and trend analysis of HP Inc. against those of its competitor Apple Inc. in the Computer Hardware industry, how the companies' comparison evaluation predicts the future success of HP Inc.in the sector as well as whether the financials and prospects of the HP Inc. would help it secure a loan from a banking institution.

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Background Information

The Hewlett-Packard Company commonly referred to as the HP Inc. is an American publicly owned and traded computer Hardware Company that provides personal computing and other computer-related technologies solutions and services to individual consumers, small, large and medium-sized enterprises, government, health and the education sectors across the world (Forbes, 2019). Founded by William R. Hewlett and David Packard in January 1939, the company is headquartered in Palo Alto in California. HP Inc. operates through various business segments namely the personal systems which offer commercial, personal computers, consumer PC's, workstations among other related accessories, corporate investments which involves the HP Labs and other business incubation projects. The printing segment of the HP Inc. provides consumers and commercial printer hardware, supplies, media solutions and services such as scanning devices. The company has received various honors since its inception such as the American best employers of 2019 among other awards.

On the other hand, the Apple is also a publicly owned and traded computer Hardware company in America founded by Steven Paul Jobs, Gerald Wayne, and Stephen G. Wozniak on the 1st of April 1976 with its headquarters in Cupertino, California (Forbes, 2019). Apple Inc. engages in the design, manufacture, and marketing of mobile communication, personal computers, portable digital music players and media devices among other services and products. Apple Inc. operates in various geographical segments such as the American, European, Greater China which includes China, Hong Kong, and Taiwan, Japan and the rest of Asia Pacific comprising the Australia and Asian countries which are not included in the reportable operating segments of the company. Apple is among the biggest companies in America with a market value of above 904.4 billion US dollars and a key competitor of HP Inc. in the computer hardware industry (Forbes, 2019).

HP Inc. and Apple Inc. Ratio and Trend Analysis

Since the year 2016 both HP Inc. and Apple Inc. have continuously reported an increase in their total revenues with HP Inc. reporting an income of 58.47 billion US dollars for the year ended on the 31st of October 2018 up from a revenue of 52.06 billion USD in 2017 and 48.24 billion US dollars in the year 2016 (HP Inc. and Subsidiaries, 2018). The increase represented a 12.3% growth as compared to the preceding year an increase that was primarily driven by the growth in desktops, notebook, commercial printing hardware, notebooks revenue as well as a favourable foreign currency impacts while in the fiscal year 2017, the total net income grew by 7.9% from the 2016 fiscal year.

On the other hand, Apple Inc. reported revenue of 265.6 billion USD in the year 2018, 229.2 billion USD for the year 2017 and revenue of 215.6 billion USD for the year 2016 (Apple Inc., 2018). This values represented a 15.86% increase from the 2017 total revenue an increase that was primarily driven by the delivery of enormous advancements for customers through new versions of iPhone, iPad, Apple Watch and Mac, their four operating systems.

To understand the financial performance of these two rival companies based on the available financial reports for the past three years, it is critical to perform a ratio analysis for both companies for the years 2016, 2017 and 2018 to determine trends that may positively or negatively impact each of the companies in terms of profitability, debt management, asset utilization, liquidity, and market value ratios. For the three years under review, the reports for the two companies that will help in analyzing their profitability, debt management, asset utilization, and liquidity ratios are as shown in the table below in millions of US dollars;

Table 1: Yearly Financial reports for HP Inc. and Apple Inc. (Apple Inc., 2018; HP Inc. and Subsidiaries, 2018)

Company HP Inc. Apple Inc.

Year 2018 2017 2016 2018 2017 2016

Net Revenue 58,472 52,056 48,238 265,595 229,234 215,639

Gross Profit 10,669 9,578 8,998 101,839 88,186 84,263

Earnings from Operations 4,064 3,519 3,549 70,898 61,344 60,024

Net earnings 5,327 2,526 2,666 59,531 48,351 45,687

Total Stockholder's equity (Value of common Stock) -639 -3,408 -3,889 107,147 134,047 128,249

Total Assets 34,622 32,913 29,010 365,725 375,319 321,686

Long term liabilities 4,524 6,747 6,758 141,712 140,458 114,431

Short term (Current) liabilities 1,463 1,072 78 116,866 100,814 79,006

Total fixed assets 13,235 10,595 10,542 234,386 246,674 214,817

Current assets 21,387 22,318 18,468 131,339 128,645 106,869

Profitability Analysis

The profitability ratio analysis will measure the income of both HP Inc. and Apple Inc. based on their revenues and invested capital for the three years under investigation. The ratios to be used for profitability analysis comparison of the two companies include gross profit margin, operating profit margin, net profit margin, return on equity and return on assets (Corporate Finance Institute, 2018). From the calculations for the three years under review, the profitability ratios for HP Inc. and Apple Inc. are as shown in the table below.

Table 2: Yearly Profitability ratios for HP Inc. and Apple Inc.

Gross Profit margin Year 2018 2017 2016

HP Inc. 18.25% 18.40% 18.65%

Apple Inc. 38.34% 38.47% 39.08%

Operating profit margin HP Inc. 6.95% 6.75% 7.36%

Apple Inc. 26.69% 26.76% 27.84%

Net Profit Margin HP Inc. 9.11% 4.85% 5.17%

Apple Inc. 22.41% 21.09% 21.19%

Return on Equity HP Inc. -833.6% -74.1% -64.2%

Apple Inc. 55.56% 36.07% 35.62%

Return on Assets HP Inc. 15.39% 7.67% 8.60%

Apple Inc. 16.28% 12.88% 14.20%

Gross Profit Margin

The gross profit margin indicates the percentage of revenue at the disposal of the company to cover the company's operating and other expenditures (Corporate Finance Institute, 2018). The gross profit margin is calculated by dividing the gross profit by the company's net revenue for the year under investigation and then multiplying the product by 100 to express it as a percentage as shown below.

Gross Profit Margin = 100 (Gross profit Net Revenue)

From the gross margin profit ratios in table 2 above, it is noted that HP's gross profit margin has been declining since the year 2016 because the higher cost of goods sold by the company proved by net revenue increasing at a higher rate as compared to the rate at which the gross profit is rising. If the trend continues, it may cause significant problems to the company's profitability and thus the need for the company to understand the factors contributing to the margin decrease and react positively to realize higher profits for the company. On the other hand, Apple Inc. also reported a decline in its gross profit margin since the year 2016 a trend that if continued may affect the company's profitability negatively in the long run. However, Apple Inc.'s rate of decline is lower than that of HP Inc. thus putting HP Inc. at a worse position of being affected by the drop as compared to Apple Inc. Generally, Apple enjoys a higher profit margin as compared to HP Inc.

Operating profit margin

The operating profit margin indicates how much profit the company makes after paying for all variables of cost of production such as wages and raw materials (Corporate Finance Institute, 2018). It is calculated by dividing the operating income by revenue and then the product multiplied by 100 to express it into a percentage as shown below.

Operating profit margin = 100 (Earnings from operations Net revenue)

From the operating profit margin ratios in table 2 above, it is clear that HP Inc.'s operating profit margin decreased from the year 2016 to 2017 but increased in the year 2018. If the current trend of an increase in the company's operating profit margin continues, it will impact the company's profitability positively as this will mean that the company is more efficient at converting sales into actual profits for the company. On the other hand, Apple Inc.'s operating profit margin has been deteriorating since the year 2016 a trend that if continued may affect the company's ability to convert sales into actual profits in the long run and thus affect the company's profitability negatively. Generally, Apple Inc. has a higher operating profit margin as compared to HP Inc. for all the three years and thus making it clear that Apple Inc. is more profitable than HP Inc.

Net profit margin

The net profit margin is a profitability indicator showing the percentage of revenue retained by a company after all expenses have been deducted from sales (Corporate Finance Institute, 2018). It is calculated by dividing the company's net income by its revenue and then multiplying the product by 100 to express it into a percentage.

Net profit margin = 100 (Net Earnings Net revenue)

From the net profit margin ratios in table 2 above, it is evident that HP Inc.'s net profit margin decreased from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level. If the current trend of an increase in the company's net profit margin continues, the company's profitability will be impacted positively since the company will be retaining more revenue after the deduction of all expenses from the sales. On the other hand, it is evident that Apple Inc.'s net profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding the 2016 level. If the current trend continues, the company's profitability will be impacted positively since the company will be retaining more revenue after the deduction of all expenses from the sales. Generally, Apple Inc. retains more revenues after deduction of all expenses from sales as compared to HP Inc.

Return on equity

Return on equity is a profitability ratio that indicates a company's ability to generate income internally and is calculated by diving the company's net earnings by the total stockholder's return on equity for the year and then the product multiplied by 100 to express it into a percentage (Corporate Finance Institute, 2018).

Return on Equity (ROE) = 100 (Net earnings Total HP stockholders' equity)

The return on equity values in table 2 above shows an indicator of success at HP Inc. because positive profits are high compared to the negative stockholder equity amount. If this trend continues, it will tell the investors that the company is making high profits for every dollar it has in stockholder equity and that the company is recovering from some external sources of finance it had taken to finance its operations. On the other hand, Apple Inc.'s return on equity has been increasing since the year 2016 a trend that if continued will impact the company's profitability positively as it will be making more profits for every dollar in the stockholder equity. Generally, HP Inc. is doin...