Economic evaluation involves the business aspect monitoring and analysis in a company. This analysis is intended to carry out comprehensive auditing of the profit and/or loss making aspects of the company. The end result is expected to put the management of the company in the know that theirs is a profit or loss making venture. During such evaluation, several aspects are considered especially the financial aspects. The analysis is intended to identify the various needs of the company and try to propose practical solutions to the identified needs of the company. Such solutions may include a change in the structure of the organization or just change in the policies of the company. This paper, therefore, seeks to do a comparable business and economic analysis of HP and other similar industry players like Toshiba, Apple, Mac et al.
Monetary Policy
Monetary policy involves the control of monetary issues in the company. It entails the control of cash flow in terms of expenditure and revenue to the company. In practice, monetary policies are targeted at improving the growth and stability of monetary issues within the company. Whereas the current Federal policies regarding monetary issues were properly identified by Hewlett Packard, there was need to properly analyze, support and extrapolate expectations of future monetary policies in regard to the policies of the federal government. The impact and implications of the other industry players too needed to be identified, for an excellent comparison. A below average comparison would be attained if there was minimal understanding and identification of the monetary policies of the federal government. Not taking into account the impact of the federal policies in as far as monetary policies were concerned would lead to a very poor comparison and this way, HP would not have made any realistic evaluation.
Fiscal Policy
Fiscal policy regards to the government’s laid down procedures on revenue collection and expenditure. The fiscal policy mainly revolves around taxation rules and how the collected revenue is supposed to be spent. The impact and implications of the current fiscal policies must have been properly identified and discussed. The expectations in fluctuations about the fiscal policies too must have been properly addressed too. Policies such as spending and taxation ought to be put in consideration while carrying out fiscal policy analysis and evaluation. If these were done, the results of the comparison with other industry players would be excellent. If these factors were averagely considered not to have far reaching consequences, the results of this comparison would not give a fair analysis. Further, ignoring fiscal policy measures could lead to very poor results and may not give the true picture of how this industry would turn out to be.
Gross Domestic Product
The GDP is the major economic indicator used to determine how healthy a country’s economy is healthy or otherwise. In a company like HP, the GDP of the country could also help while carrying out evaluation of its economic status. The results or consequences of the GDP must have been correctly identified in HP so that this evaluation would paint the true picture of the company. When the expectations about the GDP growth were correctly identified and supported, the indicators of the firm’s valuation would be excellently identified. The analysis of the GDP was correctly done by finding out the relevance of HP and other comparable companies’ contribution to the GDP growth. The impact of a company on the GDP of the nation was far much consequential in the analysis of its operations. The overall contribution of the company to the GDP was something that ought to be properly analyzed. Failure to do so would not indicate the strengths and may be weaknesses of the company. A below expectation comparison of HP’s contribution to the GDP of the nation and other comparable companies would not give good comparable results. Federal governments use economic indicators such as the GDP to make decisions on policies like monetary policies and fiscal policies.
Economic Indicators
Economic indicators, like in the country in general indicate how healthy or otherwise the economy of the nation impacts on the population. In companies as well, economic indicators foretell how stable or unstable a company may be. There are several indicators but of utmost significance to the company would be their rate of employee retention and their contribution to the GDP. An in-depth analysis of the major economic indicators would give a balanced report on the comparison of HP and other industry players. Identification of how HP impacted on these main economic indicators would tell whether HP was just an average company or whether there were areas of importance that they needed to adjust. For instance, an analysis of how the firm contributed to the overall GDP of the nation would be a valuable aspect of this comparison. Further comparison of how HP contributed to minimizing unemployment in the nation would also be a good viewpoint of comparison. If the economic indicators were not properly identified, this analysis and comparison would give a below average result. On the other hand, ignoring the effect of the economic indicators in drawing a comparison between HP and the other firms would give very poor results.
Overall Analysis and Implications for Industry and Company Valuation
This analysis and comparison would provide well documented expectations of impacts of macroeconomic factors on the firm’s performance. It would also give a brief comparison of HP and other comparable companies and how they both fair in this aspect. All the assumptions and consequences must be appropriately identified and discussed in order to achieve optimal results.
Industry Lifecycle
Knowing what stage of the industry lifecycle the competitors were in would give a hint as to whether HP was headed in the right direction. It would also tell what the management of HP ought to do if they wanted to catch up with their competitors, just in case they realized that the competitors were at an advanced stage of the lifecycle. The identification of their stage in the industry lifecycle would also help them to put the right strategies to help them move forward focused. In a case where they found out that they were way ahead of their competitors, they would also learn on how to adopt strategies that would help them consolidate their position in the industry.
Company Lifecycle
It would be advisable to know at what stage the firm was in its own lifecycle. For instance, knowing whether the firm was in its formative stages or profitability stages of its own lifecycle would help achieve excellent comparability results. The expected financial implications ought to be addressed in this comparison so that the firm would remain in sound financial position all through. If this was not properly articulated, the results of this comparison would be very poor.
Economic Structure
The implications of HP’s economic structure in regard to its financial obligations ought to be well addressed in this comparison in order to attain desirable comparative results. The company’s changes in terms of output, trade with other companies and sources of revenue ought to be evaluated as well. This would help them know their state in the market.
Competitive Structure
Comparison in terms of buyer power, supplier power, threat of a new entrant, threat of substitution and competitive rivalry would also bring out an excellent result. It would help the firm to know how stable it was in terms of these competitive forces.
Financial Analysis
Financial analysis would be important in this evaluation process as it would give the true picture of the company financially. Its outcome would help the management to know whether the company was stable, insolvent or profitable. This analysis and evaluation is carried out by looking at the books of accounts of the company. This analysis would mainly focus on the balance sheet of the company. It would also look at the income statement and the cash flow statements. Another key area in this analysis would include checking the past financial records as well as doing an estimate of how these financial books would look in the predictable future.
Balance Sheet
A balance sheet is a financial record that shows the assets and liabilities of a company. Where the liabilities exceed the assets, the company would be considered unstable. It is compiled after a defined period of time in the business. It is the most exact way of showing how the company’s performance is as compared to its previous results over the same period of time. Comparison of the balance sheets of HP and those of its rivals would give a proper statement on their financial strengths. The period covered by the balance sheets in question would provide accurate results based on their time. The more the balance sheets provided, the more accurate the results of the comparison would be. Balance sheets of preceding years would give a more consistent valuation of the company’s status financially. This would help the company know whether they were making losses or whether they were on their way to profitability.
Income Statement
An income statement is also referred to as a profit and loss account of a company. It is usually prepared after a definite period of time and shows how the company performed during that specific period in question. On its compilation, the income statement should be able to show whether the company was making profits or losses. The strength of the income statement of HP as compared t those of its rivals would be a good comparative aspect. Provision of income statements covering a lengthy period of time would provide a strong comparative indicator of this analysis.
Cash Flow Statements
The cash flow statement allows the company to know its sources of revenue and how their cash is spent. Evaluation of the most recent statements on cash flow would provide comprehensive results of this analysis. The period covered by the statements provided would indicate how HP was doing in comparison to other similar companies. To be more accurate, the period under analysis and valuation need to precede each other. This would also kind of bring some consistency in the evaluation process.
Time Series Analysis
Evaluation and calculation of the company’s key ratios would also provide a presentable analysis of the company’s performance over the period indicated by the key ratios. A discussion on the consequences of the results would help draw a comparable analysis between the firm and its competitors.
Cross- Sectional Analysis
This entails examining and evaluating the firm’s most recent ratios in comparison to other major similar firms. This kind of comparison would identify whether HP was on the right path economically as compared to other similar industry players.
Common Size Financial Statements
Evaluation of the firm’s common size statements as compared to similar firms needed to be presented and reactions drawn. This presentation would point out the direction that HP was headed businesswise.
SWOT Analysis.
Evaluation of HP’s strengths, weaknesses, threats and opportunities needed to be ultimately analyzed. The findings would need to be supported by time series and cross-sectional analysis. The consequences of this evaluation in relation to future financial and operating implications needed to be properly handled to steer the company in the right direction.
Growth Rate of Dividends- Cash Flows
An estimation of the firm’s dividend growth should also be evaluated. This ought to be done in line with the information collected from the financial, economic and industrial statements. This evaluation would help in the determination of long-term growth rate of the company. Indicative growth rate for the foreseeable future could then be estimated in comparison to similar business units.
The estimation of the rate of returns on investment should also be evaluated. The information extracted from the prior sections of this evaluation should be factored in the estimation of the expected returns. The consequences of risk premium and the expected yields on bonds should be factored in this evaluation. Calculation of the firm’s value excluding the prevailing market conditions could also give an insight into the expected returns of the company.
Valuation Multiples
Major comparable factors like industry averages and financial implications should be properly identified. This information could for example be based on the industry low points or the industry high points. These factors could give a clear and comparative evaluation of how the firm performed averagely as compared to similar firms. During this evaluation, the cash flow, the expected returns and the sales for the subsequent financial year should be properly estimated to give a clear picture of how these multiples would vary. Forecasts by other market analysts could also be used to give a clear picture of these multiples. Any shortcomings and assumptions should be properly addressed so that the evaluation and analysis’ results are optimal.
Assumptions, Limitation and Implications of Valuation
The estimates and values derived from the parameters indicated above should be put in practical range of values. The summary of these values should also be put for ease of relative valuation techniques. Any limitations during this discussion should be indicated. Relative valuation techniques when employed in this analysis would give up to standard accounts of the factors that should be varied and those that should be held constant.
Cash Flow Models
Different valuation models for cash flow valuation should be adopted. These valuation models, however, should be consistent with the earlier findings stated under the cash flow valuation. These models should be able to determine whether the firm is growing in its cash flow base or not. They should also be able to project what kind of growth the firm is experiencing, if any considerable growth is realized in the company’s cash flow. The cash flow models should also be able to vary the lifecycle stages that the company is in, either in the industry or internal lifecycle. This valuation should be done in comparison to other industry players. This would help HP know whether their cash flow was healthy for survival or not.
Dividend Models
Different discount model valuation techniques should be varied that would factor in the values derived under dividend growth evaluated in this analysis. The dividend valuation models should be able to tell whether there was a constant or non constant growth in dividends in comparison to similar companies identified under dividend growth valuation. The valuation, by use of dividend models should also factor in the stages of lifecycle that HP is in. The stages of lifecycle factored here should be both industrial and internal lifecycles. When no dividends have been realized, that would imply non constant growth. Under this model, estimates ought to be done when HP was likely to start paying dividends.
Relative Valuation Models
Relative valuation method refers to the use of present stock to estimate the values of stock that a firm might have in the near future. The use of different valuation techniques like price multiples and enterprise value multiples could be used to properly estimate values from HP’s common stock. When these models are properly used, the estimated values of the firm’s worth could be a very indicative comparative aspect of the firm and its competitors. Average results could be obtained if the values were not properly estimated. This valuation could give an insight as to the future of the company as compared to similar companies.
Range of Values, Determination of Intrinsic Value and Investment Recommendation
The values that were identified in this evaluation ought to be analyzed properly and a decisive action taken. The action taken on these values should be able to drive HP as a profit making company forward. Based on the values derived in the sections above, a final valuation should be done under this section. The information reached at under this section should also be in concurrence with the values from the prior valuation process. This would lend credence and confidence to the evaluation carried out, and HP as a company, would find confidence in its systems moving forward. Other problems encountered during this final valuation should also be noted and adequately addressed.
Assumptions, Limitations and Lessons Learned.
A recommendation for action should be made to the company, HP. This recommendation should be made after the evaluation. It should be an advice that would be consistent with the findings of the evaluation process that were discussed in the findings paper. All the assumptions made in the evaluation process should be noted and communicated to the company. All the limitations that could, otherwise, have negative effects on the confidence levels of the company should also be well addressed. This would help HP to know how to overcome such challenges moving forward. Lastly, all the lessons learned during the evaluation, comparison and analysis process should also be noted and communicated to HP. This would help them to address these issues if they intend to carry out a similar process in the future.
