Dell Company’s Financial Analysis

Company Information

Dell incorporated is a company in the information technology industry that is involved in the designing, manufacturing, marketing, and distributing desktops, personal computers, servers, networking products, laptops, notebooks, storage capacity items, and other peripherals in the information technology industry. The company was incorporated in 1984, by then a university student. He started by selling computers to the customers directly, later he moved to designing and manufacturing. They manufacture, develop the market, and designs personal computers and related computer peripherals, such as software, digital music players, and offer networking among large institutions.

The company’s headquarters is in round rock Texas with operations worldwide in the form of service centers and subsidiaries. It is among the companies that have embraced the idea of globalization through collaboration. This has assisted them to expand their market share in the international arena. The company has managed to have subsidiaries in almost all the continents, north and South America, Africa, Europe, and Asia.

Financial and Accounting Analysis

The company ratios are as follows ( data available from finance yahoo):

Ratio Formula 2007 2008
Liquidity ratios
  1. Current ratio
Current assets
Current liabilities
19,937
17,791
1.12:1
19880
18526
1.07:1
  1. Quick ratio
Current assets – stock
Current liabilities
19,937-2829
17,791
0.96:1
19880-3035
18526
0.91:1
  1. Cash ratio
cash + marketable securities
current liabilities
9546+752
17991
0.58:1
7764+208
18526
0.43:1

Short term liquidity position of dell has been analyzed above. Some ratios were calculated during the last 2 years for analysis purposes. The current ratio indicates that the firm is not financially stable as it is less than the industry average. This ratio is 1.12:1 for the year 2007 and 1.07:1 for the year 2008 as compared to 2:1 recommended for a stable ratio. This means that for every $1 of current liabilities there are $1 of current assets for the company while recommended is $ 2 of current assets for every dollar of current liabilities. Current liabilities may or may not include short-term borrowings. Creditors consider current assets as a buffer for current liabilities and hence they prefer a higher ratio. However, there is an increase in the ratio. This is due to an increase in investment in debt securities and a decrease in accrual expenses.

The acid test ratio of the company also depicts the same picture. Overall short-term liquidity as shown by the acid ratio decreased substantially during 2008 compared to 2007 from 0.96:1 to 0.91:1. The ratio indicates how able the firm is in meeting its financial obligations from the most liquid assets. It shows that the firm is strong in its liquidity. Should be there Technical default then the company will not be liquidated as liquid assets are enough. The recommended ratio should be 1:1. The Quick Ratio shows that the liquidity position of the firm has gone down in terms of its ability to meet short-term obligations. Cash to current liabilities stands at 0.58:1 and 0.43:1 for the year 2007 and 2008 respectively. Cash is major part of current assets of the company. The reason why these are so high during this year is due low investment in debt security which the company then increases steadily in the subsequent years. Working capital amount is quite adequate which increase consistently during the past two years. It shows that company is in good position to finance its short term financial needs.

Activity ratios
  1. Inventory turn over
Sales
Average inventory
57,420
660
87 times
61135
(660+1180)/2
66.5 times
  1. Day sales in Inventory
365
Inventory turn over
365= 4.2 days
87
365= 5.5 days
66.5
  1. Receivable turn over
Sales
Average debtors
57,420
1530
37.53 Times
61,135
(1530+1732)/2
37.48 times
  1. Day sales in Receivable
365
Inventory turn over
365 = 10 days
37.53
365 = 10 days
37.48
  1. Assets turn over.
Sales
Average assets
57,420
25,635
=2.24 times
61,135
(25,635+27561)/2
=2.3 times

The company’s Inventory turnover is 87 times in 2007 which is the higher turnover than 2008 which is times 66.5 meaning that the average stock was turned 66.5 times in 2008. This figure when converted into days shows 4.2 days conversion period for year 2007 increasing to 5.5 days during year 2008. It shows that company declined its performance in terms of converting its inventory into sales resulting in higher sales figure during the year 2007. Overall conversion period shows decline and stand at 5.5 days during the year 2008. The management should strive to maintain the pace as it is more than the industry average.

The rate at which the company converts debtors/receivable into cash in 2007 is times 37.53 is less than the figure of 2008 of 37.48. As shown by the account receivable turnover, the debtors’ payment frequency was 37.53 times in 2007 while in 2008 is 37.53 times. It means that the efficiency with which the firm is utilizing its debtors to generate cash is high and fell in 2008. It saw its highest turnover during the years 2008 which result in day sales in receivable of 5.5 days only.

The assets turnover is 2.24 times for 2007 which is lower than 2008 of 2.3 times. It measures the turnover on assets of most businesses ability of asset to generate high returns create substantial assets for each dollar. It measures how a dollar invested in assets is returned. In this case every dollar invested the company gets 2.24 in 2007 and 2008 is 2.3 of assets. Sales to account receivable is increasing over the two years showing that company is rapidly converting its receivable into cash. Same is the case with inventory. Company is converting its inventory into sales rapidly over these years resulting in higher sales. Sales to fixed asset and other assets show the same increasing trend during the past two years. Company has been quite effective in utilizing its assets quite efficiently as evident from the sales to total asset ratio. This has been accomplished through retaining the net income within of the company. It shows that company is converting its inventory into receivables and receivable into cash quite efficiently.

Long term debt and solvency ratios
  1. Debt to capital ratio
Total debt
Total assets
21196x 100
25635
=82.68%
23732x 100
27561
=86.61%
  1. Long term debt to equity
Long term debt
Equity
569+647x 100
4328
= 28.1%
362+2070×100
3735
=65.11%

Capital structure of the company show how much of the company assets are financed by the company through debt and how much from equity. The exhibit above shows that company is increasing its reliance on creditor financing steadily from 82.68% to 86.61% in year 2007 and 2008 respectively. At the same time company equity finance has decreased during the same last two years. This decrease in equity finance came mostly from stock repurchase of the company. The company paid no dividend to its outside shareholders. Instead it has decided to reinvest its annual profit into the business instead of relying on outside financing. The debt ratio is an indicator of the percentage of assets that have been financed through borrowed capital. It means the firm might be financing its assets using external sources. It measures how much of the debt is available in financing debt capital.

Profitability ratios
  1. profit margin
Net before tax profit
sales
3345×100
57420
5.83%
3827×100
31133
12.29%
  1. gross margin
Gross profit
sales
9,516×100
57420
= 16.57%
11,671×100
61,133
= 19.09%
  1. Return on assets
Net profit before tax
Total assets
3,345×100
25,635
=13.05%
3,827×100
27,561
=13.89%
  1. Return on equity
Net profit available to shareholders
Equity
2583 x100
4328
=59.68%
2947×100
3735
=78.90%
  1. Equity multiplier
Assets x 100
Equity
25,635×100
4328
=592.31%
27,561×100
3735
=737.91%

Gross profit margin improved drastically during the last years showing that there is major change in cost of sales and sales. Also operating margin was very high at 19.09% during 2008 compared to 2007. And because of this higher operating margin that year saw a substantial increase in ROE at 78.90%. However the profits position does not remain the same when comparing with other variables. Here it shows that the company is sacrificing more than its sales revenue by adopting huge debt in their financing.

Return on Assets is also used for the same purpose of measuring the overall performance. However to be meaningful to calculate the ROA it should be adjusted for implicit interest which is difficult to estimate and hence makes the process unnecessarily complicated. The figures show that performance is lower in 2007 than in 2008 and the performance ratio is 13.05% and 13.89% respectively. It is difficult to say that the performance of the company itself has increased.

However one needs to compare its position with the market and also its rival companies to have a clearer picture. The rate of return on Equity or ROE can be taken as a good measure to estimate the firm’s performance, from the shareholders’ point of view. However it fails to measure an overall performance of the firm. The higher this ratio is the better. If ROE is less than the ‘cost of equity’ the firm can be said to be destroying value. In the above statistics it seems that the shareholders’ viewed the firm’s performance to industry is lower.

DuPont analysis: In a DuPont analysis, the expression for ROE is broken up into three parts – profit margin, asset turnover and equity multiplier. The profit margin measures the operating efficiency of the firm concerned, asset turnover measures the asset use efficiency and the equity multiplier throws light on the financial leverage of the company under analysis. This identity helps one to understand where the superior or inferior return comes from.

Conclusion

Therefore the operating efficiency is low and declining and this is influencing the value of ROE. Therefore, improvements and innovations are sought on the technological side for company to catch up with the competitors.

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BusinessEssay. (2022) 'Dell Company's Financial Analysis'. 20 October.

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BusinessEssay. 2022. "Dell Company's Financial Analysis." October 20, 2022. https://business-essay.com/dell-companys-financial-analysis/.

1. BusinessEssay. "Dell Company's Financial Analysis." October 20, 2022. https://business-essay.com/dell-companys-financial-analysis/.


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BusinessEssay. "Dell Company's Financial Analysis." October 20, 2022. https://business-essay.com/dell-companys-financial-analysis/.