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Dell: Comparative Analysis Your Name Your University Your Class Name/Number Your Teacher Date
printers. financial leverage. laptops. corporate. manufactures. and nations. “The goal of accounting information is to provide economic decision makers with useful information. Customers can purchase Dell desktop computers. such as data providing investors on whether they should buy or sell certain companies’ stocks. Understanding Annual Reports Investment capital is always moving between different markets. Ratios also provide the changes in a company caused by internal and external factors often not displayed in individual financial statement information. markets. Dell uses financial statements and other data to communicate its financial position with investors and other users of financial information. the researcher needs to use general tools of analysis. and Carcello (2006. and software from the Dell Web site or speak with a sales representative on the telephone. examine the cost of capital and other financial incentives for the company. government agencies.” 2009). The various customers of Dell include various U. sells. and supports a range of computer systems and services that are customized to individual customer requirements” (“Business Summary.Dell Reports Dell Computers “Dell designs. “A ratio is a simple 2 . Users of financial statements determine market and financial trends within a company and in the external business environment through the use of financial statements. servers. Haka. Ratio Analysis Companies use calculations between different sets of data on the annual report to determine the short-term financial health and long-term financial health of the firm. Bettner. 670). and education entities. industries. In the examination of Dell annual reports for 2005 and 2005. such as ratios. Different users use financial statements differently and address different needs. such as the cost of goods sold.” according to Williams. develops.S. p. healthcare.
” according to Williams. p. Dell has $1. The quick ratio for 2005 was 0. Current Ratio “Investors commonly use the current ratio to evaluate a company’s liquidity” (Kieso.78:1 and increased in 2006 to 0.11 of current assets.12:1. p. Bettner. 386). Acid-test (Quick) Ratio The quick ratio (acid-test ratio) provides a view of the company’s short-term liquidity and is calculated by the following equation: 3 Acid-Test Ratio = Cash + Short-Term Investments + Receivables (Net) .1:1. and Carcello (2005. . The quick ratio Current Liabilities complements the current ratio because the quick ratio examines components of short-term liquidity not examined by the quick ratio. The 2005 ratio of 1.11:1 means that for every dollar of current liabilities. A company is better able to meet its current payments and other obligations as they come due if the current ratio is higher. 2005. including the company. the inventory displayed on the balance sheet may not be available for current sale. Dell current ratio increased in 2006 and is lower than the industry average of 2. and Warfield. meaning Dell might be encountering difficulty in making payments as these payments become current. and Carcello. 674).Dell Reports mathematical expression of the relationship of one item to another.88:1. Haka. Haka. Dell’s quick ratios seem a little low.11:1 while the 2006 current ratio was 1. p. Given that the industry average is 2. 2007. Weygandt. The current ratio for Dell in 2005 was 1. 674).2. Bettner. Different ratios provide different information to different financial information users. as the company may have slow-moving merchandise (such as computers) or inventories that have become excessive in size” (Williams. also. The formula for calculating the current ratio is current assets ÷ current liabilities.
Dell Reports 4 Inventory Turnover Ratio Inventory turnover is “the number of times on average the inventory is sold during the period” (Weygandt.17 in 2006. The ratio is found by dividing total liabilities by total assets. so Dell’s inventory turnover rate is above average. thus the need for the debt ratio in protecting creditors’ claims on firm assets. Both ratios are respectable because the company still displays it has more assets than debt and this can be attractive for potential investors and lenders. thereby identifying less cash tied up in inventory and decreased chance of inventory obsolescence. thus hurting the company’s chances of attracting future capital. The industry average in the Personal Computer Systems industry is 49. The net profit margin. p. 697). Debt Ratio “If a business fails and must be liquidated. thus providing increased leverage against its competitors. the claims of creditors take priority over those of the owners. p. 2005. and Carcello (2005. Net Profit Margin Ratio “The profit margin tells you how much profit a company makes for every $1 it generates in revenue” (Kennon. If the debt ratio were closer to 1 or over 1 a company might be struggling in satisfying debt repayments.1. Dell inventory turnover ratio declined from 106. Haka. Dell had a debt ratio of 0. and Kimmel. according to Williams.29 in 2005 to 93.82. A company being liquidate might not have enough capital to satisfy all outstanding debt and the claims by the owners.83 for 2006. 679). 2009). which is higher than the 2005 debt ratio at 0. also known as Return on Sales. This ratio measures the liquidity of the inventory and is calculated by the equation cost of goods sold/average inventory = inventory turnover. evaluates the . Kieso. In examining this ratio. Bettner.
8 percent.17 percent in 2005 and 10. Calculating Return on Sales involves dividing 5 net income. even though the average for 2006 was lower. Dell had a ROI of 15. the higher percentage means investors will be attracted to Dell as an investment opportunity. after taxes. The percentage for 2005 was higher than the historical industry average of 13. meaning the company is managing its equity better than other competitors in the personal computer systems industry. The formula used is: Return on Investment (ROI) = Net Income . The ROE for Dell is higher than the industry average of 31. the company’s ROE is 66. the ROS for 2005 is 6.4 percent and the ROS for 2006 is 4. Return on Investment Investors want an assurance that the company in which they invest will efficiently manage their financial resources. the better for said companies.25 percent in 2006.63 in 2006. The formula for ROE is: net income/shareholders’ equity. Most companies agree the higher the profit margin against their competitors.8 percent (MSN Money.22 percent in 2005 and 61.Dell Reports company’s operational efficiency. Return on Equity Return on Equity is a profitability ratio that defines the amount of profit a company generates from shareholder investments. . Thus the profits for Dell have decreased 1.3 percent. 2009) and. Using the data from the annual Total Assets report. In examining the annual reports for Dell and taking the values necessary for 2005 and 2006. One method of determining such efficiency is with the use of the return on investment ratio (ROI). from sales and the equation is: net income/sales = ROS. Using this formula on the annual reports from Dell. also known as the return on assets ratio (ROA).9 percent in the past year and the results are much lower than the industry average of 12.5 percent.
1 and this indicates that Dell is higher than the industry average for the personal computer systems industry. Bettner.751 million (Dell.Dell Reports 6 Price-to-Earnings Ratio (P/E Ratio) The price-earnings ratio is “the relationship between the market price of common stock and earnings per share” according to Williams. In 2005. . Working Capital Management In examining the previous ratios. and Carcello (2005. Debt can be paid down internally if the balance of the operations section is positive and the other two sections display negative balances. 688).868 million in 2005 to $10. The industry average for the P/E ratio is 14. meaning the company is experiencing issues with the earnings per share and also lower stock prices. however. the information came from either the balance sheet or the income statement. The P/E ratio decreased from 24. Dell reported cash from operating activities of $4.430 million in 2006. p. Starting with net income and the items that cause a difference between income and cash flow. p. 2006) and reported $3.2:1 in 2006. thereby controlling its inventory levels with fast turnaround of inventory. Cash from operating activities. Haka. cash from investing activities. Dell is not optimizing its accounts payable because the amount increased from $9.969 million in 2006. and cash from financing activities are the three sections that comprise the cash-flow statement. Inventories on the cash-flow statement align with the inventory turnover ratio because the company reduced the ratio in 2006. states Tergesen (2001. 2). the cash-flow statement should be examined to provide an overall picture of health for a company.3:1 in 2005 to 22.
the company issues $300 million fixed rate (10 percent) senior debentures with the principal balance due April 15. and 785. Equity differs from debt because shareholders provide the capital to the company in exchange for financial instruments. in addition.107 billion in 2006.55 percent of the issue price. involves a “calculation of a firm’s cost of capital in which each category of capital is proportionately weighted” . while outstanding shares (unpurchased) were 2.226 billion in 2006 and 2.Dell Reports In examining the cash-flow statement. with the company lowering the amount in 2006. paid semiannually. Dell is optimizing its cash cycle because the 7 financing section has a negative balance. as issued shares of stock were 3. Dell issued 7 billion shares of common stock. with $.000 shares of Treasury stock with $1000 face value. The notes are convertible into common stock at the discretion of the holder of the note. with $1. 2028.307 billion in 2006 and 2.330 billion in 2005.503 billion in 2005 and $10. Weighted-Average Cost of Capital The weighted average cost of capital. Debt and Equity: Finding the Right Balance Dell uses a combination of debt and equity to finance current operations and long-term projects. The current amount of capital received in the sale of stocks was $9. Such debt allows the company to fund various projects and operations. usually common stock.01 par value per share. this means Dell might be buying back shares of its stock. The debt is comprised of $200 million senior convertible notes (bonds) with an interestbearing rate of 6.818 billion in 2005. Dell is moving toward controlling financing and investment activities but the company needs to ensure more investors or potentially buying back stock to ensure a balance between the amount of cash going to payment of debt and the amount of cash paid to the company. also known as WACC.000 face value paid on maturity.
Comprehensive Analysis Examining the different items on the financial statements by using ratio analysis and WACC allows the researcher to understand Dell’s financial structure and whether investment in . Given that the table displayed a WACC of 8. with respect to total debt and total equity.42 percent. The equation for WACC involves the cost of each component.Dell Reports 8 (Investopedia.0% 0% 9. Dell has a weighted average cost of capital at 11. the following figures represent the current cost of capital. given the capital structure for the company: Debt…………………………Kd Preferred stock…………….1% 0% 39.63% 0% 3. and (c) debt. too much debt may provide difficulties for Dell if the company utilizes too much debt to finance operations and long-term projects. a company looks to optimize its current capital structure. the company is depending on the buyback of stock to increase its WACC. in addition.79% 8.Kp Common equity……………Ke Weighted average cost of capital (1) Cost (aftertax) 7. In the case of Dell.42% Entering in the totals for 2005 and 2006.5% (2) Weights 66.9% (3) Weighted Cost 4. 2009). Every type of financial instrument used to finance and fund operations and projects is included in the WACC and includes (a) common stock.0 percent in 2006. multiplied by its weight. (b) preferred stock. and then adding the sum of both debt and equity: WACC = E D × Re + × Rd ( 1 − Tc ) V V In estimating the WACC.5 percent in 2005 and a weighted average cost of capital of 12.
the current economic downturn may change the attractive quality of the stock as investors continue their nervous trend of selling stocks. 9 Even with the buyback of its shares.Dell Reports the company is properly balancing its debt and equity mix. Recommendations In viewing the ratio data. thus causing a recommendation in purchasing stock in Dell. Dell should increase the amount of debt to increase financial leverage. Shareholders were advised to hold their shares of Dell stocks. Dell is meeting or exceeding industry standards. . this could possibly give an inflated view of operations and offset any new revenue generated by the company. Given the various ratios. The current economic environment and the increase in debt financing caused a decrease in the valuation of the stock but Dell is handling its sales and financing according to current market trends. One point for investors to watch is the financing from operating activities. meaning the market is responsive to Dell as a company. Dell remains a good buy. The company should look to reduce its cost of equity and increase its cost of debt to provide the company with a better overall capital cost structure. however. as Dell does not have to report its operating leases on any financial statements.
investopedia.J.asp?Symbol=US %3aDELL Tergesen.D. (2008). & Carcello.. M. (2009). P. D. J. 2009. from the Web site: http://www.E.asp Kennon. 2009. T.msn. from the Web site: http://moneycentral. Net Profit Margin: Investing Lesson 4 – Analyzing an Income Statement.com/investor/invsub/results/compare. Hoboken. Hoboken.. Bettner. Financial Accounting (12th Ed. Retrieved January 14. from the Web site: http://beginnersinvest. Kieso.. 2009.).com/content/topics/global.). S.F. Weygandt.. (2001. J. A. January 22). Financial Accounting (5th Ed. Intermediate Accounting (12th Ed..J. Inc. D. NJ: Wiley & Sons. Williams. 2009. The ins and outs of cash flow: These reports offer clues about companies’ health. & Warfield. J.aspx/about_dell/investors/main/investors? c=us&l=en&s=corp Investopedia.htm Kieso..dell. Haka.Dell Reports 10 References Dell. Retrieved January 8. J. Weygandt. (2009). Inc. Retrieved January 15.R. New York: McGraw-Hill/Irwin..com/terms/w/wacc. Business Week.about. NJ: John Wiley & Sons. 102 – 104. 2006 Annual Report. (2006). .D. J.E.S.). (2005). & Kimmel.V. Dell Inc: Key Ratios.com/cs/investinglessons/l/blnetprofitmarg. MSN Money. Retrieved January 15. (2005). (2009). Weighted Average Cost of Capital – WACC. from the Web site: http://www.
Dell Reports 11 .
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