A PROJECT REPORT

ON

RATIO ANALYSIS

OF

SUBMITTED TO:

Kashif Yaqub

SUBMITTED BY:

Adnan Aslam

Roll No:

09

MBA NON Business (Weekend)

Semester

4th

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 Executive Summary
We gladly present you our report titled “Financial Ratio Analysis”. Our report also refers as an
analytical report of accounting. We have made the report on the two listed company annual
report analysis as you had given us to analysis by help of your suggestions. This report implies
the companies’ activity, liquidity, solvency, profitability, valuation financial ratios that helps to
get a proper picture of the companies. We have selected the company named HP and DELL. We
have discussed all of the ration in the analysis &findings content. We have described the
recommendation as much as possible.

We believe that the knowledge and experience we gathered during the report will extremely
helpful in our future professional and academic life. We will be grateful to you if you accept the
assignment.

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Table of Contents

No Contents

1 Introduction

Background of the Report

Objectives of the Report

Limitations of the Report

Methodology

2 Organizational Profile
I. HP Company
II. DELL Company

3 Findings and Analysis

4 Recommendation
5 Conclusion

6 References

Background of the Report

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We assign the report to know and analyze the current (2007) (2008) (2009) (2010)(2011).
Financial situation of two companies and discuss how to turn their financial condition into
satisfactions. This report helps us to get new experience for preparing a report. We can get a
result so that we can analyze and solve many problems.

We have used 4 categories financial ratios so that we can easily analyze the whole financial
statement of the previous year’s annual report of two listed companies. These categories are.

1: REO- Net Income/ Shareholder's Equity. This ratio tells you how much money the company
earns on an investor's dollar. The higher the ROE ratio, the higher the profitability.

2: RNOA- The return on net assets formula is calculated by dividing net income by the sum of
fixed assets and working capital.

3: PM- The profit margin ratio directly measures what percentage of sales is made up of net
income

4: ATO- The asset turnover ratio measures the value of a company's sales or revenues relative
to the value of its assets.

We have assigned a recommendation part for this report so that we can discuss financial
positive and negative impact of a company. We also have tried to focus proper comment/note
for each ratio.

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Objectives of the Study
It is very important to set an objective for preparing our report. The main objective of the
report is to analysis the annual reports of two listed company HP & Dell Company.

So at first we have to collect the previous 5 years reports of two companies.

We have tried to solve accurate ratio analysis so that we can achieve our objective. The study

Finds out the way haw we can analyze a report and find out the strong & weak sides of financial
situation of a company.

So we have analyzed 4 categories ratio analysis(which includes current ratio, quick ratio, cash
ratio, inventory turnover ratio, payable turnover ratio, fixed asset turnover ratio, debt-to-asset
ratio, debt-to-capital ratio P/E,P/CF etc.

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Limitations of the Study

Time Limitation:
Our report submission date was 13 August 2021. We got the assignment topic two/three weeks
back. Unfortunately that was not enough time to complete this presentation on a high note. If
there was more time, we could have done it much better.

Student Cooperation:
Some Students of our class did not cooperate with us at all. They were afraid that it is very
much hard to analyze annual report. So we tried to solve the ratios without proper helping
hand.

Knowledge Gap:
We did this kind of report for the very first time and it was obvious that there will be some
knowledge gap.

Absence of Necessary Documents:

As it was our first time doing this kind of report and also we do not know anyone who has
done this sort of report before . Therefore we did not have the proper documents that were
needed (except annual report of (2007) (2008) (2009) (2010) (2011).

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Methodology
Sources of Data:

We collected data to prepare our repot from 2 types of data:

Primary Data: Primary data are measurement observed and recorded as part of an original
study. There are two basic methods of obtaining primary data-

Questioning and Observation. We have collected primary data from the companies HP &
DELL. The companied have published their 2007 & 2008 2009 annual reports who are thought
to have the desired information. So we have get proper and efficient information from its
websites.

Secondary Data:
Secondary data is data collected by someone other than the user. We have collected as a
secondary data from lecturer sheet and useful web links like Wikipedia, Slide share (LinkedIn)
etc.

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Organizational Profile

Dell Inc. is an American privately owned multinational computer technology company based in
Round Rock, Texas, United States, that develops, sells, repairs and supports computers and
related products and services.

Bearing the name of its founder, Michael Dell, the company is one of the largest technological
corporations in the world, employing more than 103,300 people worldwide.

Dell sells personal computers, servers, data storage devices, network switches, software,
computer peripherals, HDTVs, cameras, printers, MP3 players and also electronics built by
other manufacturers.

The company is well known for its innovations in supply chain management and electronic
commerce, particularly its direct-sales model and its "build-to-order" or "configure to order"
approach to manufacturing—delivering individual PCs configured to customer specifications.
Dell was a pure hardware vendor for much of its existence, but a few years ago with the
acquisition of Perot Systems, Dell.

Dell is listed at number 51 in the Fortune 500 list. In 2012 it was the third largest PC vendor in
the world after HP and Lenovo. Dell is currently the #1 shipper of PC monitors in the world.

Dell is the sixth largest company in Texas by total revenue, according to Fortune magazine. It is
the second largest non-oil company in Texas – behind AT&T – and the largest company in the
Greater Austin area. It was a publicly traded company (NASDAQ: DELL), as well as a component

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of the NASDAQ-100 and S&P 500, until it was taken private in a leveraged buyout which closed
on October 30, 2013.

Hewlett-Packard Company or HP is an American multinational information technology

corporation headquartered in Palo Alto, California, United States. It provides hardware,
software and services to consumers, small- and medium-sized businesses (SMBs) and large
enterprises, including customers in the government, health and education sectors.

The company was founded in a one-car garage in Palo Alto by William "Bill" Redingote Hewlett
and Dave Packard. HP is the world's leading PC manufacturer and has been since 2007, fending
off a challenge by Chinese manufacturer Lenovo, according to Gartner.

It specializes in developing and manufacturing computing, data storage, and networking

hardware, designing software and delivering services.

Major product lines include personal computing devices, enterprise and industry standard
servers, related storage devices, networking products, software and a diverse range of printers
and other imaging products.

HP markets its products to households, small- to medium-sized businesses and enterprises

directly as well as via online distribution, consumer-electronics and office-supply retailers,
software partners and major technology vendors.

HP also has services and consulting business around its products and partner products. In 2012
it was the world's largest PC vendor by unit sales.

Hewlett-Packard company events have included the spin-off of part of its business as Agilent
Technologies in 1999, its merger with Compaq in 2002, the sponsor of Mission: Space in 2003,
and the acquisition of EDS in 2008, which led to combined revenues of $118.4 billion in 2008
and a Fortune 500 ranking of 9 in 2009.

In November 2009, HP announced the acquisition of 3Com with the deal closing on April 12,
2010. On April 28, 2010, HP announced the buyout of Palm, Inc. for $1.2 billion. On September
2, 2010, HP won its bidding war for 3PAR with a $33 a share offer ($2.07 billion), which Dell
declined to match.

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INTRODUCTION
The computer/technology industry has many key players with two of the major competitors
being Dell and HP. The computer industry has come a long way since its first inception with the
invention of Electronic Numerical Integrator and Computer in 1946.

This industry is comprised of many items such as computers, monitors, printers, scanners,
mainframes, servers, electronic computer components, networking and workstations to name a
few.

The industry started a major growth phase in the 1980’s with the production of the personal
computer and has grown every since with many new products introduced.

Innovations within this industry have had positive rippling effects to outside industries, from
manufacturing to banking.

While the United States market is fairly saturated and mature, the computer/technology
industry is very much in the growth phase on a global basis. The drivers behind this growth are
both innovations in technology and especially increased consumer spending in Asia and Africa.

 The international value of this industry is expected to grow and surpass $620 billion in 2011,
roughly a 27% increase from 2006. Dell and HP possess major market share within the
computer/technology industry due to brand name loyalty, advanced supply chain management
techniques and producing innovating products for an affordable price.

Dell vs. HP Strategies

Dell and HP operate in a competitive environment to gain market share at segmented price
intervals. Over the last decade we have seen the price of the average computer go from close
to $2,000 to less than $1,000.

In part, pressures to add customers have led to price wars between the two competitors.
However, the price wars have not affected the quality of the products in those lower priced
tiers.

Both firms have increased marketing efforts to enhance their brand recognition and strived to
reduce cost through improved supply chain management and technology innovation.

Both companies have room for growth, especially as they enter the portable tablet market. It
will also be interesting to see how HP fairs in the cell phone market with its recent acquisition
of the company Palm and how Dell with react to their success or failure within this market
segment.

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FINANCIAL RATIO ANALYSIS
Ratio analysis is such a significant technique for financial analysis. It indicates relation of two
mathematical expressions and the relationship between two or more things.

Financial ratio is a ratio of selected values on an enterprise's financial statement. There are
many standard ratios used to evaluate the overall financial condition of a corporation or other
organization.

Financial ratios are used by managers within a firm, by current and potential stockholders of a
firm and by the firms’ creditors. Financial analysts use financial ratio to compare the strengths
and weaknesses in various companies.

Values used in calculating financial ratios are taken from balance sheet, income statement and
the cash flow of company, besides Ratios are always expressed as a decimal values, such as
0.10, or the equivalent percent value, such as 10%.

Essence of ratio analysis:

Financial ratio analysis helps us to understand how profitable a business is, if it has enough
money to pay debts and we can even tell whether its shareholders could be happy or not.

Financial ratios allow for comparisons:

1. between companies

2. between industries

3: between different time periods for one company

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4. between a single company and its industry average

 To evaluate the performance of one firm, its current ratios will be compared with its
past ratios. When financial ratios over a period of time are compared, it is called time
series or trend analysis.
 It gives an indication of changes and reflects whether the firm’s financial performance
has improved or deteriorated or remained the same over that period of time.

It is not the simply changes that has to be determined, but more importantly it must be
recognized that why those ratios have changed. Because those changes might be result of
changes in accounting policies without material change in the firm’s performance.

What does ratio analysis tell us?

After such a discussion and mentioning that these ratios are one of the most important tools
that is used in finance and that almost every business does and calculate these ratios, it is
logical to express that how come these calculations are of so importance.

What are the points that those ratios put light on them? And how can these numbers help us in
performing the task of management?

The answer to these questions is: We can use ratio analysis to tell us whether the business

1. is profitable

2. Has enough money to pay its bills and debts

3. Could be paying its employees higher wages, remuneration or so on

4: is able to pay its taxes

5. Is using its assets efficiently or not

6. has a gearing problem or everything is fine

7. Is a candidate for being bought by another company or investor?

Which Ratio for whom

As before mentioned there are varieties of people interested to know and read these
information and analyses, however different people for different needs.

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 And it is because each of these groups has different type of questions that could be answered
by a specific number and ratio. Therefore we can say there are different ratios for different
groups, these groups with the ratio that suits them is listed below:

Investors:
These are people who already have shares in the business or they are willing to be part of it. So
they need to determine whether they should buy shares in the business, hold on to the shares
they already have or sell the shares they already own. They also want to assess the ability of the
business to pay dividends. As a result the Return on Capital Employed Ratio is the one for this
group.

Lenders:
This group consists of people who have given loans to the company so they want to be sure
that their loans and also the interests will be paid and on the due time. Gearing Ratios will suit
this group.

Managers:
Managers might need segmental and total information to see how they fit into the overall
picture of the company which they are ruling. And Profitability Ratios can show them what they
need to know.

Employees:
The employees are always concerned about the ability of the business to provide remuneration,
retirement benefits and employment opportunities for them, therefore these information must
be find out from the stability and profitability of their employers who are responsible to provide
the employees their need. Return on Capital Employed Ratio is the measurement.

FINANCIAL RATIOS COMPARISON OF DELL AND HP

ROE RATIO
The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to
generate profits from its shareholders investments in the company. In other words, the return
on equity ratio shows how much profit each dollar of common stockholders’ equity generates.

So a return on 1 means that every dollar of common stockholders’ equity generates 1 dollar of
net income. This is an important measurement for potential investors because they want to see
how efficiently a company will use their money to generate net income.

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 Net Income

ROE Ratio = -------------------------

Shareholder's Equity

Table1.1

YEAR DELL HP
2007 60% 19%
2008 79% 21%

2009 58% 19%

2010 79% 17%

2011 62% 18%

Analysis
Return on equity measures how efficiently a firm can use the money from shareholders to
generate profits and grow the company. Unlike other return on investment ratios, ROE is a
profitability ratio from the investor’s point of view—not the company. In other words, this
ratio calculates how much money is made based on the investors’ investment in the
company, not the company’s investment in assets or something else.

That being said, investors want to see a high return on equity ratio because this indicates
that the company is using its investors’ funds effectively. Higher ratios are almost always
better than lower ratios, but have to be compared to other companies’ ratios in the
industry. Since every industry has different levels of investors and income, ROE can’t be
used to compare companies outside of their industries very effectively.

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Many investors also choose to calculate the return on equity at the beginning of a period and
the end of a period to see the change in return. This helps track a company’s progress and
ability to maintain a positive earnings trend.

RNOA
RNOA is a variation of return on assets. Return on assets is found by dividing net income by
total assets and RNOA is net operating profit after tax divided by net operating assets.

Financial analysts created the RNOA variation to hone in on operating activities. Whereas
return on assets considers all types of profits — including investing and financing profit — and
assets like investments and securities, RNOA is comprised of only operating activities. Many
analysts see this as a better representation of how the core activities of the business are faring.

The return on assets ratio, often called the return on total assets, is a profitability ratio that
measures the net income produced by total assets during a period by comparing net income to
the average total assets. In other words, the return on assets ratio or ROA measures how
efficiently a company can manage its assets to produce profits during a period.

Since company assets’ sole purpose is to generate revenues and produce profits, this ratio helps
both management and investors see how well the company can convert its investments in
assets into profits. You can look at ROA as a return on investment for the company since capital
assets are often the biggest investment for most companies. In this case, the company invests
money into capital assets and the return is measured in profits.

Net Income

RNOA= _________________________

(Fixed assets + working capital)

Table1.2

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 YEAR DELL HP

2007 36 44

2008 38 50

2009 41 44

2010 52 65

2011 64 70

Analysis
The return on assets ratio measures how effectively a company can earn a return on its
investment in assets. In other words, ROA shows how efficiently a company can convert the
money used to purchase assets into net income or profits.

Since all assets are either funded by equity or debt, some investors try to disregard the costs of
acquiring the assets in the return calculation by adding back interest expense in the formula.

It only makes sense that a higher ratio is more favorable to investors because it shows that the
company is more effectively managing its assets to produce greater amounts of net income. A
positive ROA ratio usually indicates an upward profit trend as well. ROA is most useful for
comparing companies in the same industry as different industries use assets differently. For
instance, construction companies use large, expensive equipment while software companies
use computers and servers

PM Ratio

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The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a profitability
ratio that measures the amount of net income earned with each dollar of sales generated by
comparing the net income and net sales of a company. In other words, the profit margin ratio
shows what percentage of sales are left over after all expenses are paid by the business.

Creditors and investors use this ratio to measure how effectively a company can convert sales
into net income. Investors want to make sure profits are high enough to distribute dividends
while creditors want to make sure the company has enough profits to pay back its loans. In
other words, outside users want to know that the company is running efficiently. An extremely
low profit margin formula would indicate the expenses are too high and the management
needs to budget and cut expenses.

The return on sales ratio is often used by internal management to set performance goals for the
future.

Profit margin is one of the commonly used profitability ratios to gauge the degree to which a
company or a business activity makes money. It represents what percentage of sales has turned
into profits. Simply put, the percentage figure indicates how many cents of profit the business
has generated for each dollar of sale. For instance, if a business reports that it achieved a 35%
profit margin during the last quarter, it means that it had a net income of $0.35 for each dollar
of sales generated.

There are several types of profit margin. In everyday use, however, it usually refers to net profit
margin, a company’s bottom line after all other expenses, including taxes and one-off oddities,
have been taken out of revenue.

Net Income

PM = _______________

Net Sale

Table1.3

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 YEAR DELL HP

2007 10% 29%

2008 22% 29%

2009 34% 35%

2010 48% 45%

2011 60% 58%

Analysis
The profit margin ratio directly measures what percentage of sales is made up of net income. In
other words, it measures how much profits are produced at a certain level of sales.

This ratio also indirectly measures how well a company manages its expenses relative to its net
sales. That is why companies strive to achieve higher ratios. They can do this by either
generating more revenues why keeping expenses constant or keep revenues constant and
lower expenses.

Since most of the time generating additional revenues is much more difficult than cutting
expenses, managers generally tend to reduce spending budgets to improve their profit ratio.

Like most profitability ratios, this ratio is best used to compare like sized companies in the same
industry. This ratio is also effective for measuring past performance of a company.

Asset Turnover Ratio (ATO)

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The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate
sales from its assets by comparing net sales with average total assets. In other words, this ratio
shows how efficiently a company can use its assets to generate sales.

The total asset turnover ratio calculates net sales as a percentage of assets to show how many
sales are generated from each dollar of company assets. For instance, a ratio of .5 means that
each dollar of assets generates 50 cents of sales.

The asset turnover ratio measures the value of a company's sales or revenues relative to the
value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with
which a company is using its assets to generate revenue.

Asset Turnover Ratio= Net Sales

____________________

Average Total Assets

Table1.4

YEAR DELL HP

2007 0.25 0.17

2008 2.30 0.18

2009 0.24 0.19

2010 1.79 0.20

2011 0.24 0.18

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Capital structure of Dell and HP
Both the companies have seen increasing long term debt in the companies’ capital structures.
However, the increase is sharp in Dell compared with HP. As at end of January 2009, 63% of
Dell’s capital structure consists of borrowings. This is significantly debt heavy and impacts the
future borrowing capacity of the company.

HP vs. Dell capital structure changes

It is evident after markets become matured; the companies have been competing hard for
market leadership. Significant investments were made in the fronts of research and
development and product quality improvement areas.

Thus, the IT hardware companies have seen increasing debt as a natural industry phenomenon.
However, Dell’s significant investment in R&D and quality improvement has placed a heavy
debt burden on the company’s capital structure.

If the company could maintain its current market leadership position and capture competitor
market share based on these investments, even though Dell is suffering in the short run, the
company stands to benefit in the longer run.

However, it could benefit Dell if they would raise equity and balance the capital structure
amidst the global economic recession.

Performance ratios of HP and Dell

 Dell and HP are two of the main players in the global IT hardware market. Both are
North American companies and have been competing with each other for the market
leadership continuously in the recent past.
 Dell was founded in 1984 as a company which assembles and sells IT hardware directly
to the consumer while HP was established far back in 1939 as a tech company.
 Comparing the sizes of the businesses, HP is roughly four times (US$ 111Billion) of the
market capitalization of Dell (US$ 26 Billion). As the companies are from the same

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 industry and from the same geographical region, the comparability between the
companies is high.

CONCLUSION
Understanding the presentation of financial information is necessary. There could be instances
that such information would need to be adjusted before taking a decision.

For instance, there could be one off items included in the financial statements that are not
recurring (restructuring expenses) and for investing decisions, such would be irrelevant. Thus,
understanding the presentation of financials and adjusting appropriately would be vital.
Further, it is important to ensure that comparing sets of accounts are prepared using similar
accounting policies. There could be different accounting practices based on the industry,
geography and cultural reasons. Such would have to be neutralized if two sets of accounts to be
compared with each other.

There could be industry specific norms which needs attention. For instance, if an investor
compares the dividend yields of the tech companies with other industries, the dividend yield is
very low.

However, the norm of the industry is to reinvest profits primarily in R&D and offer capital gains
to the investors. Such norms need to be clearly understood prior to analyzing of financial
information.

There could be errors in the financial statements (intentional or non-intentional) which can
cause issues in understanding the true picture of the company through financial analysis.

Thus an analyst needs to probe into any irregularities observed in financial patterns to ensure
the results are realistic. To eliminate such errors, sourcing information from a reliable source is
important.

Thus, financial analysis can reveal useful insights of the companies in concern. However, the
information used has to be sourced from a reliable source, probing into irregular financial
patterns; adjusting to neutralize any specificity would be important in such an exercise.

BIBLIOGRAPHY
http://www.readyratios.com/reference/debt/interest_coverage_ratio_icr.html

http://www.ukessays.com/essays/finance/performance-ratios-of-hp-and-dell-finance-
essay.php.

http://en.wikipedia.org/wiki/Hewlett-Packard

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http://en.wikipedia.org/wiki/Dell

https://www.google.co.in/search?q=money%20control.com&ie=utf-8&oe=utf-

8&aq=t&rls=org.mozilla:en-US:official&client=firefox-
a&source=hp&channel=np&gfe_rd=cr&ei=UwZaU-2pFIuK8Qfk8IHgBQ

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