Financial Accounting: Dell Corporation's case - Essay Example

?The computer industry was born in the late 1970’s. This innovation changed the world forever as it allowed human to process and store information faster. A company that has had a lot of success in this industry is Dell Corporation. Dell was founded 26 years ago by Michael Dell (Dell, 2011). Through the 1990’s Dell became the market leader in the computer industry due to its innovative supply chain model which eliminated the intermediary and sold directly to the customer. Today the computer industry has become more competitive than ever. The purpose of this paper is to evaluate Dell’s common stock through financial analysis including ratio analysis to evaluate the stock. Ratio analysis is a tremendous tool to evaluate the financial performance of a company. The five categories of ratio analysis are liquidity, financial leverage, asset efficiency, profitability, and market value ratios (Peavler, 2011). In order to determine how good a financial ratio is the ratios must be compared against a benchmark company or against the industry standard ratio. A database that provides information regarding the business ratios of specific industries is the Dun & Bradstreet database. This paper will compare ten ratios of Dell against the performance of one of its main competitors, Hewlett Packard. A table illustrating a ratio analysis of Dell and Hewlett Packard is illustrated below: Dell Hewlett Packard Industry Net margin 4.28% 6.95% 5.30% Return on assets 6.83% 7.04% 5.80% Return on equity 33.93% 6.95% 8.10% Current ratio 1.49 1.10 2.9 Quick acid 1.42 0.97 1.6 Debt ratio 1.25 1.49 Debt to equity 3.97 2.05 0.62 Inventory turnover 38.51 105.38 Price-earnings 9.67 11.12 EPS $1.36 $3.78 Dell Corporation generated revenues of $61.49 billion in fiscal year 2011. In comparison with the previous year the revenues of the company went up by 16.24%. The company obtained net income of $2.63 billion in 2011. The firm’s net income increased significantly in comparison with 2010. In 2010 Dell only generated net income of $1.43 billion. The firm achieved an outstanding net income growth of 83.91%. The total assets of the company on January 28, 2011 were $38.59 billion. The company obtained a growth in net assets in comparison with the previous year of 14.70%. The total liabilities of the company at the end of fiscal year 2011 were $30.83 billion. The firm’s total liability increased a bit in comparison with the previous year. The total equity of the firm in 2011 was $7.76 billion. The net margin of Dell in 2011 was 4.28%. This metrics measures the profitability of the company (Besley & Brigham, 2000). One of its competitors Hewlett Packard had a net margin of 6.95%. The profitability performance of Dell is inferior to Hewlett Packard. The industry net margin average is 5.30% (Dun & Bradstret, 2011). The net margin of Dell was 1.02% below the industry average. The return on assets of Dell is fiscal year 2011 was 6.83%. Return on assets measures how well assets have been employed by the company (Garrison & Noreen, 2003). A high return on assets number is a desirable outcome. The return of assets of Hewlett Packard was 7.04%. The return on assets of HP is 0.21% higher than Dell. The industry average return on assets is 5.8%. Dell’s return on asset performance is 1.03% better than the industry average. The return on equity of Dell is fiscal year 2011 was 33.93%. During the equivalent financial period Hewlett Packard has a return equity of 6.95%. The return on equity metric measures the extent to which financial leverage is working for or against common stockholder (Garrison, et. al., 2003). The average return on equity in the computer industry is 8.10%. The return on equity of Dell Corporation was 4.18 times higher than the industry average. The current ratio of Dell in fiscal year 2011 was 1.49. The current ratio measures the ability of a company to pay off its short term debt (Investopedia, 2011). The general rule to evaluate a current ratio is for the current ratio to be above 1.0. Since Dell has a current ratio 0.49 better than 1.0 the company is in a good position to pay off its short term debt. The current ration of Hewlett Packard is 1.10. The current ratio of Dell is 0.39 better than Hewlett Packard. The quick acid ratio of Dell was 1.42. The quick acid ratio is another solvency ratio that is calculated similar to the current ratio with the exception that inventory is subtracted from the numerator of the formula. The quick ratio of Hewlett Packard in fiscal year 2010 was 0.97. The quick acid ratio of Dell is 0.45 higher than Hewlett Packard. Both Dell and Hewlett Packard have quick ratios that are lower than the industry average of 1.6. The debt ratio of Dell Corporation in fiscal year 2011 was 1.25. Due to the fact that the company’s debt ratio is above 1.0 the metric of the firm is good. The debt ratio measures a company’s ability to pay off its long term debt. The debt ratio of Hewlett Packard in 2010 was 1.49. The debt ratio of Dell is 0.24 lower than Hewlett Packard. The debt to equity ratio of Dell in fiscal year 2011 was 3.97. The debt to equity ratio is a measure of the amount of assets being provided by creditors for each dollar of assets being provided by the stockholders. The desirable outcome is to have a debt to equity ratio that is relatively low. The debt to equity ratio of Hewlett Packard is 2.05. Both companies have debt to equity ratios above the industry standard of 0.62. A possible reason why the debt to equity ratios of Dell and HP are much higher than the industry is due to the large size of the companies. The inventory turnover of Dell in fiscal year 2011 was 38.51. The inventory turnover measures how many times a company’s inventory has been sold during a year (Investopedia, 2011). The inventory turnover of Hewlett Packard is 105.38. HP has a much better inventory turnover metric than Dell. The price earnings ratio of Dell in fiscal year 2011 was 9.67. The price earnings ratio is an index of whether a stock is relatively cheap or relative expensive in relation to its current earnings (Garrison, et. al., 2003). The price earnings ratio of Hewlett Packard was 11.12. Investors are paying a higher premium for Hewlett Packard stocks. The earnings per share of Dell in fiscal year 2011 were $1.36. During fiscal year 2010 Hewlett Packard achieved earnings per share of $3.78. The EPS of Hewlett Packard is much better than Dell Corporation. Dell Corporation had a solid financial performance in fiscal year 2011. Its revenues and net income increased by 16.24% and 83.91% respectively. The ratio analysis performed had more positive than negatives metrics. HP was chosen as the benchmark company for comparison reasons. The net margin of the company was lower than both HP and the industry at 4.28%. Dell’s performance is both ROA and ROE were good. The ROE of the firm is outstanding at 33.93%. Dell’s ROE is 4.18 better than the industry average. The current and debt ratio of the firm illustrated that the company is in a good position to pay off is short and long term debt. The earnings per share of the company were much lower than Hewlett Packard. The performance of HP was stronger than Dell during its most current year. Despite that fact that does not mean that Dell is not a good investment. My professional opinion is that Dell common stocks are a solid investment. References Besley, S., Brigham, E. (2000). Essential of Managerial Finance (12th ed.). Forth Worth: The Dryden Press. Dell.com (2011). About Dell. [Accessed 14 December 2011]. Dun & Bradstreet (2011). Key Business Ratios. [Accessed 15 December 2011]. Garrision, R., Noreen, E. (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. Investopedia.com (2011). Current Ratio. [Accessed 15 December 2011]. Investopedica.com (2011). Inventory Turnover. Peavler, R. (2011). What are the five categories of financial ratios and what do each measure? [Accessed 14 December 2011]. Read More