Dell Financial Statement Analysis of Profitability Ratios

dell fiscal Statement Analysis of profitability RatiosIntroductiondell is a transnational corpo symmetryn that develops, manufactures, sells and supports personal computers and new(prenominal)(a) computer products. It came into success during the 1980s and 1990s and became the largest seller of personal computers and servers. The primary(prenominal) deflection between dell and it competitors is that dell sells its products directly to customers. They do so in modulate to conk out under plinth customers require and provide the intimately effective computing solutions to meet those needs and this make dingle so unique. Furthermore dell theatrical roles configure to order approach which message that they bring bum computers configured to special customer specifications. To minimize cost just-in-time approach is implemented. dingle maintains a negative specie conversion cycle(CCC) be prepargon it uses a direct- gross sales model via the inter elucidate and the telephvirt uoso network and receives payments for the products to begin with it has to pay for the materials. Other very weighty aspect is that dingle uses pull system by building computers l ane(prenominal) after customers place orders and by requesting materials from suppliers as needed and so they ward off over exertion.dells major competitors atomic number 18 orchard apple tree, Hewlett-Packard, Samsung, Sun Microsystems, Gateway, Lenovo, Sony, Acer, Toshiba and Asus.dell caudexs are trading on the NASDAQ short letter securities application and Dell belongs to Information Technology Industry (Computer Hardware).Financial statement compendiumProfitability dimensionsComparing Dells and persistences operating margin, Dells is comparatively larger. That meat that Dell earns more per clam of sales than effort. Same is with the 5 communication channel of study average. concluding profit margin is richly(prenominal) as well during the 2009 and 5 year average. That gist that Dell passs more profit for every dollar it generates in revenue or sales and of course it is a good contract for the investor as well.Dell has higher earn profit margin equivalence to the industry both in novel year and 5 year average. That heart and soul that Dell is fiscally hefty and has a elephantineger proportion of money left.Return on assets is higher as well comparing both recent year and 5 year average, indicating that Dell has an efficient management and that order is able to generate more profit with its assets.To sum up all indicators shows that Dell make outs better comparing to the industry, homogeneous in the short-time and in the long-time.Financial strengthDells authentic ratio comparing to the industry ratio is 0.28 less(prenominal) but stock-still unions current ratio is larger than 1 and that means that company dope easily meet short- full limit debt obligations. So Dell is in relatively good short- circumstance financing standing.Since we could non find the industrys total debt to fairness ratio we took Apple lodge which is Dells competitor and belongs to the same industry to analyse it to the Dells ratio. Dells total debt to equity ratio is 5.2 while Apples is only 0.95. Its a coarse difference and it is obviously seen that companys have different management approach. Talking more or less Dell this kind of total debt to equity ratio loafer be a little bit frustrating because company with a higher debt/equity ratio may be riskier, especially in quantify of rising lodge in range collectible to the additional interest that has to be authoriseful out for the debt. But since now interest rates are at all time low, in that respect is not a bulky issue, of course we need to have in mind that sooner or later interest rates testament be convertd and it leave behind disturb companys performance if it dont manage its debts or annex shareholders equity.We couldnt find industrys quick ratio as well, so we used App les ratio to compare with. Apples quick ratio is 1.59 which is considerably higher than Dells 1.05. That means that Dell has less ability to use its near cash or quick assets to immediately extinguish its current liabilitiesTo sum up Dell in financial strength didnt perform as good as in the profitability. Of course we should take into chronicle that both companies are fallowing different strategies and overall Dells figures are not with child(p) but should be rectifyd to attract more investors.Growth ratesSince we couldnt find industrys remuneration per share average we used Apples EPS as the peak to compare with our company. Dells EPS is 1.27 while Apples 0.69. That indicates that Dells stockholders retains more earnings than Apples and its a good symbol for the investor.Dell has a higher positive beta comparing to the industry. That means that stocks generally follows the mart and has higher response to the market multifariousness. We presuppose that in this time its gene rally good, because after credit crunch market volition importually stabilize and diminish to its previous positions.Dell pays no dividends because company are tainting backing its stocks. Generally its a good signal for the investors because its a signal of confidence. Buy backs excessively increase postulate for stocks driveway up prices and by fetching shares out of the publics hands, buybacks make earnings-per-share look better, since in that location are fewer shares among which to divide profits.To sum up Dell in growth rates performs well and has all attractive ratios for the investor.Fundamental abridgment shows that Dell performs very well in profitability and growth rates. On the early(a) hand it should increase its financial strength. Overall Dell seems to be good investing. Now we should examine when its the right time to buy dells stocks both for the short and long times. We will ground it by technical synopsis.DuPont analysisROE had the biggest return in 2 006 and decreased sharply in 2007 because of the financial crisis. The average ROE during the 5 year period is 0.66 and Dell credibly will seek to increase its REO to attract more investors.Technical analysisTo analyze Dell as the investiture luck its not affluent just to rely on the fundamental analysis, so we decided to do jolly technical analysis to determine is it the right time to buy stocks of the company. graph below shows the inclination of the Dells stocksSource NasdaqAs you see now it is not the right time to buy Dells stocks. Price of the stocks break through with(predicate) the lower support line and decreased. We dont think that its ascribable to companys financial stability or other major factors related to the company. For short-term investment we could remember to detainment until drift will reverse. Furthermore Dell predicts higher demand for the next year due to stabilization of the world economy, and that of course will increase shareholders equity.We think that if the world economy will stabilize and we already have indicators showing that and at that place will be no W shape recession Dell stock as the long-term investment is considered as good investment.Individual case analysisCapital anatomical mental synthesisThere are c turn a loss to possible ways how to use Debt and im trigger offiality selective information to get an informative info about ceiling structure, so to be more informative will show three charts in which there several possible ways to check how capital structure are placed.As is seen from chart Debt / Equity, debt is higher than equity and this reads to company is rough in financing growth with debt. This growth expansion by takings debt may effect on proximo profitability high interest expense. Debt / Equity ratio is falling bulge out in 2009 it is good information, cause in 2008 economical turndown, debt has in proportion to equity decreased which means in more difficult times Dell have rock-b ottom risk of default.Interesting information could be taken from Debt / Market capitalisation proportion changes. As can be seen from graphs that comparing market observe of a company and equity value from offset sheet, market cute company many times more than it actually is in balance sheet. This could be a signal to be more careful on investing in Dell, because it seems that Dell market price is overvalued. And in 2009 market capitalization of a company has been less then debt is it is very adult signal, but on the other hand market capitalization is button by the trend to get closer to equity value.Dell presently have long term debt by issuing tie ups in the bond market, all of which are rated in A, it is in category of investment level. nightlong bond maturity date is 2038-04-15. Coupon differs from 3.38% till 7.1% correlates to maturity date.leaden Average Cost of Capital for Dell is extremely high 38%, the biggest impact of high WACC value is make by very high cost of equity which is based on calculation of ROE. ROE = 65%. High WACC shows high risk probability, increases risk of insolvency. From WACC orientate of view there must be issuing new debts to repurchase equity, cause by now equity requires big interests expenses. In today bunk there is other sources for lower prices of debts than equity holders supplying.Payout policyOne-way oriented payout policyPayouts are often callight-emitting diode dividends. But not only dividends could be a form of companies payout, companies can repurchase its shares, and it will be called payout. As data showed Dells board of directors made a decision not to pay dividends. political party is only repurchasing its shares. It could be a signal for investors that shares are undervalued.Retained earnings and payout.From 2005 to 2009 Dells retained earnings more than doubled, from 9174 millions to 20677millions. but payout sum havent changed, and for all these 5years it was in a higher place 3000millions on ly in 2005 it skyrocketed to 6000millions. (See Dell balance sheet)Shares repurchasesAs one of the Dell corporation officers argues, Dell uses only shares repurchase as payout because of business climate. social club is located in climate which requires permanent growth. So Dell needs to invest in order to be competitive in laptops market. Shares repurchases to a fault has same advantages over a dividends.Firstly repurchase of shares helps to reduce opportunity of dilution, or even eliminate it.Secondly it is easier for Dell to balance return for shareholders with other business objectives.And finally it gives more flexibility for shareholders to make a decision then they indispensability to withdraw their investment.Also where almost disadvantages of shares repurchases asThere could be some agency conflicts inside the company, if managers have same inside information which is unknown for other share holders they could repurchase shares for less value than intrinsic value of the shares.Shares repurchases can negatively affect runniness of firms stock, because the will be decrease in shares outstanding.Shares repurchases can in like manner be a result of penalties, because government or other responsible organizations can view shares repurchases as way to help shareholders to empty taxes.It can likewise be a negative signal of firms future growth.Key competitors payout policiesIBMIBM is one of two key competitors for Dell. Its payout policy differs from Dell, IBM pays dividends for shareholders and similarly repurchases shares. One of the main reasons wherefore IBM pays dividends could be its revenues which are almost twice as big as Dells. (see table1a, table1b)HPQHPQ second of Dells key competitor. HPQ also as IBM pays dividends to its shareholders, but amount paid in dividends is two times smaller than IBM. So companies payout policy is the diaphragm compared with IBM and Dell payout policies. (See table2)Dell Company has long term debt. Long term debt is at the moment much bigger than in recent years. In 2009 April, Dell sell 500 million notes, later in June they sold 1 billion expense of bonds. This explains wherefore Dell long term debt is much bigger than in recent years . In likeness Apple had no long term debt in recent years. Apple company has a lot of cash so they do not need to handout new bonds and increase long term debt. Dell is an American company which as many other companies hold their part of cash outside the US. Dell chose to access capital markets in order to supplement liquidity ratio in the United States. By accessing the capital markets Dell needs to raise its long term debt. Dell also believes that its share repurchasing is good for the company, that increases operating leverage and this keeps shareholders happy to, so they exceed a big part of long term debt for share repurchasing. As we see from the graph in period from 2005-2008 long term debt was not changing dramatically. In 2008 long term debt was smaller than in end 3 years. One of the main reasons why it was lower is, that Dell was pain from interest expenses, so they decided to repay their loans and buy back some of bonds in order to decrease interest payments.Company released verifier bonds as well. There are 7 types of bonds, all of them have A rating, and that means that these bonds are high quality. Bonds differ by coupon worth, price and maturity. Dell .GH has the longest maturity (until 2038). All bonds are callable, and that means that the issuer can pay off the bond before the maturity. These bonds most time have higher coupon rate.Short term financingNet working capital during 2005 2008 didnt change a lot, with the average NWC of 1971 million dollars, but in 2009 NWC change magnitude dramatically nearly four-fold comparing to net working capital of 2008. To understand why Dell had such a huge increase in net working capital we need deeper investigation of its Balance Sheet.During 2007 2009 Total accr edited Assets increased only by 212 million dollars, so its not the driveway factor which led to such huge increase in Net works Capital, but on the Current Liabilities side a situation is different.Accounts payable decreased by 3183 millions dollars to 8309 millions by 2009 and it was the main factor which led to decreased current liabilities and furthermore an increase in Net workings Capital. Other factors like accrued expenses, notes payable, and other current liabilities decreased as well, but they played only a minor role due to a small amount of decrease.Looking at Net Working Capital, we could strongly say that Dell NWC increased due to decrease in accounts payable, which is a good signal to the investors.Dell maintains a negative cash conversion cycle(CCC) because it uses a direct-sales model via the internet and the telephone network and receives payments for the products before it has to pay for the materials.Looking at the last two years Dell improved its accounts paya ble and decreased to 60 days. Accounts receivable has improved as well to 28 days. Due to its improvements CCC has decreased.If we exclude years 2007 and 2008 as the abnormal receivables and payables due to the financial crisis, average accounts receivable will be 27 days, and accounts payable 73 days. From these calculations we can strongly say that Dell improved and that company will try to keep these figures stable, or improve even more.Industries receivable turnover is 6.17 (sourcehttp//www.reuters.com/finance/stocks/financialHighlights?symbol=DELL.O) while Dells 9.48 in 2009. This implies that Dells collection of accounts receivable is more efficient comparing to the industry average.Industries neckcloth turnover is 10.26(source http//www.reuters.com/finance/stocks/financialHighlights?symbol=DELL.O) while Dells 57.84 in 2009. Comparing to the industry level, Dells inventory turnover is five-fold bigger. That may mean that company is not property enough inventories to meet de mand. This could equate to loss of sales. But because Dell consequence its orders only after customers place orders and by requesting materials from suppliers as needed they deflect overproduction, so high measure of inventory turnover doesnt mean that Dell is in trouble unless other companies which supply Dell with materials will throw together to meet Dells demand But that is another case.To sum it up, I think that Dell manages its working capital well, and performs in most of the cases better than the industry average. Furthermore Dell uses configure to order approach which really helped them during the crisis to avoid overproduction. Dell Net Working Capital increased dramatically and immediate payment Conversion Cycle decreased almost by the half. All these figures are good signals for the investors.Following the company as financial analystSince 2005 Dells prices slightly started to fall. Even though there were periods when it bring up, the on the firm trend was shifting down until it plummeted during end of 2008 and the first base of 2009. From this period company slowly recovered. However at the end of November prices dropped a put one across. In this article stock values during family line-November 2009 and major factors modify it are described. There are also comparison of Dell with other companies, future prospects and solutions for investors included. Using a weekly review of prices following findings were made.Graph above was made by using weekly prices (in dollars)At the beginning of September stock prices started to rise quite significantly till it r distributivelyed 16.6 in day 8. Then the growth became smaller and from 16.69 in day 14 it dropped to 15.04 at the end of the month. October hadnt been too promising either. At the beginning there was a rise to 15.81 then followed by slight fluctuation stock value dropped from 15.48 in day 19 to 14.45 seven days later. November seemed to be inspiring at first when the trend started rising, but then it dropped from 15.4 at day 9 to 14.29 at day 16. Towards the end of the month trend was pretty much stable, however still slightly decreasing and reached the point of 14.12 at November 30. The graphic shows some fluctuations during these three months. However after each major rise in stock price there is a lot bigger fall which determines the decreasing trend in the whole period. Stock value due to given time span change magnitude by 1.57. By feel from a bigger scope (the whole 2009 year) stock prices were reaching a peak during these three months which was at September 14th. However an eight month climb in stock prices slackened and continues to motion down.There are few main events affecting the trend of stock prices shown in the graph. One of them is acquisition of Perot Systems the other is Dells lost position in worldwide sales from 2nd place to 3rd and the last one is sharp drop in PC sales.The agreement of Perot Systems acquisition on September 21 shows Dells wil lingness to expand in business and get some market share from IT services was a good sign to investors. It was a move made against Hewlett-Packard (HP) which also used this kind of expanding strategy by acquiring another service company, Electronic Data Systems Corp. This reflects that hardware industry is not as profitable as services. However Dell expects to gain earnings from this deal only at fiscal year 2012. This event hadnt boosted the price of shares significantly but at least helped property it from displace even more. Dell gave its position in worldwide sales and production of PCs to Acer and it made the company lose some of its market share. This was due to strategy not to lower the prices too much even though its market share can suffer. Thats how company wanted to increase profitability. Its worth mentioning that Dell had increased sales internationally. In China, India, Brazil and Russia it was up 18 percent. China is Dells second-largest country in terms of revenue, sales there increased 20 percent. However this did not help much in keeping companies position in worldwide sales. At the end of November a big decline in PC sales appeared. This made Dells stock prices plummet.Dell has been hit by economic crisis just like other brands in computer industry. The only difference is that this particular brand has problems getting back its wellbeing even at the recovering of the IT sector. Companies like Hewlett-Packard, Apple, Acer and some others start to feel the improvement of market conditions and during November had bigger than expected profits. This was influenced by boosting their presence in retail stores and also by the popularity of so called netbook computers that broadly speaking supplemented Acers wallet. The reason why Dell recovers so slowly is its target market. Company heightened on corporations and large government agencies that had tightened their spending even at economic recovery and the demand for PCs isnt as robust as hoped. Since these customers made up to 80% of Dells revenue, loss in earnings was substantial. This benefitted Dells rivals and shaped the market by making HP top seller of PCs worldwide. Acer go to the second place and pushed Dell to third. Now Michael Dell CEO of company is starting to put some effort to expand Dells presence in consumer PCs sold in stores to improve its condition. When comparing Dell with its competitors big difference in their stock price can be seen. For example when looking at share price of HP during September-November there had been an increasing trend that rose by 3.96 at the end of period when looking at weakly closing prices. Apple had also boosted stock value that lifted from 170.31 to 199.91 during these three months. There are more examples of increasing value of companies in IT sector unfortunately Dell is not joining them.In future Dell market position should start recovering. Firstly the acquisition of Perot Systems should lead to an expansion not only i n hardware but also in IT service niches. Also company announces to increase its earnings in short future, but mainly they are hoping to boost sales in holidays which might lead just to a seasonal uplift. Company started to change the ways of making and selling PCs by focusing on catching the retailers and manufacturers instead of doing everything themselves. Expanding acquisitions is also the goal towards reaching more profitable markets. The release of a new operating system Windows 7 according to Dell CEO Michael Dell will hopefully also increase the sales due to positive views towards it. There seems to be many changes and factors that could help Dell to recover its wealth again.According to the trend of historical stock prices, taking into account the position of Dells competitors and considering changes that have been and will be made in the future the following solutions for the investors have been madeThe stocks should not be acquired by investors that seek to gain earnings in short term and who want to invest lets say for 6-8 months and then sell their basket (a proposition also made by Jayson Noland, a senior analyst at investment firm Robert W. Baird), because there is a possibility for them to lose earnings due to down sloping trend in share price. However there can be boost in sales of PCs during holidays that can increase earnings, but this would only be a seasonal uplift.Long term investors can benefit from buying Dells shares. The price is relatively cheap comparing to other hardware producers and sooner or later the company is going away to recover and bringing profit to shareholders. The only question is how long will it take for it to recover completely.Existing investors that already bought Dells shares should not panic, keep the stocks to themselves and wait for Dells recovering. By selling shares now most of them will definitely lose money and the opportunity to retrieve their accumulated earnings.There is another possibility. Investors could focus on companies in PC industry that are more self-made and stable than Dell. For example HP. The price of shares is bigger, but so is the opportunity to gain wealth.In conclusion Dells financial situation comparing to other companies in IT and hardware industry does not look very good. High expectations didnt pass off true, but there is still a possibility to recover. By expanding to other fields and restructuring operations Dell will be able to stand on its feet however this might take several years to happen.