The report deals with the financial analysis of a premier computer manufacturer of the world, Dell. Dell is multinational technology corporation, manufactures, sells, develops and provide services related to computers and related gadgets. The company is employing over 82,000 employees around the globe. The company started its operations in 1980s and is continuously making progress till yet.
The company manufactures its own products and had entered in the market in the 1980's as PC's limited. It has grown to become one of the largest sellers of servers and personnel computers. The founder of this corporation is Michael S. Dell. This company was established on November 4th 1984 as "PC's Limited". Dell is global multinational firm now with its headquarters in Round Rock, Texas, USA.
For the purpose of analysis, financial ratios of the company will be taken into account and a through image of company's financial position will be presented. The ratio analysis of a company determines the performance of a company over the entire fiscal year. It is based on this performance that the stakeholders and the stockholders of the company can take decisions regarding the procedural functioning of the company.
Ratio analysis:
Introduction:
The ratio analysis of a company determines the performance of a company over the entire fiscal year. It is based on this performance that the stakeholders and the stockholders of the company can take decisions regarding the procedural functioning of the company. As for example, the total assets turnover determines the amount of sales over the assets of the company. This ratio determines the place of the company in the financial market. Ratio analysis also determines the strengths and weaknesses of a particular company. The market price of a company is used in various financial ratios to estimate the position of the company with respect to others in the market. An important categorization of ratio analysis is Liquidity ratio, profitability ratio, activity ratio, market ratio and debt ratio.
Dell ratios:
Profitability ratio
2009 (Balance Sheet, 2010) (Income Statement, 2010)
2008
2007
Return on Capital
33%
38%
57.7%
Gross Margin
7.9
19.1%
16.57%
Operating Margin
5.2%
5.6%
5.34%
Net profit Margin
4.1%
4.8%
4.49%
Liquidity Ratio
2009
2008
2007
Quick Ratio
1.30
1.03
1.08
Current Ratio
1.36
1.1
1.12
Activity ratio
2009
2008
2007
Profit Margin
4.05%
4.82%
4.498%
Operating profit Margin
5.22%
5.63%
5.346%
ROE
58%
76.9%
58.18%
Return on Investment
9.35%
10.69%
10.076%
Asset Turnover
2.30x
2.218x
2.24x
Debt Ratio
2009
2008
2007
Debt ratio
.8388
.861
.8268
Market Ratio
2009
2008
2007
EPS
$1.25
$1.31
$1.13
DPS
0
0
0
Discussion:
The profitability ratios of Dell show that the company has highest operating and net profit margin in the year 2008. The gross margin shows the same picture which mean that the cost of sales would have definitely came down in 2008 and again increased in 2009. In terms of return on capital, the ROC for investors is constantly decreasing since 2007. (Balance Sheet, 2010) (Income Statement, 2010)
The activity ratios show that the company return on investment has decreased to 9.35 from 10.69% in year 2008. This goes parallel with the profitability ratios which show that the company has a very profitable year in 2008 as compared to 2009 and 2007.
The profit margin in decreasing with the least value touched in year 2009, which is around 4.05%. This is a major result of two dominating factors. Firstly the increasing competition in computer market and secondly is the great depression in global capital market. Decreasing return on assets and return on equity also supports these facts. The lowering down of return on investment in 2009 indicates that the company is earning less per capita investment in the fiscal year 2009 than its performance in year 2008. Return on equity is decreasing drastically that mean that the company is not performing great in terms of profitability with comparison to other firms of same market. (Selected Financial data and ratios, 2010)
The current ratio is mostly used to provide an indication of the company's capacity to return its short-term liabilities that includes debt and payables, with the virtue of its short-term assets comprising of cash, receivables and inventory. The greater the current ratio, the company is more efficient in paying its duty. For Dell, the ratio is above 1.36, which indicates company's efficiency in returning back its obligations by its assets. (Selected Financial data and ratios, 2010)
Debt to total assets ratio of around 0.8388 in year 2009, points towards company's financial risks. This also highlights company's inefficient financial status in this year. But this attribute is visible in all computer companies of world and thus is a matter of periodic effects because of global financial crises.
Financial leverage usually increases the volatility of an organization's income per share. As the company is adding to its financial leverage, the EPS or earning per share can rise and drop by exaggerated amounts in answer to changes in EBIT. This is makes the EPS flow riskier for the investors of the company. Also, the option that EPS could be lesser than if there are lower financial leverage and the authority over the organization given to creditors indicates that the firm is having difficulty in paying its debts and thus is creating additional dangers for shareholders. Dell's EBIT and EPS indicates that 2007 was the year of little trouble for the company but the company is doing good and is back on the path of progress.
Conclusion
The ratio analysis of Dell suggests that the company is making considerably profit for its investors and providing reasonable return for its equity investors. Few factors that are been highlighted here is the fact the company has not distributed dividends in these three years instead of high profitability. Another thing is the reason for increased profit margin in 2008: decreased cost of sales. There is no obvious reason for this and thus the increased profit margin can be only looked as higher prices in 2008 than other concerned years.
Recommendations
Few recommendations for Dell on the basis of ratio analysis are:
The company may be confident in its investors and is not distributing dividends but historically it is seen that dividend paying firms are catchier for investors. Here the concern is not because of non paying of dividend but it is more becoming a trend (as the company has not distributed divined in last 5 years) which may harm the long term investor support of the company.
The capital structure of Dell needs a revision as D/E ratio is high as compared to industrial benchmark.
The company's current asset is increasing and its return in decreasing (in 2009) which can be looked as company's inefficiency in managing its profit, so company need to review it accordingly.
