Financial Ratios for Dell Inc

Financial Ratios for Dell Inc.

Jose Gonzales

Finance 544--Finance for Managerial Decision Making

Kevin Boyle (FAC)

March 9, 2005

Abstract

Financial Ratios for Dell Inc.

Team D selected Dell Inc. as our company for the team project. Why was Dell chosen? Dell Inc. with annual revenue of $41.4 billion, is a premier provider of computing products and services. Because of its direct business model, Dell was the leading seller of computer systems worldwide and the number one seller in our customer segments in the United States during calendar year 2003.

Michael Dell founded the company in 1984 on a simple concept of selling computer systems directly to customers. Using this technique, Dell could best understand customer needs and efficiently provide the most effective computing solutions to meet those needs. Dell's climb to market leadership is the result of a relentless focus on delivering the best customer experience by selling computer system and services directly to customers.

Dell, a Delaware corporation, is based in Round Rock, Texas and conducts operations worldwide through wholly owned subsidiaries. The company's business strategy combines its direct customer model with a highly efficient manufacturing and supply chain management organization and an emphasis on standards-based technologies. This strategy enables Dell to provide customers with superior value high quality, relevant technology customized systems; superior service and support; and product and services that are easy to buy and sell. (Form 10K, 2004)

A company with an annual revenue of $41.4 billion must be financially sound, right? The answer is..."not necessarily!" However, there are tools available that will help determine if our selected company is financially sound. Ratio analyses are those tools used to evaluate the performance of a business and identify potential problems.

Financial Ratios

Financial ratio analysis can teach so much about Dell's accounts and business. For example, using ratio analysis, we can conclude the profitability of Dell. We can also determine if Dell has enough money to pay its bills. Ratio analysis can check whether Dell is performing better this year than it was last year. Additionally, ratio analysis can alert us if Dell is doing better or worse than other businesses selling the same or similar products. http://www.bized.ac.uk/compfact/ratios/intro1.htm

Table 1.1 lists the ratios we feel are important for our selected company.

Dell Incorporated

Profitability Ratios 01/30/2004 01/31/2003 02/01/2002 02/02/2001 01/28/2000

Return on Equity (%) 42.12 43.55 26.54 39.77 31.39

Return on Assets (%) 13.7 13.72 9.21 16.64 14.52

Return on Investment 740.2 601.58 332.88 615.91 482.48

Gross Margin 0.018 0.018 0.018 0.02 0.021

Operating Margin (%) 8.55 8.03 5.74 8.35 8.96

Net Profit Margin (%) 6.38 5.99 4 6.83 6.59

Liquidity Indicators 01/30/2004 01/31/2003 02/01/2002 02/02/2001 01/28/2000

Quick Ratio 0.81 0.81 0.82 1.27 1.3

Current Ratio 0.98 1 1.05 1.45 1.48

Working Capital/Total Assets (0.01) 0 0.03 0.22 0.22

Debt Management 01/30/2004 01/31/2003 02/01/2002 02/02/2001 01/28/2000

Current Liabilities/Equity 1.74 1.83 1.6 1.16 0.98

Total Debt to Equity 0.08 0.1 0.11 0.09 0.1

Long Term Debt to Assets 0.03 0.03 0.04 0.04 0.04

Asset Management 01/30/2004 01/31/2003 02/01/2002 02/02/2001 01/28/2000

Revenues/Total Assets 2.15 2.29 2.3 2.37 2.2

Revenues/Working Capital (157.58) (3,933.78) 87.06 10.82 10.15

Interest Coverage 267 179.06 - - -

Table 1.1

(Mergent)

As indicated above, four categories were selected to perform our ratio analysis. They are profitability, liquidity, debt management, and asset management.

Profitability

The first category is profitability. Has Dell made a good profit compared to its turnover? For example, return on equity determines the rate of return on Dell's investment in the business. As an owner or shareholder, this is one of the most important ratios. Why is it important? It answers the question, "Is Dell making enough of a profit to compensate for the risk of being in business. To calculate this ratio, divide net profit by equity. Then compare the return on equity to other investment alternatives, such as stocks or bonds. http://www.bized.ac.uk/compfact/ratios/intro1.htm

Return on assets is the next ratio we will review. It is considered a measure of how effectively assets are used to generate a return. Return on assets shows the amount of income for every dollar tied in assets. It is an indicator of how profitable Dell is. This ratio is used annually to compare Dell's business performance to industry norms. Earnings before income taxes divided by net operating assets is how the return on assets ratio is calculated.

The gross profit margin ratio indicates how