Evaluating an Annual Report for Dell Corporation Thesis

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¶ … annual report for DELL corp

The current ratio of a company, calculated by dividing the current asset value to the current liabilities value, shows that respective company's capacity to cover its short - term liabilities by using its current assets. It is an important measure that shows the short-term financial solidity of the company: if the current liabilities are much greater than the value of the current assets, it is likely that the company will start having financial problems in the very near future. This is why a value around 1 is generally advisable for this ratio.

For Dell, in 2006, the current ratio was 1.11, as compared to 1.20 in 2005. As we can notice, there is a slight decreasing trend, however, the value shows the short-term financial solidity of the company and the company policy of using a current ratio as close to 1 as possible so as to give it a solid perspective for the financial development of the company in the future as well.

The quick ratio further argues these conclusions related to the company short-term prudent financial policy. Despite a small decrease from 1.16 to 1.08, the company's quick ratio is makes it very attractive from a short-term financial perspective.

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The inventory turnover is calculated by dividing the value of net sales to the value of the inventory. At Dell, the inventory turnover was 97.0625 in 2006, with this value decreasing slightly to 87 in 2007. This high ratio is supported mainly by Dell's very strong performance in terms of sales over the last couple of years. Despite a small decrease from 2006 to 2007, the value is still significantly higher than the industry average. It also shows the policy that Dell has in terms of inventory, with very low values for this in all years. As we have previously seen from the current and quick ratios, the company aims to produce to sell rather than to stock.

TOPIC: Thesis on Evaluating an Annual Report for Dell Corporation Assignment

The debt ratio is calculated as the total debt divided by the total value of assets in the company. At Dell, the debt ratio was 2.95% in 2007 and 2.2% in 2006. Despite the small increase in the value of the debt ratio, the company's performance is still remarkable in that it tends to use almost no debt to finance its development. Indeed, if we have a look on the company's balance sheet, the highest values for the liabilities category are those for accounts payable, which comes to show that the company's policy is to finance its investments through the products it sells rather than appeal to debts (the stockholders' equity is quite small as well).

The net profit margin ratio compares net profits after taxes to the revenue the company has obtained. Dell's values for the net profit margin ratio were 4.5% in 2007 and 6.4% in 2006. The company's net profit margin ratio has decreased from 2006 to 2007, the main reason for this being an increase in costs of sales. The company still retains a strong performance, especially if we look at the absolute value of the net profits for Dell.

In terms of the price per earnings ratio, the figures here are somewhat contradictory. In 2007, the P/E at Dell were 16.24, while its closest competitor, Hewlett - Packard had a P/E of 14.54. However, at the same time, the industry average was reported to be 33.14, which means that the P/E at Dell is almost half that of the industrial average. The result, despite being conclusive, is not very reflective of the company's activities and good potential show different movements on the stock market without a real backup in the operational activities of the organization.

The return on equity is calculated as net income divided by the total shareholders' equity. In 2006, this amounted to 86.5%, with 59.6% in 2007. The significant decrease from 2006 to 2007 can be explained with the drop in the net income value, previously explained. At the same time, the return on assets (ROI/ROA) can be calculated as a ratio of the net income to total assets. At Dell, this ratio was 10% in 2007 and 15.45% in 2006. As we can see, the same decrease from 2006 to 2007 is noticeable here, mainly due to the same causes.

If we were to resume this section based on the financial ratio interpretation, it is noticeable that, despite some strong performances in 2007, these are still lower than the ones in 2006, mainly because of an important decrease in the company's final net income. Despite a constant growth over this period of time, the operating costs grew as well, usually at the same rate, minimizing the effects of the revenue growth. At the same time, some of the other variables have increased, leading to disproportionate ratios over the period of time.

The company has a very solid financial situation, with prudent short- and long-term approaches that include low levels of inventory and almost no debt (the debt ratio is very small). This has led to positive values for the current ratios, as well as for the debt ratios. Additionally, the company seems to be using its assets well, although the decreasing trend from 2006 to 2007 could be a cause for future concerns, due to the decrease in returns.

The working capital shows the distinct characteristics of Dell, as well as of the characteristics of the industry. As previously mentioned, Dell works with high levels of account receivables and low levels of inventories. In other words, the company prefers to sell its product, even if on credit, rather than build large volumes of stock, which it would sell at another time in the future. Such an approach to working capital definitely has some important advantages.

First of all, the company does not incur the costs related to stocking products. Second, it does not run the risks of prices dropping at some of its stocked products and, from this point-of-view, it is obviously a better idea to sell it at the current price rather than wait for its eventual devaluation.

In terms of risks, there is obviously always the risk the clients will either take a long time to pay or will not pay at all, in cases of default. There are several things worth mentioning here.

First of all, the company generally works with large organizations and entities on credit, where the risk of default is sensibly lower than for smaller or individual entities. Second, in shopping areas where the company does deal with individual purchasers, such as computer stores, the default risk is usually taken on by the outlet itself rather than by the company providing the computer, in this case Dell.

The working capital at Dell was $1,779,000,000 in 2006 and $2,148,000 in 2007, thus showing an increase of 20.74%. The company is not only able to pay off its short-term debt, but it is also show the sustainability of its short-term obligations. The company's working capital is fully efficient.

In 2008, the company long-term debt grew from $378 million in August 2007 to $1,840 million in August 2008. This was equivalent to a decrease in stockholders' equity during the same period of time, thus a re-balancing of the company's financing to include more long-term debt. The new issuance was mainly done during April 2008, in three different private placements as such: "$600 million at 4.7% yield due April 15, 2013; $500 million at 5.65% yield due April 15, 2018; and $400 million at 6.5% yield due April 15, 2038."

However, as clearly stated by upper management in company policies, the company uses "cash generated by operations as our primary source of liquidity and believes this cash is enough to support our business operations." This is consistent with some of our previous observations referring… [END OF PREVIEW] . . . READ MORE

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