Act assignment final 2014 sssl (1)
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Dell's financial analysis shows improving liquidity from 2011 to 2012 based on ratio calculations. The current ratio increased from 1.05 to 1.09, indicating greater ability to pay short-term debts. However, the quick ratio of 0.92 to 0.97 suggests Dell still relies on inventory to meet obligations. Asset turnover declined slightly from 0.58 to 0.55, meaning assets were not fully utilized to generate sales. Overall, the analysis found signs of better liquidity management but also opportunities for Dell to optimize its asset usage.
Act assignment final 2014 sssl (1)
- 1. Letter of Transmittal 15th December, 2014 Nishat Akther Faculty Department of Business Administration Southeast University. Submission of an assignment on: Financial analysis on Dell Inc. Dear Madam, This is our pleasure to complete the assignment and submit the report on “IInnttrroodduuccttiioonn ttoo FFiinnaanncciiaall AAccccoouunnttiinngg.” We organized the report on the basis of the Study in ffiinnaanncciiaall aannaallyyssiiss. This report is prepared on the basis of both primary and secondary data. Primary data was collected by questioning the concerned people of the company during the period of the working hour; while secondary data was collected from various printed documents like annual report of the company. Although the main purpose of the report is to kknnooww tthhee ffiinnaanncciiaall aannaallyyssiiss. We would like to express our gratitude to you for your tiresome effort for us which provided the opportunity to complete this assignment. Thank you For your kind deliberation. Yours Sincerely, On behalf of the group Rafat Ara Toma (2013210000001)
- 2. Acknowledgement At the very beginning we want to praise our respectable course teacher to Nishat Akther give us the assignment of preparing a ffiinnaanncciiaall ssttaatteemmeenntt aannaallyyssiiss. It has been a great honor for us to take part in such a prominent opportunity. Inestimable suggestion, invariable guidance, opinion, advice and reasonable help throughout the assignment work which smooth the achievement of this assignment. To entire staff without whose interest and co-operation we could not have produced this study. In the end we like to honor those persons whoever comprehend this proposal, with the name of Almighty Allah. Executive Summary This financial analysis report examines high profile competitors, Dell within the computer/technology industry in order to evaluate company performance and financial health. Overall company strategies were reviewed and considered along with the financial analysis to come to a conclusion for recommendation of investment. The reports introduction gives an overview to the computer/technology industry and expands on the strategies executed by Dell Inc.
- 3. The financial analysis covers common-size income statements and balance sheets, comparative income statements and balance sheets, and various financial statement ratios such as liquidity, capital structure and solvency, return on investment, operating performance, asset utilization and market measures from year 2011 to year 2012. A pro forma look ahead estimated financial performance is generated for each company and assumptions explored that helped derive the financial data for the pro forma. Conclusions are drawn from the above stated financial analysis as well as areas for improvement and investment recommendations. Dell well known companies competing in an ever evolving and expanding industry. The industry is in every segment from personal to educational to professional. Dell made waves throughout not only the computer/technology industry but in multiple industries for its ability to rethink distribution and customized sales direct to customers. While companies offer products and services, Dell has a slightly more diverse portfolio and is a bit more brand recognized as a trusted and quality company. From years 2011-2012, Dell was able to keep downward pressure on the growth of cost of goods sold. Through this time span, Dell secured a lower liquidity risk for its shareholders .
- 4. Dell choosing to not participate in this option for its investors. Dell’s approach is that instead of paying out a dividend, those funds are used to reinvest into the company to produce higher profits and overall create a stronger more financially fit company. Dell’s revolutionary process thinking along with its growth potentials, recent strategic acquisitions, low liquidity risk, and good return on investment makes a good case for potential investors to pursue. Table of Contents Letter of Transmittal Acknowledgement Executive Summary Introduction
- 5. I. Activity Ratio II. LiquidityRatio III. ProfitabilityRatio IV. SolvencyRatio V. ValuationRatio Findings Recommendation Conclusion Introduction The computer industry has come a long way since its first inception with the invention of Electronic Numerical Integrator and Computer in 1946. This industry is comprised of many items such as computers, monitors, printers, scanners, mainframes, servers, electronic computer components, networking and workstations to name a few. The industry started a major growth phase in the 1980’s with the production of the personal computer and has grown every since with many new products
- 6. introduced. Innovations within this industry have had positive rippling effects to outside industries, from manufacturing to banking. While the United States market is fairly saturated and mature, the computer/technology industry is very much in the growth phase on a global basis. The drivers behind this growth are both innovations in technology and especially increased consumer spending in Asia and Africa. The international value of this industry is expected to grow and surpass $620 billion in 2011, roughly a 27% increase from 2006. Dell market share the computer/technology industry due to brand name loyalty, advanced supply chain management techniques and producing innovating products for an affordable price. Dell over the last decade we have seen the price of the average computer go from close to $2,000 to less than $1,000. In part, pressures to add customers have lead to price wars between the two competitors. However, the price wars have not affected the quality of the products in those lower priced tiers.Dell firms have increased marketing efforts to enhance their brand recognition and strived to reduce cost through improved supply chain management and technology innovation. Both companies have room for growth, especially as they enter the portable
- 7. tablet market. It will also be interesting to see how Dell fairs in the cell phone market with its recent acquisition of the company Palm and how Dell with react to their success or failure within this market segment. Objectives The primary objectives for this financial analyst report are major companies the computer/technology industry Dell. Suggestions for company improvement will be discussed as well as recommendations for investment. A pro forma financial analysis for each company’s expected performance for 2011 will be conducted and assumptions that lead to these figures. The company’s performance will cover the years spanning from 2011 through 2012 with analysis of each company’s common-size income statement, common-size balance sheet, comparative income statement, comparative balance sheet and financial statement ratios.
- 8. Financial Analysis THE DELL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 2012 2011 (In millions except par value) As Adjusted ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,442 $ 12,803 Short-term investments 5,017 1,088 TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 13,459 13,891 Marketable securities 3,092 144 Trade accounts receivable, less allowances of $53 and $83, respectively 4,759 4,920 Inventories 3,264 3,092 Prepaid expenses and other assets 2,781 3,450 Assets held for sale 2,973 — TOTAL CURRENT ASSETS 30,328 25,497
- 9. EQUITY METHOD INVESTMENTS 9,216 7,233 OTHER INVESTMENTS, PRINCIPALLY BOTTLING COMPANIES 1,232 1,141 OTHER ASSETS 3,585 3,495 PROPERTY, PLANT AND EQUIPMENT — net 14,476 14,939 TRADEMARKS WITH INDEFINITE LIVES 6,527 6,430 BOTTLERS’ FRANCHISE RIGHTS WITH INDEFINITE LIVES 7,405 7,770 GOODWILL 12,255 12,219 OTHER INTANGIBLE ASSETS 1,150 1,250 TOTAL ASSETS $ 86,174 $ 79,974 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 8,680 $ 9,009 Loans and notes payable 16,297 12,871 Current maturities of long-term debt 1,577 2,041 Accrued income taxes 471 362 Liabilities held for sale 796 — TOTAL CURRENT LIABILITIES 27,821 24,283 LONG-TERM DEBT 14,736 13,656 OTHER LIABILITIES 5,468 5,420 DEFERRED INCOME TAXES 4,981 4,694 THE DELL COMPANY SHAREOWNERS’ EQUITY Common stock, $0.25 par value; Authorized — 11,200 shares; Issued — 7,040 and 7,040 shares, respectively 1,760 1,760 Capital surplus 11,379 10,332 Reinvested earnings 58,045 53,621 Accumulated other comprehensive income (loss) (3,385) (2,774)
- 10. Treasury stock, at cost — 2,571 and 2,514 shares, respectively (35,009) (31,304) EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE DELL COMPANY 32,790 31,635 EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS 378 286 TOTAL EQUITY 33,168 31,921 TOTAL LIABILITIES AND EQUITY $ 86,174 $ 79,974 Years 2011 2012 3013.1 000,899,4$ 000,374,6$ AssetsTotal Sales :TurnoverAssetTotal
- 11. In 2011, the firm’s ability to cover its current liabilities with its current assets was 1.05. In 2012, the ratio goes up to 1.09 as compared to 2011, which means that the company has the ability to pay its liabilities, as the definition says that higher the ratio, greater the ability of the firm to pay its bills. This tells that Dell is improving their liquidity and efficiency, because their current ratio is improving. Years 2011 2012 Quick Ratio 0.92 0.97 Current Ratio 1.05 1.09 347.2 500,837,1$ 000,313,4$ InventoryAvg. SoldGoodsofCosts :TurnoverInventory
- 12. According to the definition of Acid Test Ratio, the company should have the ability to pay its liabilities through its most liquid assets. The table shows that in 2011, the firm has the ratio 0.92 cents. Then we observe a slight improvement in 2012. So we can figure out from the ratios that Dell still cannot pay its debts without its inventory. This leads us to believe that Dell is a somewhat risky business, even though it is the largest in the nonalcoholic beverage industry. Years 2011 2012 Assets Turnover 0.58 0.55 3013.1 000,899,4$ 000,374,6$ AssetsTotal Sales :TurnoverAssetTotal
- 13. The ratio is supposed to be high. Here we can see that the Dell company’s total asset turn over ratio in 2011 was 0.58, which means that the company generated more revenue per dollar of asset investment. The ratio then comes slightly down in 2012. Years 2011 2012 Inventory Turnover 5.90 5.80 347.2 500,837,1$ 000,313,4$ InventoryAvg. SoldGoodsofCosts :TurnoverInventory
- 14. The Dell’s Inventory turnover ratios deteriorated from 2011 to 2012, which means that its ability to sell inventory has relatively come down. In 2011 Dell had a ratio of 5.90 and in 2012 has a ratio of 5.80. These ratios are not what we expected; we assumed that the ratios would be much higher because Dell sell its syrup to bottling partners around the world so it does not need to deal with the storing of the product Years 2011 2012 Avg. Collection Period 38.60 36.17 3013.1 000,899,4$ 000,374,6$ AssetsTotal Sales :TurnoverAssetTotal
- 15. The ability of the firm of collecting the receivables in the specific time. Here in the year 2011 the turnover in days was almost 39, but the collection days decrease in the year 2012 and the collection period of approximately 36 days is well within the 60 days allowed in the credit terms. This shows that the collection is faster as compared to the previous year. Years 2011 2012 %01.11 000,899,4$ 500,539$ AssetsTotal EBIT :ROA
- 16. Gross Profit Margin % 60.90 60.32 The ratio should be high according to the definition. Because higher the ratio, higher will be the firm’s ability to produce goods and services at low cost with high sales. Here in this table there is small difference between the ratios in two years, but its still high, which means it is favorable Operating Profit Margin: Years 2011 2012 Operating Profit Margin % 21.80 24.59 %46.8 000,375,6$ 500,539$ Sales EBIT :MarginProfitNet
- 17. Dell’s operating profit margin has increased in 2012 than the margin in 2011 by approximately 3%. This increase in Operating Profit Marin is mainly due to growth of net revenue, good cost control and strong productivity in company in 2012. This higher margin reflects that the Dell is more efficient cost management or the more profitable business. Net Profit Margin: Years 2011 2012 Net Profit Margin % 18.40 18.78 %46.8 000,375,6$ 500,539$ Sales EBIT :MarginProfitNet
- 18. According to the definition, higher the ratio, higher will be the firm’s ability to pay its taxes. In the year 2011, the margin was little low but in 2012 the margin increases by 0.4%. For the company, roughly 0.38 cents out of every sales dollar consists of ‘After Tax Profit'. Dell is more efficient at converting sales into actual profit and its cost control is good. Return on Assets (ROA): Years 2011 2012 ROA % 10.70 10.46 %46.8 000,375,6$ 500,539$ Sales EBIT :MarginProfitNet
- 19. The decrease in Return on Assets indicates that the company is generating less profits from all of its resources in the year 2012 as compared to the year 2011. The higher of this ratio is, the better for the company. Therefore this decrease in Dell’s ratio is indicating that the company is not that much prospering Return on Equity (ROE): Years 2011 2012 ROE % 27.10 27.51 %66.6 000,817,2$ 500,187$ EquityCommonTotal DividendsStock Preferred-EAT :ROE
- 20. The ratio should be higher. Here starting from 2011, the ratio was 27.10% and goes up in 2012 to 27.51%. This increase in Return on Equity is a good thing for stockholders and indicates that Dell is using the equity provided by stockholders during this specific year effectively and using it to generate more equity for the owners . Conclusionand Recommendationfor Investment Dell companies had their share setbacks due to the economic recession that started in 2006. The recession predominantly affected the areas of sales and investments the most. However, the downturn did highlight the ability to acquire other companies and their assets to broaden and expand each company’s market reach within industry. One of the better ways to determine a company’s direction financially is to look at the last few years of their performance and see where they physically placed their priorities. Dell’s growth strategy involves
- 21. reaching more customers worldwide through new distribution channels, such as consumer retail, expanding their relationships with value-added resellers, and augmenting select areas of their business through targeted acquisitions. Dell’s sales will continue at a larger rate than they did in the pro forma 2011 due to more focus being able to be directed at increasing traditional sales as well as the technology services sector instead of laboring over the restructuring from the acquisition, as they had to focus on over the last two years. Also, to improve net income Dell should continue to work out strategic alliances to put downward pressures on cost of goods sold and selling, general and administrative costs. Dell had lower liquidity risks good return on investments, which weigh heavily into an investors decision. Dell due to enhanced product and services diversification. With Dell’s larger brand name and recent acquisitions over the last several years makes them an interesting investment. Their price per share is believed to be undervalued and a good buy for such a prominent company, and their expanding market exposure into the tablet and possibly cell phone industry could increase their market share even more. There is also the dividend factor with Dell stock, which creates a
- 22. built in incentive for potential investors. Currently Dell does not participate in distributing dividends to its shareholders. Dell has had substantial gains in the market through diversification of sales and services offered. Also, Dell appears to have a better management of their operating expenses, which allows for them to post better net incomes. Dell companies’ are strong and healthy investments for potential investors. After reviewing their company strategies and recent year’s financial statements and ratios, it is believed that Dell would be a better investment with its larger diversification, brand name, lower operating expenses, larger net incomes, higher sales volumes and better growth potential in the long run. References Wahlen, J., Baginski, S., and Bradshaw, M. (2010). Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective. 7th ed., South- Western College Pub Investopedia (n.d.). Retrieved from http:// www.investopedia.com Yahoo! Finance (n.d.). Retrieved from http://finance.yahoo.com
- 23. Yahoo! industry center (n.d.). Retrieved from http://biz.yahoo.com/ic Google Finance (n.d.). Retrieved from http://www.google.com/finance Dell, Inc. and Subsidiaries. (Jan 2012). Form 10-K. Dell, Inc. and Subsidiaries. (Jan 2011). Form 10-K.