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 “Introduction toIntroduction to

Financial AccountingFinancial Accounting.” We organized the report on the basis of the Study in financial analysisfinancial analysis.

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 know the financial analysisknow the financial analysis. 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)

Acknowledgement

At the very beginning we want to praise our respectable course teacher

to Nishat Akther give us the assignment of preparing a financialfinancial

statement analysisstatement analysis. 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.

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 .

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

I. Activity Ratio

II. Liquidity Ratio

III. Profitability Ratio

IV. Solvency Ratio

V. Valuation Ratio

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

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

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.

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

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)

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

Current Ratio:

Total Asset Turnover: SalesTotal Assets

= $ 6 ,374 , 000$ 4 ,899 , 000

=1 . 3013

Current Ratio 1.05 1.09

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

Quick/Acid Test Ratio:

Inventory Turnover: Costs of Goods SoldAvg . Inventory

=$ 4 ,313 , 000$1 ,837 ,500

=2 .347

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

Total Asset Turnover Ratio:

Total Asset Turnover: SalesTotal Assets

= $ 6 ,374 , 000$ 4 ,899 , 000

=1 . 3013

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

Inventory Turnover Ratio:

Inventory Turnover: Costs of Goods SoldAvg . Inventory

=$ 4 ,313 , 000$1 ,837 ,500

=2 .347

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

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

Average Collection Period:

Total Asset Turnover: SalesTotal Assets

= $ 6 ,374 ,000$ 4 ,899 ,000

=1 . 3013

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

Gross Profit Margin % 60.90 60.32

Gross Profit Margin:

Profitability Ratios

ROA: EBITTotal Assets

= $ 539 ,500$ 4 , 899 , 000

=11. 01 %

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

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

Net Profit Margin: EBITSales

= $ 539 ,500$ 6 ,375 ,000

=8 .46 %

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

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.

Net Profit Margin: EBITSales

= $ 539 ,500$ 6 ,375 , 000

=8 . 46 %

Return on Assets (ROA):

Years 2011 2012

ROA % 10.70 10.46

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

Net Profit Margin: EBITSales

= $ 539 ,500$ 6 ,375 , 000

=8 . 46 %

Return on Equity (ROE):

Years 2011 2012

ROE % 27.10 27.51

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

ROE:

EAT-PreferredStock Dividends

Total Common Equity=

$ 187 , 500$ 2 , 817 ,000

=6 . 66 %

.

Conclusion and Recommendation for 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

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

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

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.