This paper presents a financial analysis of Dell Inc. – a multinational technology company based in, Round Rock, Texas. The ratio analysis takes into account: Dell’s financial ratios for FY 2009, 2010, 2011, 2012, and 2013 forecasts are analyzed. Consideration is placed on the company’s profitability, efficiency, liquidity, investment, and gearing. The findings show that Dell is indeed a well-established, low cost leader in the computer market; though, it faces current and future economic uncertainties, as well as intense competition from other technology giants, such as IBM, HPQ, and Acer. Dell Inc. has plenty market share growth opportunities in such areas as manufacture and sell of servers, printers, storage, and services for commodity products, in addition to opportunities outside the U.S. The analysis finds that Dell’s direct model renders the company with the most competitive supply chain logistics in the entire industry. Dell has increasingly focused on the profitability improvement and has a massive potential to benefit the value and performance of its shares for the better. On the other hand, Dell has been expressing sequential slowing down in revenue grow over the years which places its cash flow as a major area of concern for shareholders. A worrying trend in the PC market where it is steadily growing into a commodity industry is also cited as a worrying factor for Dell’s shares. Lastly, there is a fear that, as enterprise IT budgets and commodity prices become tighter, consumer spending may become weaker, and thus, compromise the status of Dell’s shares. The decision for a shareholder to either hold existing shares, sell them, or buy more is, therefore, be founded on its strength in the marketplace, the company’s ability to sustain its operating margin, and Dell’s long-term growth projections.
Dell is an information technology company that offers an array of services that are delivered through direct and other distribution channels to its customers. Dell is focused on offering technological solutions that are effective, simply accessible, and easy manageable (Dell Inc 2012). Whereas, Dell Inc is the holding company, which has various subsidiaries globally, there corporate headquarters is located in Round Rock, Texas. Therefore, the paper will refer to Dells business and activities of its consolidated subsidiaries.
In order to get a clear picture of Dells corporate performance and financial structure, one must understand the business strategy, operating business segments, geographical location, competition and sales and marketing activities. Dell business strategies are built on being the leading technology provider globally through listening to the customer needs and develop solutions to cater for those needs (Dell Inc 2012). Nonetheless, over recent years, Dell has undergone a broad transformation into a company that offers end-to-end solutions in the technology market. The company has expanded enterprise solution to include servers, networking and storage solutions. At the same time, in the services sector, Dell has added more capabilities to offer end-to-end technology solution to address their customers’ needs, such as managing customers’ security needs, which is focused on the level of threat and security consulting (Dell Inc 2012). Dell has also expanded its services into the desktop and mobility that have seen tremendous growth recently. Dell, moreover, offers enterprise software to meet the growing need of the customers. Therefore, Dell’s business strategy has been geared to ensure balanced profitability while at the same time to grow operating income and cash flow over the long-term (Canak 2006, p. 78).
Dell’s operating business segments are in the information technology sphere. Enterprise, Public, Small and Medium Business, and Consumer are the four business segments which are customer driven. The business segments have allowed Dell to serve customers faster and foster innovation (Dell Inc, 2011). First, large enterprises are customers that include large national and global businesses. Dell focal point on this segment is on delivering innovative solutions and services through the use of cloud computing technologies and data centers. The other customer is the public which include national institutions such as education institutions, government, national health sector, law enforcement and others government bodies (Dell Inc, 2011).These have unique needs that seek to address leadership challenges and ensure effective delivery of technology solution to aid them to achieve their goals. Third, small and medium (“SMB”) this segment is focused in ensuring that small companies get the most out the technological offering by ensuring that are scalable to meet expansion needs of the business.
Dell has designed, developed, manufactures, market and provides supports for a wide range of products and services. In addition, Dell provides various customer financial services to various financial institutions globally. Enterprise solutions include: severs, networking and storage (Dell Inc, 2011). In terms of software and peripherals, the company offers Dell-branded printers, displays, as well as a range of competitively priced third-party peripheral products e.g. televisions, printers, notebook accessories, keyboards, mice, digital cameras, networking, and wireless products, etc. They also offers a range of third-party software products, such as operating systems, antivirus and other security software, business and office applications, entertainment software, and products in several other categories. Dell’s client products are divided into two sectors: commercial and consumer. The commercial products include: Latitude, Vostro, Optiplex, and Dell Precision (Dell Inc, 2011).
Dell Inc. also offers a range of financial services and options for both consumers and commercial customers in the United States and Canada through the Dell Financial Services (DFS). The financial services include: originating, collecting, as well as servicing customer receivables associated to purchase of Dell products (Dell Inc, 2011). DFS also offers private label credit financing programs, in addition to leases and fixed term financing.
The company’s RDE spending is well-managed by prioritizing innovations and products considered most valuable to the customers and reliance on capabilities of their strategic relationships (Dell Inc, 2011). The collaborative, customer-oriented approach serves to deliver new relevant products to market quicker and more efficiently.
The bulk of products sold under the Dell brand are manufactured by the third parties i.e. contract manufacturers, as well as manufacturing outsourcing relationships. The company has an efficient manufacturing process that entails assembly – software installation – functional testing – quality control (Dell Inc, 2011). The third-party-obtained components, sub-assemblies, parts, and systems are also taken through testing and quality controls. Dell obtains materials, supplies, products, and product components from a vast number of vendors. Where it is advantageous for performance, support, quality, capacity, or pricing, the company makes use of a limited number of suppliers or a single source.
Dell Inc. has its global corporate headquarters in Round Rock, Texas. The company does business in a large number of countries in South and North America, Europe, the Middle East, Asia, and other geographical areas. Dell is expanding and investing in the Growth Countries (non-U.S. markets, except Western Europe, Canada, and Japan), especially the BRIC region (Dell Inc. 2011). The expansion outside the U.S. has created extra complexity in terms of coordinating the development, design, procurement, distribution, manufacturing, and support of complex products and services.
Dell’s business environment is characterized by rapid technologies advances, especially in hardware, software, as well as service offerings. The company faces strong price and product competition in almost all areas of their business from both generic and branded competitors (Dell Inc, 2011). Dell gains competitive advantage from offering integrated, scalable, competitive solutions which offer the state-of-the-art, desirable products and services. The company believes that its strong positive relationships with their customers, as well as its distribution channels enable it to respond effectively to rapidly evolving customer needs compared to many competitors (Pride & Ferrell 2011, p. 466).
Sales and Marketing
Dell sells its products and services to customers directly through retailers, system integrators, third-party solution providers, and third-party resellers (Ignatiuk 2009, p. 22). The company has a vast range of customers, which include national corporate and large global businesses, public institutions, such as government, healthcare, and education organizations, small and medium size business, law enforcement agencies, and consumers. For the last three fiscal years, no single customer was responsible for more than 10 per cent of the company’s net revenue (Shirani 2012, p. 27).
Dell organizes its sales efforts around the identified changing needs of its customers. They use a direct business model that focuses on direct communication with the customers, which enable refining of products together with marketing programs for the particular customer segments (Ignatiuk 2009, p. 34). Dell markets its products and services to a vast number of small and medium-sized enterprises and consumers via a multiplicity of advertising media. Dell IdeaStorm is the interactive section of Dell’s website, which invites customers to present suggestions relating to current and future products, services, and operations offered by Dell. Dell also uses the popular customer loyalty metric, Net Promoter Score, so as to respond to their customer’s needs quickly (Pride & Ferrell 2011, p. 470). The company has recently merged its global and marketing teams in a tactical move to develop a more efficient, collaborative, customer-focused, innovative, and responsive sales organization. The company maintains a field sales team across the world for large business, as well as institutional customers.
We used major technical and fundamental factors to critically assess the share value of Dell to a shareholder and determine the overall recommendation of Dell shares. It will offer an in-depth insight on the methodology used to represent Dell’s strength and weakness. However, it is necessary for one to understand that financial ratios only give a part of the picture. Therefore, to have a clear picture of the performance of Dell, these ratios must be accessed in a combination with the stock’s valuation. In addition, an understanding of the annual financial reports and patterns developed through past performance is developed in order to determine and value the company future prospects (Dell Inc, 2011).
Annual Financial Reports
According to Williams et al (2006, p.670) “The goal of accounting information is to provide economic decision makers with useful information.” Therefore, users of such information determine market futuristic trends within the organization and external factors that would impact the business environment. Financial statements are used differently by different individuals depending on the needs and goals for the investors. He or she takes a critical look on the return on investment (Kieso et al. 2006). On the other hand, the government requires 10 –k report to access the company’s solvency and compliance to taxation policies and regulation. Therefore, for the above case, a clear examination of Dell 3 year annual financial report from 2009 to 2012 will be used to data mine the research needs of the papers requirements to determine the Dell’s capital structure and test the chances of surviving the current recession through calculating fundamental financial ratios for the firm.
Financial Ratio Analysis
Performing calculation to determine the financial ratio is critical to determine both long-term financial and short-term health of the firm. Ratios offer dynamic changes that occur within the business that are often ignored or not shown in the annual financial statements, such as COGS (cost of goods sold). According to Williams et al (2005, p.674), “A ratio is a simple mathematical expression of the relationship of one item to another.” Therefore, ratios are very powerful test offering different financial information to users of financial statement to perform the analysis.
Most businesses are concerned over the overall profitability of the firm. Consequently, tools used to determine the overall profitability of the firm are essential to determine the company’s bottom line and its return on investment. The profitability ratio forms an integral component in calculating this (Kieso et al. 2006). The following ratio shows the firm’s efficiency and performance over a given period of time. Profitability ratios are divided into categories: margins and returns. Margins reflect on the company’s ability to translate revenue into profit; while returns represent the company’s measures the efficiency on generating returns to its shareholders. In order to determine Dell’s profitability ratio, the following ratios will be used: margin ration -: gross profit margin and operating profit margin and return ratio – return on equity, and return on assets.