Dell vs. Hp Performance & Finanical Analysis

Financial analytic thinking jet-Size Analysis Common-Size Income Statement Analysis The common-size income statement for dell conveys a relatively horizontal history for salute of goods sold compargond to gross sales from 82. 27% in 2006 to 82. 49% in 2010. dingles tail fin form bonnie for appeal of goods sold to sales was 82. 23%, which is bit higher than HP cost of goods sold to sales cinque family bonny of 75. 96%. This in turn gives HP higher gross revenue enhancement than dingle most likely through means of obtaining raw materials and goods at demoralise costs, braggy HP greater energy for an change magnitude profit boundary line.This out exploitationd profit valuation reserve plunder allow for HP to dourer frequently discounts then dingle may be able to afford, or enlarge spending in champaigns of investment for the company. Another area of interest inside the common size income statement is related to failing, general and administrative to sales . boilersuit through the immense time 2006 to 2010, dell saw an increase in this area growing from 9. 05% in 2006 to 12. 22% in 2010. Mean period, HP experienced the take aim opposite effect, with this category declining from 12. 29% in 2006 to 9. 99% in 2010. accord to dingles yrly report, the major increase was referable to the erudition of Perot Systems.It also appears that over the last quintuple days, dingles system of products in a flash to customers has been adopted by many competitors, allowing the competitors to decrease some of their belt and commissions paid to sellers, all the while increase sales. In the same meter span as competitors conk outially adopted the st regularizegy that made dingle prominent, dingle began to place more products in sell stores to compete flatly on the front lines with its competition, as menti one and altogether(a)d in their Managements backchat and Financial Analysis meetings.This approach FINANCIAL psychoanalysis OF dell AND HP has subjectd a good percent of the sales revenue to go to retailers and distri besidesors, thusly straining the ability to maximize elucidate income for the present. Research, instruction and engineer for dingle as a percentage to sales were 0. 82% in 2006 and fairly grew to 1. 18% in 2010. HP research, articulatement and engineering to sales is close to 3 times the meter that dingle dedicated however, HP has drawdown their research, development and engineering to sales from 3. 92% in 2006 to 2. 35% in 2010.The five year bonny in this category for dell was 0. 99% and HP was 3. 04%. Even with HPs very a great deal higher research, development and engineering to sales percentage than Dell, HP has a higher ope array expense, nevertheless since their cost of goods sold to sales is let down, it gives HP the edge in producing a higher run income than Dell. Overall net income to sales fall for Dell throughout 2006 to 2010, with a major decrease happening in 2010 and general having a five year modal(a) of 4. 51%. In 2006 the net income to sales was 6. 46%, then in 2009 it fall awayped to 4. 6%, but in 2010 was when the major drop happened, resulting in net income world just 2. 71%. The main contributor to the drop in net income to sales was from operating expenses, with one component be the increase in research, development and engineering, but the primary increase coming from the selling, general and administrative category. Increased operating expenses are pondering of Dells push of broadly branched out into the retail market. HPs net income to sales remained flat during the same time span, with a five year average of 6. 88%.The basically net zero increase in net income potful be attributed to the economic downturn, and its rippling effect on customers. Common-Size equilibrise canvas tent Analysis The common-size residual sheet of Dell reflects a true assets to thorough assets five year average of 74. 91% and shows a li ght enclosure liabilities to jibe liabilities and allotholders comeliness five year average of 63. 72% cover charge years 2006 to 2010. Dells watercourse assets and genuine liabilities both decreased from 2006 to 2010, but their current liabilities decreased at a faster rate than their current assets did.The gap between the two in 2006 was somewhat 7% and had change magnitude to 16% by 2010, providing plenty of opportunity to grow and develop the company further in their plans. HP common size balance sheet represents a different story. Their a current assets to fundamental assets five year average was 49. 45% and short landmark liabilities to total liabilities and shareholders fairness five year average was 42. 37% across years 2006 to 2010. both(prenominal) accounts FINANCIAL ANALYSIS OF DELL AND HP 7 decreased slimly over the years, and by 2010, HP had a gap of current assets to current liabilities of only 4%.Potential investors will focus on this close edge because HP may start to become too heavily leveraged, which could occlude their ability to expand. It could also pose the problem of decreasing the percentage meat that HP reinvests back into the company, due to using assets to feed off short endpoint liabilities. Within Dells current assets, short marge investments to total assets decreased from 8. 67% in 2006 to 1. 11% in 2010. some(prenominal) of these short destination investments had matured and were sold. The additional cash in on script helped decrease accounts payable, which decreased from 42. 4% in 2006 to 33. 80% in 2010. cut down its liabilities strengthens Dell financial health, yet further liquidity and asset employ proportion analyze should be conducted to de frontierine if their more solid financial standing is big term or simple a one year over year change. Dells catalogue to total assets remained mainly the same over the five year span with 2. 53% in 2006 and 3. 12% in 2010. This is a reflection Dells dodge of keeping on hand entry levels low and only producing the derive able to quickly sell. HP inventory to total assets changed well from 9. 5% in 2006 to 5. 19% in 2010. The drop in inventory percentage to total assets is a representation of HP improved strategy to minimize holding periods by taking delivery of inventory and manufacturing nowadays prior to sale or dispersion of product to customers. It is also reflective of the aggressive discounting that HP conducted as a result of the economic downturn. Dells long term debt to total liabilities and shareholders equity increased considerably from 2. 69% in 2006 to 10. 15% in 2010 with average long term debt of 4. 71%.The major increased indicates that the company was dependant on long term debt to finance its acquisition of Perot Systems in 2010. HP long term debt to total liabilities and shareholders equity followed the same path by increasing from 3. 04% in 2006 to 12. 26% in 2010. This increased in total debt is explained in their annual report as being spending on acquisitions and share repurchases. Debt to equity proportionalitys are needed to be further evaluated to determine the risk gene for this increased level of liabilities. Comparative Analysis Comparative Income Statement AnalysisDells net revenue sharply declined from 2008 to 2010, going from 6. 47% to (13. 42%), as a result of the economic downturn, as individual customers put off luxury purchases such as computers and commercial customers put off good deal computer orders for a later to be determined FINANCIAL ANALYSIS OF DELL AND HP 8 date. On average, the net revenue harvest-home was 1. 86% while cost of goods sold was 2. 05%. Cost of goods sold increased faster than sales, lowering its likely gross profit. Even though selling, general, and administrative was reduced substantially from 2008 level of 26. 3% down to (8. 97%) in 2010, its egression rate averaged 9. 45%, which outpaced net revenue on average. The drop in selling general and administrative was due to decreases in compensation, ad expenses and improved controls during the downturn. The harvest-feast rate of cost of goods coup guide with the economic downturn, set up Dell with a (31. 91%) operating income for year 2010. A huge decrease in the market yield of over 200 stand points from 2009 was the cause for the (210. 45%) for investments and other income n 2010. Net income average was (10. 8%) over years 2006 to 2010, with major causes for this being lower sales due to economic downturn, decreases in investments, increases in tax liabilities and higher cost of a hedging program. Much like with Dell, the economic fallout had its effects on HP. Their net revenue severely decreased from 13. 50% in 2008 to (3. 22%) in 2009. The dollar depreciation to the euro played a large break open in this drop for its European sales. However, unlike Dell, HP rebounded in 2010, increasing sales up to 10. 02%, which can be attributed mostly in part to HPs acquisi tion of EDS. HPs annual cost of goods averaged 7. 4%, which was lower than their net revenue average of 7. 96%. This led to a more favorable net income on average, indicating HPs ability to better control its operating income through successful trade or more effective investment approaches over the years. Comparative Balance Sheet Analysis Dells five year average total current assets exploitation rate was 7. 75%, which was higher by a slim margin over average total current liabilities of 7. 27%. The relationship was consistent with the common size analysis giving support to Dells capability to cover short term liabilities with current assets.However, caution should be raised and solvency ratios further investigated as Dells current assets dipped below its current liabilities in 2010 by a comparison of 20. 32% to 27. 60%. Its competitor HP current liabilities growth rate average is out pacing its current assets growth by almost double with rates of 10. 88% to 4. 68%, respectively. This should meet caution to HP to get control of its short term liabilities growth rate, but not be too alarming, considering that by its common-size comparison, the company before long has enough current assets to pay for its short term liabilities.FINANCIAL ANALYSIS OF DELL AND HP 9 Dells accounts receivable rate of growth was 11. 90% on average, growing faster than the companys average sales rate, 1. 86%. This relates to the increase in the hookup period in days also increasing over this five year span. The category of property, plant and equipment grew for Dell at an annual rate of 6. 12%, with the absolute majority of this growth happening in years 2006-2008. Plant, property and equipment declined in years 2009-2010, (14. 66%) and (4. 2%) respectively, which coincides with the companys declining sales growth over these same years. On average, Dells total liabilities grew 11. 36% annually, compared to its total liabilities and shareholders equity growth rate average of 8. 21 %. This highlights the companys candidacy for potentially becoming a long-term solvency risk. Financial ratio Analysis Liquidity Current proportion and Acid Test Ratio Average current ratio for Dell was 1. 19 and the acid test ratio was 1. 14. These averages are better in comparison to HPs current ratio of 1. 17 and acid test ratio of 1. 0, which tells that Dell has more current assets to cover its short term liabilities and makes Dell a safer and more financially strong company. HP had a risky year in 2008 when its current ratio fell below 1. 00, ending at 0. 98, but shouldnt be focused on too much considering that their net revenue in sales averages 7. 96% growth rate and is averaging a 39. 33% net income growth rate. Collection Period Dells ability to collect customers payments on accounts receivable is stronger than HPs, with Dell taking 32. 04 days on average compared to HPs 49. 74 days. piece both companies collection period was longer than the normal business benchmark of 3 0 days, Dell was much more successful in collection from its customers and thus reduced the liability for risky accounts receivable. The shorter period for collection also enables Dell to pay for its inventory and not have to expose them to greater amounts of short term debt through increased on the job(p) capital financing. geezerhood to Sell Inventory Dell inventory holding period was much shorter than HP, with Dell having days to sell inventory ratio of 6. 70 on average and HP having an average ratio of 32. 2. Dell operates in a FINANCIAL ANALYSIS OF DELL AND HP 10 slightly anorexic production manner than HP and is able to quickly move inventory through its distribution networks. The quicker a company is able to sell its inventories, the quicker the clock begins to receive payment to be able to pay back money owed on inventories acquired and sold, and not have to increase your working capital financing. Capital Structure and Solvency Debts to Equity Ratios Dells five year aver age of total debt to equity was 5. 23, compared to HP lower average ratio of 1. 5. This shows that Dell had more debt (creditors) financing than equity (shareholders) financing. Long term debt for to equity on average for Dell was 0. 29 and HP was 0. 22. While many feel that debt from creditors is more harmful because of the interest paid on the principle borrowed, the advantage here is that once the creditor is paid back, they are done for(p) and off the payroll. Whereas equity financing involves more shareholders owning parts of the company, which reduces the dividend payout per shareholder as well as waters down honorarium per share.Dells approach to being more heavily financed through debt than equity may be in an attempt to keep earnings per share at an increased level. offspring on Investment retrograde on Assets and Return on Common Equity An important ratio is the authorize on assets ratio for its ability to measure earnings per dollar from its assets. The five year aver age for return on assets of Dell was 13. 06% while HPs was 9. 07%. This higher percentage for Dell reflects a more economic use of its assets and higher earnings from products sold per company asset.Both companies have strong return on assets that goes to show the loyal base of customers each brand name of the two companies has. Return on common equity is another important advantageousness ratio. This ratio measures the earnings success of its capital investments through common shareholders. The return on equity for Dell averaged 81. 46% while HP averaged 23. 91. An observation of this profitability measure shows that Dell is possibly much more attractive for potential investors for its ability to effectively manage and use funds generated through shareholders equity. direct executing Profit Margin Ratios Dells gross profit margin average of 17. 77% was lower than HPs average of 24. 04% HP controls a larger portion of the computer market as equal through this ratio. Dell also FI NANCIAL ANALYSIS OF DELL AND HP 11 posted lower operating profit margins and pretax profit margin compared to HP. Dells higher selling, general and administrative expenses are cause for lower operating and pretax profit margins, partly due to brand-new retail and certain global distribution relationships.As expected from the precursors above, net income was also lower for Dell when compared to HP. Dell needs to encroach more forcefully into HPs large market share to positively influence its sales. Operating expense components should be addressed as well to find cost savings measures to increase operation income in order to ultimately increase its net income. Asset Utilization Cash Turnover The measure of how efficient a company utilizes its cash and cash equivalents to create sales revenue is depicted with the cash employee turnover ratio. In respect to this ratio, Dell averaged 5. 0, while HP averaged 7. 09. This showed that HP used its cash and cash equivalents more expeditiousl y to build revenue. On the other hand, it shows that HP used its cash and cash equivalents while Dell refrained from using its cash and cash equivalents, as bare in the common size analysis, exhibit that Dell retained on average 31. 77% of cash and cash equivalents to assets while HP averaged 12. 41%. Inventory Turnover Inventory turnover represents how fast companies turn their inventories into sales revenue. Dell had a much slower inventory turnover on average, 58. 8, than HPs 11. 86. Over the past five years more companies have became better at the Dell model of sales direct to customers which has overall effected Dells sales as perspicuous in the comparative analysis showing on average Dell grew sales by 1. 86% while HP grew at 7. 96%. Also, HP has become more efficient in their inventory distribution cycle and the amount of inventories held in relation to total assets, dropping from 9. 45% in 2006 to 5. 19 by 2010. Dells turnover ratio was directly affected by its increase in inventory to total assets growing from 2. 53% in 2006 to 3. 2 % by 2010. The increase in Dells inventories to total assets percentage coupled with declining sales growth over the past five years was a cause for their much higher inventory turnover rate. Total Assets Turnover Total assets turnover measures how efficiently a company utilizes total assets to create sales revenue. On average, Dells ability to generate more profit from its assets was roughly FINANCIAL ANALYSIS OF DELL AND HP 12 double that of HP, being 2. 15 to 1. 07 respectively. This shows that for overall assets held, Dell had a better record of generating sales.Market Measures determine to Earnings Ratio and Earnings Yield The price to earnings for Dell on average was 16. 35, lower than HPs 18. 52. From this statistical ratio, HP is able to show that its investors have higher expectations of their company performance by being committed to paying a higher price per share to own HP stock over the past five year time span. However, with Dell showing better results when it came to liquidation and return on investment, they are able to portray to potential investors that they are the better misdirect at a lower price per share when compared to HP.Earnings yield represents the amount of earnings generated for every dollar invested. Here, Dell has a better showing on average with 7. 02% compared to HPs 6. 25%. This ratio can be another point of persuasion that Dell is the better purchase for it being properly priced when talking of earnings yield over the years 2006 to 2010. Summary of Financial Performance and Suggestions for Improvement Both Dell and HP have the financial statistics showing why they are strong competitors in an ever evolving industry.In an industry that attracts potential customers by offer the latest, fastest and greatest products, Dell needs an increase their amount of research, development, and engineering to sales percentage. Dell can no longer rely on just offering cheaper products because offering the newest technology and quality of product has moved to the forefront of consumers minds. It would be wise for Dell to focus on precise areas where they have a strong competency and not try to be all things to everyone. genius area they may rethink of pushing into is their expanded exposure into retail stores.Considering that Dell is fairly new to the retailing segment, their ties to the retailing market are not as strong as many of its competitors who have long withstanding relationships with retailers. These long withstanding relationships with retailers give companies like HP an advantage over new comers to retail stores, such as Dell, and possible over the next year or so, Dell should rethink this new part of their strategy. At the moment, the amount of increased funds used on selling, general and administrative has not equally translated into higher sales revenue.