ANGLIA RUSKIN UNIVERSITY

STRATEGIC FINANCIAL ANALYSIS

Financial Analysis Report for DELL and HP

Prepared by MD MONIRUL ISLAM ARIF

SID 1230634

MOD 000983

Module Leader: LENEKA KRUPOVA

7/21/2014

Financial Analysis

Report for the DELL Corporation and HP

Executive summary

This Strategic financial Analysis report are consist of two most well-known computer

technology company DELL and HP also known as Hewlett and Packard which are design

for producing computer and also others technological stuff for their consumers globally.

However, these reports also portray company’s performance and financial health as well. In

total after go through with the strategies of both companies along with their financial

analysis report considered with a given conclusion for recommendation for investment. On

the other hands, this reports presenting a synopsis to the computer technology industry

along with tactics which is executed by DELL and HP. Moreover, it is also come up with

company’s common size income statement and balance sheet, comparative income

statement and balance sheet, different financial statement ratio which is liquidity, capital

structure and solvency, ROI, operating performance, and market measures from the year of

2010 to 2013. However, conclusions are given from the above financial analysis and also

some of the extents for enhancement and investment recommendation.

Dell and HP are both well-known company today’s world for producing computers and many

others computing technology. This computer industry is in all division from the personal to

educational and also for professional. Their innovations divers in all area to develop the

products for their consumer globally. Conversely, HP is one of the more established

company founded in 1939 on the other hands DELL completed whitecaps throughout not

only the computer technology but also it made in various industries for its aptitude to

reconsideration distribution process and personalized its sales through to the customers.

Furthermore, both companies are well recognized brands for offers both products and

services, perhaps, HP has ahead slightly miscellaneous portfolio with a bit more brand

recognized as a reliable and superiority company. On the other hand from 2010 till 2013

DELL was gifted to keep descending pressure based on growth of cost of goods sold

whereas HP kept their robust in growth and also in net profit. By the time span, DELL

protected lower liquidity risk for their shareholders than HP. Moreover, for HP, the marginal

operating performance was strong comparatively DELL corporation.

Introduction:

In this present technological era there have several computer industries which are working

hard and making more innovative to producing new device in every spare of life. Amongst of

several competitors DELL and HP are one of the most leading computer producing industry

around the globe. This technological industry has come with a long way since when the

development of Electronic Numerical Integrator and computer in during 1946. However,

both of this competitors comes up with many more computing technologies such as

computers, monitors, printers, scanners, mainframes, and many more others electronically

computer components which make easier the peoples to accomplish their workforce.

Nevertheless, the technological industry ongoing a major growth phase in 1980’s not only

with the invention of personal computer but also comes up with many more new computing

products. By revolutions within this industry reflects a positive effects outside trades such as

manufacturing and financial sectors. Perhaps, in the USA markets impartially soaked and

mature, on the other hands, the computer industry also have spontaneously growth phase

in the world. Behind the growth expectation are both in innovation in technology and also it

is surge the consumer expenditure in Asia pacific and Africa as well. According to

Bloomberg, The value of this both industries internationally is predictable to growth and

surpasses of $620 billion in 2011 which in coarsely increased 28% from 2008. However,

both companies DELL and HP still capture their market share in worldwide with their highly

reputed brands name, loyalty, and supply chain management system to manufacture more

innovative products for their consumer in an affordable and convenience price.

Strategies using by both companies DELL and HP:

Both of these computer technological companies are using modest environment to increase

market share at segmented price breaks. By gone through with their past price index it is

visualized that the average computer price closes to $2000 to less than $1000 (Wahlen, j.,

Baginski, S., and Bradshaw, M, 2010). Based on this, compressions to add customers have

led to price wars between the two competitors. Perhaps, these price wars are not making

any problematic reason for the quality of their products which is in lower case price index.

Both of these companies also putting too many efforts to upsurge marketing for their

products and also to improve brand appreciation and also endeavors cost through better

supply chain management and also technological creativity. Both companies have room for

growth specifically while they enter for portable tablet market. On the other hands, it is more

stimulating to view that how HP fairs in the mobile phone market while they acquisition most

recent company PALM and also it is interesting to see how DELL respond to their

accomplishment or letdown within this market segment.

The primary objectives for both of these companies financial report analysis to make a

comparison both financial position of DELL and HP through given suggestion of companies

improvement and also will be give recommendation for investment. Furthermore, a pro

forma financial analysis for both companies predictable recital for 2013 will be showed and

the assumption as well which is lead to the figure. The performance of both companies will

cover the year straddling from 2010 through 2012 along with each company’s common size

income statement, common size balance sheet, comparative income statement,

comparative balance sheet, and financial statement ratio as well.

Financial Analysis

Common size Income statement analysis

At the starting point, for the DELL Corporation, the common size income statement

demonstrate a relatively flat history for cost of goods sold while doing comparison with sales

from 83.28% in 2010 to 83.50% in 2012. Dell’s three years average for cost of goods sold to

sales 83.28% which is a bit higher than HP cost of goods sold to sale which is for three

years 76.95%. This turnover gives HP higher gross revenue than DELL which is most likely

concluded which means procurement raw materials and goods at lower costs, by giving HP

bigger aptitude for an amplified profit margin. This amplified profit margin could allowed for

HP to offer supplementary discount then DELL may be able to afford or could be upsurge

spending in areas for investment of the company. On the other hand, there have another

area of interest for the common size income statement which is associated with selling,

general and administrative to sale. In whole, the year of 2010 to 2013 DELL corporations

have seen an increment within this area consist of 9.15% in 2010 to 13.23% in 2013. At the

same time HP acknowledged of the opposite effect, which means it is declining from

13.29% in 2010 to 9.98% in 2013. Based on the DELL annual report it becomes clear that

by acquisition of perot system it increased. It is also portray that last three years strategy of

products of DELL, directly to the consumer espoused by the many competitors and also

which is allowing many more competitors to shrinkage overhead and commission which is

paid to retailers, all the while cumulative the sale. At meantime, while opponents partially

adopted the strategy which is made by DELL, the company starts to place more products in

retail store to compete straight on the front lines with it competition (Wahlen, j., Baginski, S.,

and Bradshaw, M, 2010). However, this tactic has caused very good percentage of the

sales revenue to go to the retailers as well as distribution therefore straining the ability to

maximize net income for the present. For the research and development and engineering

for the DELL industry sales were 0.85% during the year of 2010 and it is increased a bit

1.19% during the year of 2013. As for HP corporations, in the same department sales are

gone through unevenly 3 times more than DELL devoted. Nevertheless, in this category for

DELL was 0.99% and HP was 3.06%. More even, HP has a higher operating expense, but

since their cost of goods sold to sales is lower which is given to HP advantage to gain

higher operating income than DELL. Through, the year from 2010 to 2013 net income to

sale decreased for DELL causes of a major decrease happening in 2012 and overall having

three years average of 4.71%. During the year of 2013, net income of sale was for DELL

6.66% then the year 2010 it downturn in 4.26% but in 2011 was when the major dropped

was happen. On the other hands, HP net income to sale persisted flat during the same time

span along with three years 6.99%. However, net zero increase for net income can be

accredited to the economic downturn (Dell, Inc. and Subsidiaries. (Jan 2010). Form 10-K.).

Common size Balance Sheet:

The common size balance sheet for DELL corporations reproduces a current asset to total

asset for the three years average of 74.98% and also shows a short term liabilities to total

liabilities and shareholder’s equity for three years average of 63.69%. For the current asset

and current liabilities both decreased for the year of 2010 to 2013. Conversely, HP common

size balance sheet epitomized in different way. For the current asset to total asset for three

years average was 49.55% while short time liabilities to total liabilities and shareholder’s

equity was for three years 43.38%. Moreover, both accounts are decrease somewhat over

the year and HP had a gap of their current asset to current liabilities of only 5% (Hewlett-

Packard Company and Subsidiaries. (Jan 2010). Form 10-K).

Comparative income statement:

Between the years of 2010 to 2011 for the DELL net revenue abruptly drop from 7.47% to

13.78% which result is economic downturn, perhaps, many individual customers cut off

luxury purchases. Thus the result customers put off back to order for a later to be

unwavering date. However, on average the net revenue growth was 1.96% while the cost of

goods sold was 2.15%. This cost of goods sold amplified than sales, lowering is latent for

gross profit. Moreover, selling, general, and administrative was decrease significantly from

2010 27.73% down to 8.97% in 2012 which growth rate average10.45% which indicating

outperformed net revenue on average. Like DELL, the economic upshot also effect on HP

as well. The net value for HP separately decreased 13.76% in 2010 to 3.74% in 2011.

Basically the depreciation of dollar to euro played a large part in this drop section for its

European sales. Furthermore, perhaps, DELL and HP recovered in year of 2013 cumulative

sales up to 10.31%, which can be accredited for most of the part for HP acquisition of EDS.

By far, HP annual cost of goods averaged 7.84% which was lower than their net revenue

average 7.98%. This directed to additional favorable net income average, it is also

representing HP’s aptitude to healthier control its operating income through successful

marketing operation.

Comparative balance sheet:

Based on analysis of comparative balance sheet, DELL’s three years total current asset

average rate was 7.85%, indicating a higher slim margin over average total current liabilities

of 7.37%. However, the relationship was consistence along with common size analysis

which is given support to DELL ability to cover short term liabilities with current asset.

Perhaps, DELL current assets dipped below it current liabilities in 2010 by a comparison of

21.32% to 28.60%. On the other hands, the competitors HP current liabilities growth rate in

average is out striding it current asset growth almost twice with rates of 10.88% to 4.64%.

Financial Ratio Analysis

Liquidity (Current Ratio and Acid Test Ratio)

After analyzing of the ratio for both companies, it is indicating that, for the DELL average

current ratio of 1.18 and acid test ratio of 1.15 (Dell, Inc. and Subsidiaries. (Jan 2010). Form

10-K). These modes are better while doing comparison with HP current ratio which is 1.17

and acid test ratio is 1.00, while it is describing that DELL has some more current asset to

cover short term liabilities and also helps to make DELL more safer and even more

financially strong company. However, in the year of 2011 HP had possessing more risky

while their current ration fall below 1.00 and stopped it in 0.96% (Hewlett-Packard Company

and Subsidiaries. (Jan 2010). Form 10-K).

Collection period:

Based on the collection methods DELL has the strong collect customers payments on

account receivable compare to HP. As analyze that, DELL taking 32.08 days average while

HP took 49.64 days. However, both company’s collection period is much longer than the

usual business benchmark of 30 days; perhaps, DELL is much more successful to

collection from its customers.

Days to sell inventory:

It is one more positive side for DELL’s is inventory holding period much shorter than HP.

However, DELL took days to sell their inventory as a ratio of 6.77 on average and HP

having an average ration of 32.05. However, in this case, DELL operates in slightly thinner

production method than HP.

Return on Investment:

It is a much more important ratio which is return on asset ratio which is able to measure

earning per dollar from its assets. The companies three years average for return on assets

for DELL was 13.09% (Dell, Inc. and Subsidiaries. (Jan 2011). Form 10-K) while HP was

9.08%. This higher percentage indicating for DELL more efficient use of its assets and also

a high range of earning from products sold per company asset. Perhaps both companies

have strong return on asset which indicating of loyal base on customers of each brand

name of these two companies has. On the other hands, return on common equity is another

important portfolio ratio. This ratio justifies the earning success of capital investments which

concluded with the shareholder’s. However, for DELL average 41.89% while HP is 23.92%.

By looking at this portfolio measure, indicating that dell possibly much more attractive for

potential investor.

Operating Performance:

Profit margin ratio:

For the DELL Company gross profit margin on average 17.88%was lower than HP’s

average of 24.06%. Through this ratio it is indicating that HP controls a large portion of

computer market globally. In somewhat, DELL also portray lower operating profit margin

and pretax profit margin compare to HP. The higher selling, general and administrative

expenses are one of the reason for lower operating and pretax profit margin.

Summary of financial performance and suggestions for improvement:

It is clearly visualize through both companies DELL and HP financial statistics why these

companies are strong competitors in evolving industry. In an industry that attracts to the

customer through their latest, fastest, and greatest products, DELL needs an increase of the

amount of research and development and also need to gain more for the engineering to

sales percentage. It will be really difficult for DELL to rely only with offering cheapest

products because they are showing their new technology and quality of products have move

from front line on consumers mind. However, it would be really wise thinking of DELL if they

focus on prices areas where they also have a strong capability and should not try to be all

things to everyone. Perhaps, DELL is new to the retailing segment, thus for they need to re

think of pushing in to the retail store. This relationship with retailers gives companies like HP

an advantage over new comer at retail store. However, at this time the amount of increased

funds use on selling, general, and administrative are not equally translated into higher sales

revenue.

HP areas of improvement is with it is collection period. As above it is shows that the

collection period is higher than the DELL and is causes to HP to used its working capital

funds to pay for its inventories sold that they have yet to collect to payment on. They should

be addressed the day to sell inventory or either reduce inventory produce improve buyer

incentive for HP products further than current level.

DELL liquidity and return on investment ratios are good enough strong. Perhaps, still they

need to be improving their operating performance. If they are able to improve their profit

margin along with operating performance, then DELL will be able to gain higher net income

and also have chances to increase asset utilization. By improving this area it also have an

great possibility for DELL to increase price per share and earning yield from their healthy

position.

Conclusion and recommendation for investment:

Due to the economic recession in 2008, both companies share setback and it is also

affected the area of sales and investment. Nevertheless, the downturn highlighted that the

ability to acquire other companies and also their asset to extend each companies market

reach within the industry. However, DELL’s growth strategy engage to getting more

customer worldwide through their new distribution channels, such as consumer retails,

which is expanding their relationship with value added consumer. However, DELL sale will

continue at a large number than they did before due to more focusing being able to be

directed at increasing traditional sales.

On the other hands HP owns a large number of market shares than the DELL due to

improve product and service diversification. Through most recent acquisition and for brand

name last couple of year makes them an interesting investment company. However, their

price per share is believed to be in undervalued and also a very good buy for such kind of

this company and also their expanding market share much more than others.

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 2010). Form 10-K.

Dell, Inc. and Subsidiaries. (Jan 2009). Form 10-K.

Dell, Inc. and Subsidiaries. (Jan 2008). Form 10-K.

Dell, Inc. and Subsidiaries. (Jan 2007). Form 10-K.

Dell, Inc. and Subsidiaries. (Jan 2006). Form 10-K.

Hewlett-Packard Company and Subsidiaries. (Jan 2010). Form 10-K.

Hewlett-Packard Company and Subsidiaries. (Jan 2009). Form 10-K.

Hewlett-Packard Company and Subsidiaries. (Jan 2008). Form 10-K.

Hewlett-Packard Company and Subsidiaries. (Jan 2007). Form 10-K.

Hewlett-Packard Company and Subsidiaries. (Jan 2006). Form 10-K.