Dell vs. Hp Performance & Finanical Analysis

fiscal Analysis Common-Size Analysis Common-Size Income Statement Analysis The common- coat income direction for dingle shows a relatively flat history for cost of goods change compared to sales from 82. 27% in 2006 to 82. 49% in 2010. dingles quint division full for cost of goods sold to sales was 82. 23%, which is bit high(prenominal) than HP cost of goods sold to sales five year second-rate of 75. 96%. This in turn gives HP higher(prenominal) gross receipts than dingle most likely with means of obtaining raw materials and goods at put down costs, giving HP greater ability for an increased profit margin.This increased profit margin can allow for HP to offer more discounts indeed dingle may be able to afford, or increase spending in areas of investment for the company. Another area of pertain within the common size income statement is related to selling, general and administrative to sales. Overall through the years 2006 to 2010, Dell saw an increase in this area gr owing from 9. 05% in 2006 to 12. 22% in 2010. Meanwhile, HP experienced the exact opposite impression, with this category declining from 12. 29% in 2006 to 9. 99% in 2010. According to Dells annual report, the study increase was due to the acquisition of Perot Systems.It withal appears that over the last five years, Dells strategy of products directly to customers has been adopted by many competitors, allowing the competitors to shine some of their overhead and commissions paid to retailers, all the while increasing sales. In the very(prenominal) time span as competitors partially adopted the strategy that do Dell prominent, Dell began to place more products in retail stores to compete directly on the front lines with its competition, as menti mavind in their Managements interchange and Financial Analysis meetings.This approach FINANCIAL ANALYSIS OF DELL AND HP has caused a good percentage of the sales revenue to go to retailers and distributors, thus strive the ability to maximize net income for the present. Research, development and engineering for Dell as a percentage to sales were 0. 82% in 2006 and slightly grew to 1. 18% in 2010. HP research, development and engineering to sales is roughly 3 times the heart and soul that Dell 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 average in this category for Dell was 0. 99% and HP was 3. 04%. Even with HPs some(prenominal) higher research, development and engineering to sales percentage than Dell, HP has a higher in operation(p) expense, but since their cost of goods sold to sales is lower, it gives HP the border in producing a higher operating income than Dell. Overall net income to sales decreased for Dell throughout 2006 to 2010, with a major decrease happening in 2010 and overall having a five year average of 4. 51%. In 2006 the net income to sales was 6. 46%, then in 2009 it dropped to 4. 6%, but in 20 10 was when the major drop happened, resulting in net income being just 2. 71%. The main contributor to the drop in net income to sales was from operating expenses, with one component being the increase in research, development and engineering, but the primary increase coming from the selling, general and administrative category. Increased operating expenses are meditative of Dells push of broadly branching 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 can be attributed to the stinting downturn, and its rippling effect on customers. Common-Size Balance Sheet Analysis The common-size balance tag end of Dell reflects a flowing assets to total assets five year average of 74. 91% and shows a short edge liabilities to total liabilities and stockholders equity five year average of 63. 72% covering years 2006 to 2010. Dells current assets and current liabiliti es 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 roughly 7% and had increased 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 total assets five year average was 49. 45% and short term liabilities to total liabilities and shareholders equity five year average was 42. 37% across years 2006 to 2010. Both accounts FINANCIAL ANALYSIS OF DELL AND HP 7 decreased slightly 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 margin because HP may start to set out too heavily leveraged, which could hinder their ability to expand. It could also pose the problem of decreasing the percentage amount that HP reinvests back into the company, due to using assets to conduct off short term liabilities. Within Dells current assets, short term investments to total assets decreased from 8. 67% in 2006 to 1. 11% in 2010. Many of these short term investments had matured and were sold. The additional notes on hand helped decrease accounts payable, which decreased from 42. 4% in 2006 to 33. 80% in 2010. reduce its liabilities strengthens Dell financial health, yet further liquidity and asset utilization ratio test should be conducted to determine if their more solid financial rest is coherent term or simple a one year over year change. Dells inventory 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 strategy of keeping on hand inventory levels low and only producing the amount able to quickly sell. HP inventory to total assets changed substantially from 9. 5% in 2006 to 5. 19% in 2010. The drop in inventory percentage to total assets is a representation of HP melior ate strategy to minimize holding layovers by taking tar of inventory and manufacturing immediately prior to sale or distribution of product to customers. It is also reflective of the aggressive discounting that HP conducted as a result of the sparing downturn. Dells long term debt to total liabilities and shareholders equity increased substantially 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 ratios are needed to be further evaluated to determine the risk factor for this increased level of liabilities. relative Analysis Comparative Income Stateme nt 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 bulk computer orders for a later to be unflinching FINANCIAL ANALYSIS OF DELL AND HP 8 date. On average, the net revenue growth was 1. 86% while cost of goods sold was 2. 05%. Cost of goods sold increased faster than sales, lowering its capableness gross profit. Even though selling, general, and administrative was reduced substantially from 2008 level of 26. 3% down to (8. 97%) in 2010, its growth rate averaged 9. 45%, which outpaced net revenue on average. The drop in selling general and administrative was due to decreases in compensation, advertising expenses and improved controls during the downturn. The growth rate of cost of goods coup conduct with the economic downturn, found Dell with a (31. 91%) operating income for year 2010. A large decreas e in the market yield of over 200 basis 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 seve curse decreased from 13. 50% in 2008 to (3. 22%) in 2009. The dollar depreciation to the euro played a large part 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 acquisition 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 marketing or more effective inve stment approaches over the years. Comparative Balance Sheet Analysis Dells five year average total current assets growth rate was 7. 75%, which was higher by a slim margin over average total current liabilities of 7. 27%. The relationship was coherent with the common size analysis giving support to Dells capability to cover short term liabilities with current assets.However, caution should be embossed 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 bring 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 soon 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 suckion 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 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 semipermanent solvency risk. Financial Ratio Analysis Liquidity Current Ratio and Acid Test Ratio Average current ratio for Dell was 1. 19 and the savage test ratio was 1. 14. These averages are better in comparison to HPs cu rrent 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.While both companies collection period was weeklong than the normal business benchmark of 30 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 surrender to expose them to greater amounts of short term debt through inc reased working great financial support. Days 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 leaner merchandise 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 quantify 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 social structure and Solvency Debts to candour Ratios Dells five year average 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 gone 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 earnings 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. Return on Investment Return on Assets and Return on Common Equity An important ratio is the surpass on assets ratio for its ability to measure earnings per dollar from its assets. The five year average for return on assets of Dell was 13. 06% while HPs was 9. 07%. This higher percentage for Dell reflects a more efficient 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(prenominal) important profitability 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.Operating Performance 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 represented through this ratio. Dell also FINANCIAL 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 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 take 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 perturbation The measure of how efficient a company utilizes its cash and cash equivalents to create sales revenue is depicted with the cash turnover rate 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 efficiently 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 evident in the common size analysis, viewing that Dell retained on average 31. 77% of cash and cash equivalents to assets while HP aver aged 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 evident 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 turno ver 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 Price 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 buy at a lower price per share when compared to HP.Earnings yield represents the amount of earnings generated for every dolla r 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 buy 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 offering 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 punctilious areas where they have a strong competency and not try to be all things to everyone. One area they may rethink of pushing into is their expand ed ikon 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.