Report on Financial Analysis of Dell and HP, Research Paper Example

The following financial study report investigates two highly competitive computer technology companies, Dell and HP in the computer industry in terms of their performance. Financial ratios have been employed to evaluate the strengths and weaknesses from which policies and proposals can be made. The ratios are useful in calculating the company’s outcomes against other businesses and make decisions concerning management efficiencies and operation impact.

Current Ratio and Acid Test Ratio

The average current ratio for Dell 1.2 while the Acid test ratio was 1.1. these averages were better when compared to those of Hp which had a current ratio of 1.17 and an acid ratio of 1.00,  this tells that Dell has more current assets which helped it cover its short term liability hence making Dell the safer and the more financially stable company (Kay 2013, March 25). In 2012, HP had a risky year when its current ratio went down to 0.98, however, we shouldn’t concentrate on this fact by taking into consideration that their net revenue in sales averaged 7.94% growth rate which averaged 39.27% net income growth rate.

Collection period

Dell was able to collect customer payments on accounts receivable for a much shorter time than HP hence proving to be much stronger. Dell took 32.04 days while HP took 49.64 days to complete the task. However, both companies took a much longer time than expected because according to the normal business benchmark this task was to take 30 days. Dell was much more successful in this task than HP hence reducing the liability for the risky accounts receivable. Dells ability to make the collection in a shorter period enabled it to pay for its inventory hence not exposing greater amounts of a short-term debt by more working capital financing (Dave et al 2013).

Days to Sell Inventory

Dell’s inventory holding period was much shorter than that of HP. Dell had days to sell inventory ratio of 6.70 on average (Kay 2013, March 25) while HP had an average of 32.02. Dell works in a slightly leaner production way than HP and hence it is able to move inventory through its distribution networks. The faster the ability of a company to sell its inventories, the faster it starts paying back money owned on inventories obtained and sold, hence it does not have to increase its working capital financing.

Debts to equity ratios

Dell had a 5.23 average total debt to equity ratio in comparison to that of HP, which was lower average debt to equity ratio of 1.65. From these ratios, it is evident that Dell owed more to creditors and hence more debts than its equity or the shareholders finances. Moreover, the long-term debt to equity ratio for HP was 0.23, while that for Dell was 0.3. Many people may feel that Dell was not performing well because of many debts. However, the argument is that once Dell clears the debts, the creditors are gone forever as opposed to financing from equity that means that, more shareholders are needed and hence they will still be on payroll as in the case of equity financing as seen in the case of HP (Li et al 2013). Therefore, the strategy by Dell to finance its operation through debt than equity is a strength and an advantage as it tries to make more earnings at an increased level per share as opposed to HP.

Return on Assets ratio

This is an important ration as it is used to measure or determine the earnings per dollar from a company’s assets. The average for 2012/2013 of return on assets for Dell was 13.0% as compared to that of HP, 4.8%. The higher returns per dollar by Dell’s assets predict that the company was more effective in the utilization of its assets and the higher profits gained from products sold per the firm asset. However, both the firms have strong return on assets, even though Dell is stronger than HP in this area (Li et al 2013).

Return on common equity

This is a profitability ratio, which is very essential in a business as it determines the earnings achievement of the capital funds through common shareholders. The returns on capital for Dell were an average of 81.46% as compared to that one of HP that was 23.91%. This ratio reflects the higher potential for Dell in the attraction of new in investors than that of HP. Dell has a higher capability in efficiently managing and utilizing investments made through shareholders equity.

Profit Margin Ratios

Dells had a gross profit margin of 17.77%, which was lower than that of HP, which was 24.04%. HP controls a bigger portion of the computer market. Moreover, Dell also showed a lower operating profit margin as well as the pretax profit margin when compared to HP. The ability of Dell to sell more General as well as administrative expenses are the major cause for the lower operating and pretax profit margins, partially because of the new retail and global distribution relationships. As aspirated from the precursors above, the net income for Dell was also lower when compared to that of HP. Therefore, Dell needs to influence forcefully into the HP’s large market to positively impact on its sales (Frink & Blackburn 2013, February 19).

Cash Turnover

The cash turnover ratio is used to predict how a business uses its cash or cash equivalents to make sales revenue. The Dell’s cash turnover ratio averaged 5.60, while that of HP was 7.09. This is evident that HP was utilizing its cash and cash equivalents more effectively to create revenue than Dell was doing (Kay 2013, March 25). Moreover, this can predict that Dell avoided using its cash and equivalents as was also witnessed in the common size analysis where Dell retained 31.77% of cash and its equivalents as compare to the 12.41% by HP.

Inventory Turnover

This ratio represents the rate in which the company turns its stock into sales returns. Dell has a lower inventory turnover averaging at 58.38, than 11.86 for HP. Over the past few years, HP has hence become more effective in stock distribution cycles. Moreover, the amount of its stock held with regard to total assets has dropped from 9.5% in 2006 to 4.9% by 2013. Dell’s turnover ratio is affected by the rise in stock to total assets increasing from 3.14% in 2012 to 3.5% by 2013. The decline in sales of Dell’s products coupled with its rise in inventories to total assets over the past few years is the cause of its much higher stock turnover ratio (Dave et al 2013).

Total Assets Turnover

This ratio determines and measures the effectiveness of a company in utilizing total assets to make sales returns. Averagely, Dell’s capability to create more profits from the assets is about double that of HP, given that Dell has an average of 2.4 compared to HP’s 1.18. This shows that Dell has a better record of making sales of the overall stock or assets (Frink & Blackburn 2013, February 19).

Price to Earnings Ratio

The price to earnings for Dell was lower than that of HP, Dell had the price to earnings of 16.35 while that of HP been 18.52. From the perspective of this statistical ratio, HP showed more expectations to its investors by paying a higher price per share over the past 6 year time span. Nonetheless, considering that Dell portrayed better results in liquidation as well as return on investment, the company proved to its potential investors that it had a better buy at a lower price per share if compared to the HP company shares.

Earnings Yield

Earnings yield is the representation of the amount of earnings generated per dollar invested. Concerning the earnings yield, Dell is better since it shows an average of 7.02% compared to HP, which was 6.25%. This ratio also proves that Dell is the better buy since it is well priced in terms of earnings yield over the years 2009 to 2013 (Frink & Blackburn 2013, February 19).

Conclusion

The financial statistics above prove that Dell and HP are both strong competitors in the evolving world of technology. Dell should improve their research, development, as well as engineering to its sales percentage. It should no longer rely on only offering cheaper products because offering the latest technology as well as quality of products has shifted to the forefront of the customers’ minds. Dell should concentrate on the precise fields where they are more competent and should not try everything to everyone. Concerning this, they should concentrate on their retail stores. Taking into consideration that Dell is relatively new in the retailing segment, its ties to the retailing segment is not that strong compared to their competitors who have established good relationships with retailers. Good relationships with retailers give companies like HP an added advantage over new comers to the retailing segment, such as Dell; therefore, Dell should rethink this part of their marketing strategy. Currently, the quantity of increased funds used on selling and administration has not equally been converted into higher sales revenue.

However, Dell’s liquidity and return on investment ratios are very strong, even though they should increase their operating performance. Incorporation of work processes and striving for efficiency and development of better relationships with the raw material vendors will be the solution to improving the area of interest. If Dell increased its profit margin in their operating performance, this would result to a higher net income as well as increased asset utilization. Up grading from this situation would offer Dell the option to increase their price per share as well as earnings yield from their already strong position.

On the other hand, HP’s field of improvement is in its collection period. In its current position the collection period takes a lot of time hence resulting to the company using its capital funds to pay the inventories sold which have yet to collect payment on. Moreover, the days for to sell the inventory should also be attended to, the company should consider reducing the inventory produced and improve customer incentives for the HP products further that the present levels in order to move the products off the shelves more quickly.

References

Kay, R. (2013, March 25). Dell Has Put Itself In Exactly HP’s Position. Retrieved November 19, 2014, from http://www.forbes.com/sites/rogerkay/2013/03/25/Dell-has-put-itself-in-exactly-hps-position/

Frink, D., & Blackburn, J. (2013, February 19). Dell Reports Fourth Quarter, Full Fiscal Year Financial Results. Retrieved November 19, 2014, from http://www.Dell.com/learn/us/en/uscorp1/secure/2013-02-fy13fullq4pr

Dave, P., Wadhwa, V., Aggarwal, S., & Seetharaman, A. (2013). The Impact of Research and Development on the Financial Sustainability of Information Technology (IT) Companies Listed on the S&P 500 Index. Journal of Sustainable Development, 6(11), p122.

Li, F., Lundholm, R., & Minnis, M. (2013). A Measure of Competition Based on 10?K Filings. Journal of Accounting Research, 51(2), 399-436.