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Dell vs HP ratios flexible budget perf measures

You must choose a publicly held company. Indicate the name of the company, a link to the homepage of the company and links to at least two other sources of financial information. Also, comment on your interest in the company and how one can expect to benefit from the analysis of this particular company.

Part I- Understanding Financial Reports
Assess the financial position of the company company in comparison to one of its competitors. The emphasis is on cash flow for this analysis.
1. Compute the return on assets, profit margin and asset utilization rate for your company and its competitor.
2. Assess your company's competitive financial position.
3. Compute the free cash flow for your company and its competitor.
4. Assess your company's relative cash position and comment on its receipt and use of cash during the year.

Part II- Cost Behavior
Review financial statements for two years. Make a comparison of
â?¢ revenues;
â?¢ cost of goods sold;
â?¢ accounts receivable; and
â?¢ accounts payable
â?¢ inventory
...for the two years and show trends for all five categories for each company. Keeping the case analysis in mind, discuss and interpret the changes over the three year period. Which company is the best performer and why? How is this information useful to you from a managerial perspective? Explain your reasoning and support with the numbers you have pulled out for the comparison above. Don't forget to comment on the interaction of the balance sheet and income statement.

Part III- Break-Even Analysis and Planning
Prepare a flexible budget for next year.
Limit limiting your budgeting to the absorption approach.
Set up the flexible budget showing three different growth rates. Use the financial statements and do research to determine growth trends. Explain your estimates and prepare a flexible budget showing the low, the average, and the high revenues and adjust all other line items in the income statement to reflect the revised revenue assumptions.
â?¢ What is the growth rate in sales for the past three years?
â?¢ Are revenues and expenses growing at the same rate? What was the experience in the past few years?
â?¢ What is the current growth rate in the economy?
â?¢ How are the competitors doing?
â?¢ Current interest rates and tax burdens.
Discuss the implications of the information after you have completed the flexible budget.
â?¢ How does the flexible budget differ from a static budget?
â?¢ Budgets are used for planning and control. Discuss how you can use the information derived for these two purposes?
â?¢ Comment on using this information for performance evaluations.

Part IV-
Lastly, regarding operating leverate, ROI, EVA, and pick another performance measure of your choice. You will note that there are variations in the computations of a particular measurement. Consistency in application is the key.
Use information from the latest financial statement for the same company to compute the measurements you researched.
Reflect on the advantages and disadvantages of these performance measures. Choose your preferred measure and explain your rationale.

Solution Preview

Analyze a company of your choice and help with this four part problem.

You must choose a publicly held company. Indicate the name of the company, a link to the homepage of the company and links to at least two other sources of financial information. Also, comment on your interest in the company and how one can expect to benefit from the analysis of this particular company.

I am interested in DELL because of how important computers are to our lives and how quickly they change. I reviewed DELL's webpage and Yahoo's page on DELL as well as an investor analysis site called Ventureline. I wondered if DELL was still as successful as they used to be when they were up-and-coming. It is hard to stay on top and with all the handheld devices, which DELL has not produced to compete, I wonder if they are losing ground to their competitor, HP. I can benefit from analyzing DELL because I can use my financial knowledge to discern if they are doing better than HP or not.

Part I- Understanding Financial Reports
Assess the financial position of the company in comparison to one of its competitors. The emphasis is on cash flow for this analysis.

1. Compute the return on assets, profit margin and asset utilization rate for your company and its competitor.
See Excel attached

2. Assess your company's competitive financial position.

Dell's Profit margin is consistently below HP in the last three years. However, their return on assets was higher in 2009 but dipped below HP in 2010 (just barely) before going even further behind HP in 2011. They seem to be slipping away from their competition! The asset utilization rate for Dell, however, is much better than HP, likely due to their lean inventories. HP has about six times as much inventory as Dell â?" and that inflates their asset base considerably.

3. Compute the free cash flow for your company and its competitor.

Free cash flows = Operating cash flows less capital expenditures.
See Excel attached

4. Assess your company's relative cash position and comment on its receipt and use of cash during the year.

Both firms have a great ability to generate cash from operations. Dell seems to be reinvesting about 10% of operating cash flows while HP is reinvesting more like a third of their operating cash flows. That's a big difference. That makes me wonder if Dell just doesn't have enough interesting projects to invest in or if they are just stricter in what they will devote cash to buy.

Both firms have a solid current ratio (over 1, see excel) and solid cash position so there is nothing in particular to discuss here.

Part II- Cost Behavior

Review financial statements for two years. Make a comparison of
â?¢ revenues;
â?¢ cost of goods sold;
â?¢ accounts receivable; and
â?¢ accounts payable
â?¢ inventory
...for the two years and show trends for all five categories for each company. Keeping the case analysis in mind, discuss and interpret the changes over the three year period. Which company is the best performer and why? How is this information useful to you from a managerial perspective? Explain your reasoning and support with the numbers you have pulled out for the comparison above. Don't forget to comment on the interaction of the balance sheet and income statement.

Starting with the income statement, Dell's sales are about half of HP, meaning that they are much smaller. And Dell's sales are declining while HP's sales are growing. In addition to size, Dell's gross margin percent is lower than HP's gross margin percent (see excel) in all years reviewed. And the difference was 5% in the most recent year, a substantial percent difference!

Moving from the income statement to the balance sheet, Dell dominates the inventory turnover ratio, turning nearly three times as fast as HP. This is due to Dell's policy of making inventory to order rather than having stock on the shelf for orders. So, as mentioned earlier, they have only a fraction of HP's inventory on hand. Inventory turnover has been getting even better for Dell, but this is because of a decline in sales and COGS with a smaller decrease in inventory levels, so this isn't a good trend. The reason for the decline is the lack of customer ...

Solution Summary

Your tutorial is 2,190 words and six references and discusses a range of issues for Dell over 2011, 2010 and 2009 years (fiscal 2012, fiscal 2011 and fiscal 2010). Dell is compared to HP for the ratios, remarking on how they compare and where Dell is weaker or stronger than its competitor. A flexible budget is created for "down 15%" "up 1%" and "up 10%" and the reasons are discussed. Assumed percent of fixed and variable costs are used to create a flexible budget and the outcome is discussed. Performance measures are computed and a preferred performance measure is discussed and justified.

$2.19