ROE and ROA (strength)
Dell’s ROE and ROA have different patterns through the life of the case. Dell’s ROA has ranged from a high 18.2% in 1999 then gradually drop to 9.2% in 2008. Dell’s ROE has ranged from 43.7% in 1999 to 61.2% in 2008. Both ROA and ROE dropped significant amount in 2001. Dell’s ROE and ROA are well above the Federal Nominal 10-year T bills rates in all yeas and exceed HP’s ROE and ROA in all years. In 2001, HP’s ROE and ROA drop to the lowest point through the life of the case, because HP acquired Compaq and almost doubled size of the company. In 2001, Dell’s ROA and ROE drop to the lowest point through the life of the case. This large drop is due to the net income declined (42.77%) in 2001 compare to 2000. In 2006, Dell’s ROA and ROE dropped almost 5% and 7%. This drop also is due to net income declined (27.69%) in 2006. In 2008 Dell’s ROA dropped 2% and ROE dropped 10%. This large drop is due to the recession in 2008.
Using leverage to maintain higher returns to investor is not a bad thing. However, too much debt may cause serious financial problem. Dell’s ROE exceeds ROA by almost 50 %( average) from 2005 to 2008. In 2007, Dell’s ROE exceed ROA by 60%, which means the high returns to investor are based on use of leverage. In contrast, Dell’s debt to equity ratio is much higher than HP’s debt to equity ratio. This means HP’s returns to investor are more solid than Dell. P/E ratio (weakness)
The stock market is pessimistic about Dell’s future earning ability. This is due to the recession in 2008. Dell’s major business is selling computer and accessories, in the recession consumer tends to spend money on life essential goods such as food and gasoline. Dell’s P/E ratio is ranged from 70.7 in 1999 and gradually decreases to 14.2 in 2008. In contrast, HP’s P/E ratios fluctuate from high 32.77 to low 13.59 through the life of the case except in 2001 and 2002. In 2001 HP’s P/E ratio increased by 108 to 140.71 and in 2002, HP’s P/E ratio declined almost 100 to (48.06). This large change is due to the acquisition of Compaq Computer. Both Dell and HP’s P/E ratio are below S&P average P/E ratio in 2008 which means stock market is pessimistic about computer business in recession. Gross Margin (strength)
Both Dell and HP’s gross profit margin experienced little variation through the life of the case. Dell’s gross profit margin ranged from a low 16.57% in 2006 to a high 20.65% in 1999. HP’s gross profit margin gradually declined from 29.9% in 1999 to24.1% in 2008. The only difference is HP’s average gross profit margin is higher than Dell’s average gross profit margin by 6%-8%. I don’t think this is Dell’s weakness, because Dell’s high volume, low price strategy. Dell’s is doing a better job control their overhead costs more effectively than HP. Dell’s S, G, and A lower than HP’s through the life of the case until 2007 and 2008. Dell’s S, G, and A in 2007 exceeds HP by 0.6% and 0.55% in 2008. This is not a huge difference, but in a high volume, low margin strategy this small percentage matter. Asset Turnover
Dell’s asset turnover ratio is much higher than HP. Dell’s asset turnover has ranged from 2.26 to 2.75 through the life of the case compared to HP’s 1 to 1.41. This ratio indicates that Dell has high volume, low margin strategy. Both Dell and HP’s asset turnover are dropping over the life of the case. This is due to the increased competition and market saturation in the recession of 2008. Cash Management
Cash Conversion Cycle (CCC) (strength)
Dell’s cash conversion cycles are negative through the life of the case, which means Dell does not have to finance their working capital. Because Dell’s days cash in payable are almost 60 days (average) longer than their days in receivable plus days in inventory. This means Dell convert their sales into cash 60 days early than they have to pay for their bills. Also Dell’s days cash in inventory only has 5.4 days (average)....