Common-Size Income Statement Analysis
The common-size income statement for Dell shows a relatively flat history for cost of goods sold compared to sales from 82.27% in 2006 to 82.49% in 2010. Dell’s five year average for cost of goods sold to sales was 82.23%, which is bit higher than HP cost of goods sold to sales five year average of 75.96%. This in turn gives HP higher gross revenue than Dell most likely through means of obtaining raw materials and goods at lower costs, giving HP greater ability for an increased profit margin. This increased profit margin can allow for HP to offer more discounts then Dell may be able to afford, or increase spending in areas of investment for the company.
Another area of interest 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 growing from 9.05% in 2006 to 12.22% in 2010. Meanwhile, HP experienced the exact opposite effect, with this category declining from 12.29% in 2006 to 9.99% in 2010. According to Dell’s annual report, the major increase was due to the acquisition of Perot Systems. It also appears that over the last five years, Dell’s strategy of products directly to customers has been adopted by many competitors, allowing the competitors to decrease some of their overhead and commissions paid to retailers, all the while increasing sales. In the same time span as competitors partially adopted the strategy that made Dell prominent, Dell began to place more products in retail stores to compete directly on the front lines with its competition, as mentioned in their Management’s Discussion 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 straining 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 amount 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 HP’s much higher research, development and engineering to sales percentage than Dell, HP has a higher operating expense, but since their cost of goods sold to sales is lower, it gives HP the edge 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 4.06%, but in 2010 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 reflective of Dell’s push of broadly branching out into the retail market. HP’s 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 economic downturn, and its rippling effect on customers. Common-Size Balance Sheet Analysis
The common-size balance sheet of Dell reflects a current assets to total assets five year average of 74.91% and shows a short term liabilities to total liabilities and shareholders’ equity five year average of 63.72% covering years 2006 to 2010. Dell’s current assets and current liabilities both decreased from 2006 to 2010, but their current liabilities decreased at a faster rate than their current assets...
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