Ratio Anayzes and Statement of Cash Flowfor Dell and Apple

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Ratio Analysis and Statement of Cash Flows Paper
Dell Incorporated (Inc.) and Apple Inc. are two of the biggest names in the computer industry. From laptops to accessories, both companies offer a wide range of products. In order to differentiate between the two companies and review the current financial health of their organizations, the financial statements will be analyzed. Dell and Apple will be compared based on operating profitability, asset utilization and risk management. Ten ratios comparing Dell and Apple during 2005 and 2006 will be defined, calculated and evaluated. Finally, an interpretation of these ratios as they are applied to Dell and Apple will be presented. Operating Profitability

Operating profit is "a measure of a company's earning power from ongoing operations, equal to earnings before deduction of interest payments and income taxes, also called EBIT (earnings before interest and taxes) or operating income" (Inverstorwords.com, 2007). The formula for operating profit is: operating profit = operating revenue – operating expenses.

In January of 2005, Dell reported that EBIT was $4,445 million and in 2006 it was $4,574 million, a 2.9% increase (Forbes.com LLC, 2007b). Alternatively, in 2005 Apple reported on EBIT of $1,815 million and in 2006, $2,818 million, a 55.26% increase (Forbes.com LLC, 2007a). These results indicate that Dell is more successful; however, Apple is rapidly and dramatically increasing their operating profitability. Tables 1 through 4 display the four most commonly used ratios for operating profitability. Asset Utilization

Asset utilization is vital to the success of an organization, and Dell and Apple both utilize capital equipment to manage their manufacturing and distribution operations. Dell is more streamlined in their operation while Apple has more assets. "Asset performance is typically used to compare one company's performance over time or against its competition. Possessing strong asset performance is one of the criteria for determining whether a company is considered a good investment" (Investopedia, 2007k). The ratios that are calculated in relation to asset utilization for fiscal years 2005 and 2006 show improved performance year over year for Dell; however, there is a decrease in Apple's performance in managing assets to convert capital into revenues (see Tables 5, 6, and 7). Risk Management

Risk management is a process of recognizing and reducing risks or threats to a company. Dell stated on their corporate government statement, "Managing risk – identifying and managing the risks that Dell undertakes in the course of carrying out its business and managing Dell's overall risk profile" (Dell Inc., 2007b). In late 2006 a press release by Apple states some the risks that are of concern to the company. "The effect of competitive and economic factors… possible disruption in commercial activities caused by terrorist activity… possible competitive pressures in the marketplace; the ability of the company to successfully evolve its operating system" (Apple Inc., 2007). Being aware of the risks and appropriately planning to deal with potential situations is how successful companies use risk management. Some of the ratios that can help in identifying possible risks can be found in Tables 8, 9, and 10, where fiscal years 2005 and 2006 for Apple and Dell are compared. Financial Ratios and Evaluation

Financial ratios are used to analyze financial statements in order to evaluate an organization's current financial standing and assess its overall performance. There are a variety of ratios that can be applied to Apple and Dell's operating profitability, asset utilization, and risk management. Each ratio can help in improving the financial condition and health of a company. Operating Profitability

Operating profitability ratios "are used to measure the firm's return on its investments" (Brealey, Myers, & Marcus, 2004, p.450). To evaluate the operating profitability for Apple...
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