You are on page 1of 2

The stock price of Dell Computers had decreased by 50% in the previous year.

The
reason for the unexpected decline is unknown. An analysis of the financial
statements of Dell and competitors will provide the reasons for the decline in share
price. The macro reasons why the share price could have declined include the poor
performance of Dell Computers or the poor performance of the industry itself.
Financial statements and financial ratios of Dell Computers and its competitors will
allow for a concrete reason for the drop in the stock price of Dell Computers.
Financial ratios are basically a condensed and comparable form of financial
statements. It allows us to compare different companies in the same industry.
Although it does have its drawbacks, it still gives us an idea of what the financial
scenario of the company and industry looks like. The financial ratios of Compaq
Computers, HP, and Gateway Computers is provided in exhibit 10. The financial
ratios of Dell and IBM are missing and have been calculated and consolidated with
exhibit 10 in the table below. Competitor average was also calculated to compare
DELL with the industry average.

To present a precise and significant analysis of the ratios we will look at a few ratios
only. The most important ratio for analysis is ROE (Return on Equity). This ratio
explains what the profit on the investment by the owners is. As you can see in the
table above the Dell ROE is higher than 3 competitors and the competitor average.
Looking at the DELL ROE only, we can see how it has increased from about 31% to

38%. Dell also has the highest growth with respect to sales, operating income and
net income. Some competitors have negative growth. This shows how the industry
is in a state of decline yet Dell has managed to grow year on year. Return on assets
is also highest for Dell. Ratios of efficiency for Dell are far superior to the competitor
average. This is because the business model Dell follows is very different to that of
its competitors.
After looking at the financial ratios let us now look at two other aspects for our
analysis. We will first look at the common size balance sheet and common size
income statement (Exhibit 4 and Exhibit 5). The common size balance sheet shows
that Dell has a unique distribution on assets. It has an above average portion in
investments, cash and marketable securities. Dell has zero investment in Property,
Plant and Equipment. In terms of performance with respect to the income statement
we can see in exhibit 5 that IBM is the only competitor which is performing better
than Dell in previous two years. The balance sheet structure and income statement
proportions are similar across the industry except the difference mentioned above.
The differences are not significant enough to isolate Dell from the industry trends.
The other aspect we will look at are the stock price graphs in exhibit 7, 8 and 9.
Before we can conclude on the downward trend of the prices of Dell we should
analyze the trends of the prices of all the competitors and the index as well. Exhibit
8 shows that all competitors had a similar downward trend. All Stock prices of all the
four companies is falling. The gradient of HP and Gateway is steeper than that of
Compaq and IBM. Stock prices of HP and Gateway have fallen more than 50%.
After using different tools for analyses for common size statement, comparative
stock prices and ratios we can conclude that Dell is not the only company in the
industry to experience a decline in stock price. This is an industry wide
phenomenon. This specific industry experienced a boom before 2001, which ended
and therefore the prices of the stocks declined sharply. Dell Computer as a company
is growing faster than the industry and is increasing its top-line as well as bottomline. There is no reason for Dell stock price to go down except the fact that the
industry is in a decline.