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1. Financial Statement Analysis Financial statement analysis involves using the information so that one can fully understand the story it tells about the company. It is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. Financial statements are prepared to meet external reporting obligations and also for decision making purposes. Different people read it for different reasons. Customers might want to know if a company will still be around in a year to honor a warranty. Suppliers might want to see if a customer can afford a price hike. Managers, creditors all have their purposes for reading the statements. Investors read financial statements either to check on their current investments or to plan their future ones. They analyze it to determine whether their beliefs about the company have been borne out and develop expectations about the future. 1.1. Objectives The overall objective of financial statement analysis is to observe a firms financial position and returns in relation to risk. This must be done with a view to forecasting the firms future prospective. Investors use financial statement analysis to1. Predict their expected returns 2. Assess the risks associated with those returns.
2. Overview of Dell Inc. Dell Inc. was founded in 1984 and is headquartered in Round Rock, Texas. It designs, develops, manufactures, markets, sells and supports computer systems, as well as provides related services globally. It offers desktop PCs; notebook computers, mobile workstations and smart phones, servers and networking products, network-attached storage, disk and tape backup systems and removable disk backup, printers and displays. The company also provides third-party software products such as operating systems, business and office applications, anti-virus software and entertainment software; tangential products such as printers, televisions, notebook accessories, keyboards, networking and wireless products, digital cameras and scanners. In addition, it offers infrastructure technology services, as well as customer deployment, asset recovery and recycling services; IT consulting, strategy and enterprise consulting, implementation for prepackaged software applications, and research services; applications development and maintenance services; and business process services such as claims processing, product engineering, payment and settlement management, life insurance policy administration, receivables collection and call center management. Further, the company provides financial services including originating, collecting, and servicing customer receivables related to the purchase of its products and financing alternatives and asset management services. It serves corporate businesses, government, education and healthcare organizations; law enforcement agencies and small and medium-sized businesses, individual customers and retailers. The company sells its products and services through its sales representatives, telephone-based sales, and online at dell.com, as well as through indirect sales channels.
3. The Significant Recent Events On March 2, 2011, Judy C. Lewent, a member of the Board of Directors of Dell Inc., chair of the Finance Committee and a member of the Audit Committee, informed the Chairman and Chief Executive Officer that she will not stand for nomination for re-election at Dell's Annual Meeting of Stockholders.
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On February 16, 2011, Dell Inc. share market position upgraded to Market Outperform from Market Perform by Rodman & Renshaw.
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On February 15, 2011, Dell Inc. issued a press release announcing its financial results for its fiscal quarter and fiscal year ended January 28, 2011.
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4. Auditors Report PricewaterhouseCoopers LLP, the audit firm that audits and makes reports for Dell. In the auditors report of March 18. 2010, they described that the company changed the manner in which it accounts for business combinations. Respectively in 2008, Dell changed the manner in which it accounts for uncertain tax positions and certain hybrid financial instruments. Managements Report on Internal Control over Financial Reporting described that management has excluded Perot Systems Corporation from its assessment of internal control over financial reporting as of January 29, 2010 because it was acquired by the Company in a purchase business combination during 2010. They have also excluded Perot Systems Corporation from their audit of internal control over financial reporting. Perot Systems Corporation is a wholly-owned subsidiary whose total assets (excluding allocated intangibles and goodwill) and total revenues represent
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3% and 1%, respectively, of the consolidated financial statement amounts as of and for the year ended January 29, 2010.
2006 Net revenue Cost of revenue Gross margin SG&A R&D Special charges Total operating expenses Operating income Investment and other income, net Income before taxes Income tax provision Net income $ 55,788 45,897 9,891 5,051 458 5,509 4,382 226 4,608 1,006 3,602
2007 $ 57,420 47,904 9,516 5,948 498 6,446 3,070 275 3,345 762 2,583
2008 $ 61,133 49,462 11,671 7,538 693 8,231 3,440 387 3,827 880 2,947
2009 $ 61,101 50,144 10,957 7,102 665 7,767 3,190 134 3,324 846 2,478
2010 $ 52,902 43,641 9,261 6,465 624 7,089 2,172 (148) 2,024 591 1,433
2006 Assets Cash & Short Term Investments Receivables Inventory Other Current Assets Total Current Assets Gross Property, Plant & Equipment Accumulated Depreciation Net Property, Plant & Equipment Long Term Investments Goodwill & Intangibles Other Long Term Assets Total Long Term Assets Total Assets 454 2770 23250 9070 4080 588 2690 17790 3560 1560 1990 2690
2007 10300 4620 660 2830 4050 1640 2410 2150 155 662 3550
2008 7900 5960 1180 3040 4610 1950 2670 1560 2430 618 6120
2009
2010
9090 11010 4730 867 3750 4510 2230 2280 454 2460 657 5890 5840 1050 3640 4650 2470 2180 781 5770 345 8630
Liabilities Current Portion of Long Term Debt Accounts Payable Accrued Expenses Deferred Revenues Total Current Liabilities Total Long Term Debt Other Long Term Liabilities Total Long Term Liabilities Total Liabilities
10430 11490
8310 11370
Shareholder's Equity Common Shares Outstanding Common Stock, Net Retained Earnings Treasury Stock
2230
2060
1940
1960
10110 10590 11190 11470 15280 18200 20680 22110 21030 25040 27900 27900
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Other Shareholder's Equity Shareholder's Equity Total Liabilities & Shareholder's Equity
-47 4050 23250 4330 3730 4270 5640 25640 27560 26500 33650
2006 2007 Net Income Depreciation Deferred Taxes Change In Working Capital Other Non Cash Operating Items Cash From Operations Capital Expenditures Sale of Assets Acquisitions Investments Other Investing Activities Cash from Investing Sale / Purchase of Stock Net Borrowings Other Financing Cash Flows Cash From Financing Foreign Exchange Effect Net Change in Cash 3570 2580 393 471
2008 2950 607 0 -168 563 3950 -831 0 -2220 -2390 2850 -1760 -3870 -199 -53 -4120 152 -1780
2009 2480 769 86 -1980 536 1890 -440 44 -176 -1580 1089 177 -2790 1280 100 -1410 -77 588
2010 1430 852 -52 771 902 3910 -367 16 -3610 155 -367 -3810 2 1940 74 2010 174 2280
0 0 355 529 519 386 4840 3970 -728 -896 0 0 -7560 1140 3880 -6230 0 0 40 -118 8340 9420 1000 2710
5.4.Horizontal Analysis Income Statement(in millions) (Dollar Change) FY06-FY07 FY07-FY08 FY08-FY09 Net revenue Cost of revenue Gross margin SG&A R&D Special charges Total operating expenses Operating income Investment and other income, net Income before taxes Income tax provision Net income $ 1,632 2,007 (375) 897 40 937 (1,312) 49 (1,263) (244) (1,019) $ 3,713 1,558 2,155 1,590 195 1,785 370 112 482 118 364 $ (32) 682 (714) (436) (28) (464) (250) (253) (503) (34) (469)
FY09-FY10 $ (8,199) (6,503) (1,696) (637) (41) (678) (1,018) (282) (1,300) (255) (1,045)
Income Statement (Percentage Change) FY06-FY07 FY07-FY08 Net revenue Cost of revenue Gross margin SG&A R&D Special charges Total operating expenses Operating income Investment and other 2.9% 4.4% -3.8% 17.8% 8.7% 17.0% -29.9% 21.7% 6.5% 3.3% 22.6% 26.7% 39.2% 27.7% 12.1% 40.7%
income, net Income before taxes Income tax provision Net income
Balance Sheet (Dollar Change in millions) 200620072007 2008 Assets Cash & Short Term Investments Receivables Inventory Other Current Assets Total Current Assets Gross Property, Plant & Equipment Accumulated Depreciation Net Property, Plant & Equipment Long Term Investments Goodwill & Intangibles Other Long Term Assets Total Long Term Assets Total Assets Liabilities Current Portion of Long Term Debt Accounts Payable Accrued Expenses Deferred Revenues Total Current Liabilities Total Long Term Debt Other Long Term Liabilities Total Long Term Liabilities Total Liabilities Shareholder's Equity Common Shares Outstanding Common Stock, Net Retained Earnings Treasury Stock Other Shareholder's Equity 1230 540 72 140 2150 490 80 420 -540 155 208 780 2390 -2400 1340 520 210 -60 560 310 260 -590 2275 -44 2570 1920
20082009 1190 -1230 -313 710 270 -100 280 -390 -1106 30 39 -230 -1060
20092010 1920 1110 183 -110 4100 140 240 -100 327 3310 -312 2740 7150
20 280 1430 0
280 2390
-600 1920
540 -1060
1370 7150
Balance Sheet (Percentage Change) 200620072007 2008 Assets Cash & Short Term Investments Receivables Inventory Other Current Assets Total Current Assets Gross Property, Plant & Equipment Accumulated Depreciation Net Property, Plant & Equipment Long Term Investments Goodwill & Intangibles Other Long Term Assets Total Long Term Assets Total Assets Liabilities Current Portion of Long Term Debt Accounts Payable Accrued Expenses Deferred Revenues Total Current Liabilities Total Long Term Debt Other Long Term Liabilities Total Long Term Liabilities Total Liabilities Shareholder's Equity Common Shares Outstanding Common Stock, Net Retained Earnings Treasury Stock Other Shareholder's Equity Shareholder's Equity Total Liabilities & Shareholder's Equity 13.6% 13.2% 12.2% 5.2% 12.1% 13.8% 5.1% 21.1% -20.1% 45.8% 28.2% 10.3% -23.3% 29.0% 78.8% 7.4% -0.3% 13.8% 18.9% 10.8% -27.4% 1467.7% -6.6% 72.4% 7.5%
20082009 15.1% -20.6% -26.5% 23.4% 1.4% -2.2% 14.4% -14.6% -70.9% 1.2% 6.3% -3.8% -3.8%
20092010 21.1% 23.5% 21.1% -2.9% 20.3% 3.1% 10.8% -4.4% 72.0% 134.6% -47.5% 46.5% 27.0%
5.5.Trend Analysis
Income Statement (in millions) FY06 FY07 Net revenue Cost of revenue Gross margin SG&A R&D Total operating expenses Operating income Investment and other income, net Income before taxes Income tax provision Net income 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 103% 104% 96% 118% 109% 117% 70% 122% 73% 76% 72%
FY08 110% 108% 118% 149% 151% 149% 79% 171% 83% 87% 82%
FY09 110% 109% 111% 141% 145% 141% 73% 59% 72% 84% 69%
FY10 95% 95% 94% 128% 136% 129% 50% -65% 44% 59% 40%
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Balance Sheet 2006 Assets Cash & Short Term Investments Receivables Inventory Other Current Assets Total Current Assets Gross Property, Plant & Equipment Accumulated Depreciation Net Property, Plant & Equipment Long Term Investments Goodwill & Intangibles Other Long Term Assets Total Long Term Assets Total Assets Liabilities Current Portion of Long Term Debt Accounts Payable Accrued Expenses Deferred Revenues Total Current Liabilities Total Long Term Debt Other Long Term Liabilities Total Long Term Liabilities Total Liabilities Shareholder's Equity Common Shares Outstanding Common Stock, Net Retained Earnings Treasury Stock Other Shareholder's Equity Shareholder's Equity Total Liabilities & Shareholder's Equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
2007 114% 113% 112% 105% 112% 114% 105% 121% 80% 100% 146% 128% 110%
2008 87% 146% 201% 113% 112% 129% 125% 134% 58% 1568% 136% 221% 119%
2009 100% 116% 147% 139% 113% 127% 143% 115% 17% 1587% 145% 213% 114%
2010 121% 143% 179% 135% 136% 131% 158% 110% 29% 3723% 76% 312% 145%
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5.6.Vertical Analysis
2006 Net revenue Cost of revenue Gross margin SG&A R&D Total operating expenses Operating income Investment and other income, net Income before taxes Income tax provision Net income 100.0% 82.3% 17.7% 9.1% 0.8% 9.9% 7.9% 0.4% 8.3% 1.8% 6.5%
2007 100.0% 83.4% 16.6% 10.4% 0.9% 11.2% 5.3% 0.5% 5.8% 1.3% 4.5%
2008 100.0% 80.9% 19.1% 12.3% 1.1% 13.5% 5.6% 0.6% 6.3% 1.4% 4.8%
2009 100.0% 82.1% 17.9% 11.6% 1.1% 12.7% 5.2% 0.2% 5.4% 1.4% 4.1%
2010 100.0% 82.5% 17.5% 12.2% 1.2% 13.4% 4.1% -0.3% 3.8% 1.1% 2.7%
2008
2009
2010
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Assets Cash & Short Term Investments Receivables Inventory Other Current Assets Total Current Assets Gross Property, Plant & Equipment Accumulated Depreciation Net Property, Plant & Equipment Long Term Investments Goodwill & Intangibles Other Long Term Assets Total Long Term Assets Total Assets Liabilities Current Portion of Long Term Debt Accounts Payable Accrued Expenses Deferred Revenues Total Current Liabilities Total Long Term Debt Other Long Term Liabilities Total Long Term Liabilities Total Liabilities Shareholder's Equity Common Shares Outstanding Common Stock, Net Retained Earnings Treasury Stock Other Shareholder's Equity Shareholder's Equity Total Liabilities & Shareholder's Equity
40.2% 18.0% 2.6% 11.0% 77.8% 15.8% 6.4% 9.4% 8.4% 0.6% 2.0% 2.6% 11.9% 13.8% 100.0% 100.0%
28.7% 34.3% 21.6% 17.8% 4.3% 3.3% 11.0% 14.2% 72.1% 76.0% 16.7% 17.0% 7.1% 8.4% 9.7% 8.6% 5.7% 1.7% 8.8% 9.3% 2.2% 2.5% 22.2% 22.2% 100.0% 100.0%
32.7% 17.4% 3.1% 10.8% 72.1% 13.8% 7.3% 6.5% 2.3% 17.1% 1.0% 25.6% 100.0%
10.0% 8.7% 40.9% 39.4% 54.6% 59.6% 77.5% 82.0% -0.2% 17.4% 16.9% 100.0% 100.0%
In the fiscal year 2010, sales were more than two-third lower and net income is more than onethird lower from the fiscal year 2006. Sales were $61133000 in 2008 which was the highest in
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5 years, but net income of 2006 was the highest in 5 years and decreased with the amount of $1433000 in 2010. The decreasing sales revenue from 2008 2010 showed the declining in profitability. The downward gross margin is a telltale sign of future problems. Declining net income indicate decreasing profitability & efficiency. But growing cash of Dell Inc. indicates strong company performance. Cash was increased with $11010000 in 2010 and total current liability also increased with $18960000. The increasing receivables show that the company is not quicker to collect payments from customers. Net property, plant and equipment was decreased to $2180000, but total long term asset was increased to $8630000 in 2010. Total long term liability also increased to $9050000 in 2010, which is not a good sign for the company. Retained earnings were increased in 2010, but Treasury stock remained unchanged in 2009-10. In the horizontal analysis, sales and net income were decreased accordingly at 13.4% and 42.2%. in 2009-10. Cash & Short-term investments increased 6% in 2009-10, but it was decreased at -23.3% in 2007-08. Net property, plant & equipment increased by 10.2% in 200910. Total long-term assets increased in 2009-10 by 42.7%. Total long-term liabilities decreased by 16.3% in 2009-10. Shareholders equity increased by 17.6% in 2009-10. In the trend analysis, assuming fiscal year 2006 as a base year, sales increased by 10% in 2008 & 2009, but decreased by 5% in 2010. Net income decreased by 60% in 2010 & increased most in 2008 by 18%. Cash increased by 21% in 2010, Total long-term assets increased by 212% in 2010. Total long-term liabilities increased by 199% in 2010. Shareholders equity increased by 39% in 2010, but decreased in 2008 by 8%. In the vertical analysis, Net income was 2.7% of sales in 2010, where it was 6.5% in 2006. Cash & short-term investment was 32.7% of total assets in 2010, where it was 28.7% in 2008. Total current asset was 77.8% in 2007, where it was 72.1% in 2010. Total long-term asset was
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25.6% of total assets in 2010. Total long-term liability was 26.9% & Shareholders equity was 19.8% of total liabilities & Shareholders equity in 2010. From the cash flow statement, the cash from operations was $3910000 in 2010, but it was $1890000 in 2009. So, the companys cash from operations is good enough for the company to remain solvent. Its a good sign as the cash from operations is going up. But the cash from investing was -$3810000 which showed the companys too much re-investment in 2010 and the Investors might not judge the company as a financially sound company. The cash inflow from financing of $2010000 showed that Dell Inc. raised their cash by borrowing and selling stock.
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Dell Inc. should hold their growing cash for strong performance. They should be quicker in collecting money from their customers. The forecasted earnings growth rate is 9.4% for Dell and 31% for the industry. They should increase their earnings growth rate to sustain in the industry. Technology has the power to enable human potential, but only if technology works harder to provide practical solutions to real-world problems. Thats how they define success at Dell. Dell creates solutions that are easy and efficient to use, reduce complexity, and save money. Meet the people and learn about the trends and perspectives that inspire Dell to give the power to do more.
Reference
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Introduction to Financial Accounting, (8th Edition); Horngren, Sundem, Elliott; Chapter-13 http://www.scribd.com/doc/2433224/Financial-Statement-Analysis http://finance.yahoo.com/q/pr?s=dell http://finance.yahoo.com/q/ce?s=DELL+Company+Events http://ycharts.com/financials/DELL/annual_balance_sheet http://www.wikinvest.com/stock/Dell_(DELL)/Report_Independent_Registered_Public_Accou nting_Firm
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