Ratio Anayzes And Statement Of Cash Flowfor Dell And Apple
Essay Preview: Ratio Anayzes And Statement Of Cash Flowfor Dell And Apple
Report this essay
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 companys 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 companys 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 Apples 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 Dells 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 organizations current financial standing and assess its overall performance. There are a variety of ratios that can be applied to Apple and Dells 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 firms return on its investments” (Brealey, Myers, & Marcus, 2004, p.450). To evaluate the operating profitability for Apple and Dell in 2005 and 2006, four profitability ratios were completed: the net profit margin, operating profit margin, return on assets, and return on equity.
The net profit margin is the proportion of revenue that finds its way back into profit, which is expressed as a percentage (Brealey, et al., 2004, p.457). To find the net profit margin, net income is divided by sales:
Table 1
2005/2006 Net Profit Margin for Apple and Dell
Net “profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs” (Investopedia, 2007c). Table 1 indicates that in 2005 and 2006 Apple had a much higher profit margin at 9.6% and 10.3%, while Dell on average was about three percentage points lower.
The operating profit margin “is a measurement of what proportion of a companys revenue is left over after paying for variable costs of production such as wages, raw materials, etc” (Investopedia, 2007a, ¶1). The operating profit margin can be found by calculating net income plus interest divided by sales:
Table 2
2005/2006 Operating Profit Margin for Apple and Dell
The operating profit margin shows how much a company makes per dollar of items sold. This margin needs to be compared over time and with other companies to determine if the companys margin is increasing. For this ratio, a higher number is better. In Table 2, Apple shows a larger number both years, with an increase in 2006. Dells increase was only a tenth of a percentage point.
The return on assets (ROA) ratio is a technique used to measure the return on a companys assets. This ratio is able to give feedback on how efficient management is at using the assets the company has to generate earnings. ROA is calculated from net income plus interest divided by average total assets:
Table 3
2005/2006 Return on Assets for Apple and Dell
“The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better… earning more money on less investment” (Investopedia, 2007d). For Apple and Dell, during these time periods, the numbers