Dell Inc. Investment strategy Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Issue in the case

The main issue in the case is that Anthony Chan the portfolio manager for the Trinity Funds Inc., has to make the decision regarding Dell. Anthony Chan has to decide whether to sell, buy or hold Dell’s shares in his clients' portfolios and should move the investment into any other PC manufacturer.

Question 1

Assessment of Dell's performance and financial health

In order to assess the financial health and performance of Dell, the exhibits in the case study are analyzed. The financial ratios that are given in Exhibit 4, 9 and 10 of the case are used to examine the current financial performance of the company.

Market Ratios

Exhibit 9 of the case study is used in order to analyze the overall performance of the company in the market and it is determined that the performance of the company is not satisfactory as compared to its major competitors in 2008. Dell’s share price has declined in 2008 as compared to the previous year, as in 2007 it was US $22.85 but in 2008 it reduced to US $19.90.

However, Dell’s earnings per share ratio also declined in 2008 than the previous year. The earnings per share ratio in 2007 was 20.1 while in 2008 the amount reduced to 15.2, showing the portion of the company’s profit that is assigned to the number of shares. The market to book ratio of Dell for both the year is around US $11.69 and this was higher as compared to its competitors, thus, this reflected the poor performance of the company.

Profitability Ratios

Exhibits 4 and 10 are used for analyzing the profitability of Dell and it is concluded from the evaluation of the profitability ratios that the overall performance of the company decreased in the year 2008. The growth in the sales of the company has shown a decrease in 2008 as compared to the previous years, such as in 2004, growth in the revenue ratio of Dell was 17% but in 2008 it reduced to 6.5% indicating a huge decrease in the sales of the company.

The gross profit margin ratio of Dell increased in the year 2008 than the previous four years from 2004 to 2007. In 2004 it was 18.2%, but in 2008 it increased to 19.1% indicating enhancement in the gross profit margin of the company. The net profit margin ratio was in decline in 2008 as compared to the previous years, whereas in 2004 the net profit margin ratio of Dell was 6.4%, which reduced to 4.8% in 2008. However, the return on equity ratio has indicated an increase for the year 2008, likewise in 2004 it was 42.1% while in 2008 this ratio increased to 77.0% indicating that the company is generating a sufficient gain for their shareholders. The return on assets ratio also showed an increase for the year 2008 which was more than 2007 as return on assets ratio in 2007 was 10.1%, but in 2008 it increased to 10.7% indicating that assets are generating an adequate return for the company.

Liquidity Ratios

The liquidity ratios are analyzed in order to determine the financial position of the company in the market. The cash & market sec. to total assets ratio in 2008 declined as compared to the cash & market sec.to total assets ratio in the year 2007. The cash & market sec securities ratio in 2007 was 0.40x that showed a decline in 2008 which was 0.29x indicated that the worth of the convertible asset of Dell was low. The acid test ratio of Dell also indicated the reduction for the year 2008 than the previous year as the acid test ratio in 2007 was 0.84x which decreased to 0.75x in 2008 reflecting the poor liquidity of the company.

From the analysis of the comparative financial ratios (Exhibit 10) it is also concluded that the current ratio of the company also decreased in 2008 as compared to the previous year. The current ratio of Dell in 2007 was 1.12x but in 2008 it decreased to 1.07x indicating that Dell did not have enough current assets that could pay off its current liabilities in the future. Similarly, the working capital/sales ratio of Dell in 2008 also dropped compared to the year 2007, as it was 0.04x but in the year 2008 it reduced to 0.02x...........................

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