1

INSTITUTE OF TECHNOLOGY AND

MANAGEMENT

A
PROJECT REPORT
ON
FINANCIAL ANALYSIS
OF


SUBMITTED TO: SUBMITTED BY:
LATIKA KARNANI BHARTI GIANCHANDANI
ASSIT. PROFESSOR MBA 1
st
YEAR(2
ND
SEM)


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ACKNOWLEDGEMENT
I have taken efforts in this project. However, it would not have been possible without the
kind support and help of many individuals and organizations. I would like to extend my
sincere thanks to all of them.
I am highly in debted to Assit., Professor Latika Karnani for their guidance and constant
supervision as well as for providing necessary information regarding the project & also
for their support in completing the project.

I would like to express my gratitude towards my parents & member of Organization for
their kind co-operation and encouragement which help me in completion of this project.

My thanks and appreciations also go to my colleague in developing the project and
people who have willingly helped me out with their abilities.

















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INDEX
Contents
COMPANIES PROFILE: ........................................................................................................................... 4
INTRODUCTION ........................................................................................................................................ 6
FINANCIAL ANALYSIS ............................................................................................................................. 7
FINANCIAL RATIO ANALYSIS ............................................................................................................ 9
FINANCIAL RATIOS COMPARISON OF DELL AND HP ................................................................. 12
LIQUIDITY RATIOS: ............................................................................................................................ 12
1. CURRENT RATIO: ...................................................................................................................... 13
SOLVENCY OR GEARING RATIOS: ............................................................................................... 15
1. Debt Equity ratio: ......................................................................................................................... 15
PROFITABILITY RATIO ...................................................................................................................... 16
GROSS PROFIT RATIO: ................................................................................................................ 17
NET PROFIT RATIO: ...................................................................................................................... 18
RETURN ON CAPITAL EMPLOYED ................................................................................................ 18
RETURN ON EQUITY ......................................................................................................................... 19
INVENTORY TURNOVER RATIO .................................................................................................... 20
EARNING PER SHARE ...................................................................................................................... 21
INTEREST COVERAGE RATIO: ....................................................................................................... 22
Capital structure of Dell and HP ......................................................................................................... 23
Performance ratios of HP and Dell ........................................................................................................ 24
CONCLUSION .......................................................................................................................................... 25
BIBLIOGRAPHY ....................................................................................................................................... 26

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COMPANIES PROFILE:

Dell Inc. is an American privately owned multinational computer technology
company based in Round Rock, Texas, United States, that develops, sells,
repairs and supports computers and related products and services.
Bearing the name of its founder, Michael Dell, the company is one of the largest
technological corporations in the world, employing more than 103,300 people
worldwide.
Dell sells personal computers, servers, data storage devices, network switches,
software, computer peripherals, HDTVs, cameras, printers, MP3 players and also
electronics built by other manufacturers.
The company is well known for its innovations in supply chain management and
electronic commerce, particularly its direct-sales model and its "build-to-order" or
"configure to order" approach to manufacturingdelivering individual PCs
configured to customer specifications. Dell was a pure hardware vendor for much
of its existence, but a few years ago with the acquisition of Perot Systems, Dell
entered the market for IT services.
The company has since made additional acquisitions in storage and networking
systems, with the aim of expanding their portfolio from offering computers only to
delivering complete solutions for enterprise customers.
Dell is listed at number 51 in the Fortune 500 list. In 2012 it was the third largest
PC vendor in the world after HP and Lenovo. Dell is currently the #1 shipper of
PC monitors in the world.
Dell is the sixth largest company in Texas by total revenue, according to Fortune
magazine. It is the second largest non-oil company in Texas behind AT&T
and the largest company in the Greater Austin area.
It was a publicly traded company (NASDAQ: DELL), as well as a component of
the NASDAQ-100 and S&P 500, until it was taken private in a leveraged buyout
which closed on October 30, 2013.

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Hewlett-Packard Company or HP is an American multinational information
technology corporation headquartered in Palo Alto, California, United States. It
provides hardware, software and services to consumers, small- and medium-
sized businesses (SMBs) and large enterprises, including customers in the
government, health and education sectors.
The company was founded in a one-car garage in Palo Alto by William "Bill"
Redington Hewlett and Dave Packard. HP is the world's leading PC manufacturer
and has been since 2007, fending off a challenge by Chinese manufacturer
Lenovo, according to Gartner.
It specializes in developing and manufacturing computing, data storage, and
networking hardware, designing software and delivering services.
Major product lines include personal computing devices, enterprise and industry
standard servers, related storage devices, networking products, software and a
diverse range of printers and other imaging products.
HP markets its products to households, small- to medium-sized businesses and
enterprises directly as well as via online distribution, consumer-electronics and
office-supply retailers, software partners and major technology vendors.
HP also has services and consulting business around its products and partner
products. In 2012 it was the world's largest PC vendor by unit sales.
Hewlett-Packard company events have included the spin-off of part of its
business as Agilent Technologies in 1999, its merger with Compaq in 2002, the
sponsor of Mission: Space in 2003, and the acquisition of EDS in 2008, which led
to combined revenues of $118.4 billion in 2008 and a Fortune 500 ranking of 9 in
2009.
In November 2009, HP announced the acquisition of 3Com with the deal closing
on April 12, 2010. On April 28, 2010, HP announced the buyout of Palm, Inc. for
$1.2 billion. On September 2, 2010, HP won its bidding war for 3PAR with a $33
a share offer ($2.07 billion), which Dell declined to match.

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INTRODUCTION
The computer/technology industry has many key players with two of the major
competitors being Dell and HP. The computer industry has come a long way
since its first inception with the invention of Electronic Numerical Integrator and
Computer in 1946.

This industry is comprised of many items such as computers, monitors, printers,
scanners, mainframes, servers, electronic computer components, networking
and workstations to name a few.

The industry started a major growth phase in the 1980s with the production of
the personal computer and has grown every since with many new products
introduced.

Innovations within this industry have had positive rippling effects to outside
industries, from manufacturing to banking.

While the United States market is fairly saturated and mature, the
computer/technology industry is very much in the growth phase on a global
basis. The drivers behind this growth are both innovations in technology and
especially increased consumer spending in Asia and Africa.

The international value of this industry is expected to grow and surpass $620
billion in 2011, roughly a 27% increase from 2006. Dell and HP possess major
market share within the computer/technology industry due to brand name loyalty,
advanced supply chain management techniques and producing innovating
products for an affordable price.

Dell vs. HP Strategies

Dell and HP operate in a competitive environment to gain market share at
segmented price intervals. Over the last decade we have seen the price of the
average computer go from close to $2,000 to less than $1,000.

In part, pressures to add customers have lead to price wars between the two
competitors. However, the price wars have not affected the quality of the
products in those lower priced tiers.

Both firms have increased marketing efforts to enhance their brand recognition
and strived to reduce cost through improved supply chain management and
technology innovation.

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Both companies have room for growth, especially as they enter the portable
tablet market. It will also be interesting to see how HP fairs in the cell phone
market with its recent acquisition of the company Palm and how Dell with react to
their success or failure within this market segment.



FINANCIAL ANALYSIS

Financial analysis is a tool of financial management. It consists of the evaluation
of the financial condition and operating performance of a business firm, an
industry, or even the economy, and the forecasting of its future condition and
performance.

It is, in other words, a means for examining risk and expected return. Data for
financial analysis may come from other areas within the firm, such as marketing
and production departments from the firms own accounting data , or from
financial information vendors such as Bloomberg Financial market, Moodys
Investor service, Standard And Poors cooperation, Fitch Ratings, and Value
Line, as well as from government publications, such as the Federal Reserve
Bulletin.

Financial publications such as Business Week, Forbes, Fortune, and the Wall
Street Journal also publish financial data (concerning individual firms) and
economic data (concerning industries, markets, and economies), much of which
is now also available on the Internet.

Within the firm, financial analysis may be used not only to evaluate the
performance of the firm, but also its divisions or departments and its product
lines.

Analyses may be performed both periodically and as needed, not only to ensure
informed investing and financing decisions, but also as an aid in implementing
personnel policies and rewards systems.
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Outside the firm, financial analysis may be used to determine the
creditworthiness of a new customer, to evaluate the ability of a supplier to hold to
the conditions of a long-term contract, and to evaluate the market performance of
competitors.

Firms and investors that do not have the expertise, the time, or the resources to
perform financial analysis on their own may purchase analyses from companies
that specialize in providing this service.

Such companies can provide reports ranging from detailed written analyses to
simple creditworthiness ratings for businesses. As an example, Dun &
Bradstreet, a financial services firm, evaluates the creditworthiness of many
firms, from small local businesses to major corporations.

As another example, three companies Moodys investors service, Standard And
Poors and FitchH evaluate the credit quality of debt obligations issued by
corporations and express these views in the form of a rating that is published in
the reports available from these three organizations.

Who uses these analyses?
Financial statements are used and analyzed by a different group of parties, these
groups consists of people both inside and outside a business. Generally, these
users are:

A. Internal Users: are owners, managers, employees and other parties who are directly
connected with a company:

1. Owners and managers require financial statements to make important business
decisions that affect its continued operations. Financial analysis is then performed on
these statements to provide management with more detailed information. These
statements are also used as part of management's report to its stockholders, and it form
part of the Annual Report of the company.

2. Employees also need these reports in making collective bargaining agreements with
the management, in the case of labour unions or for individuals in discussing their
compensation, promotion and rankings.

B. External Users: are potential investors, banks, government agencies and other
parties who are outside the business but need financial information about the business
for numbers of reasons.

1. Prospective investors make use of financial statements to assess the viability of
investing in a business. Financial analyses are often used by investors and is prepared
by professionals (financial analysts), thus providing them with the basis in making
investment decisions.
9


2. Financial institutions (banks and other lending companies) use them to decide
whether to give a company with fresh loans or extend debt securities (such as a long-
term bank loan ).

3. Government entities (tax authorities) need financial statements to ascertain the
propriety and accuracy of taxes and duties paid by a company.

4. Media and the general public are also interested in financial statements of some
companies for a variety of reasons.
FINANCIAL RATIO ANALYSIS
Ratio analysis is such a significant technique for financial analysis. It indicates
relation of two mathematical expressions and the relationship between two or
more things.

Financial ratio is a ratio of selected values on an enterprise's financial
statement.There are many standard ratios used to evaluate the overall financial
condition of a corporation or other organization.

Financial ratios are used by managers within a firm, by current and potential
stockholders of a firm and by the firms creditors. Financial analysts use financial
ratio to compare the strengths and weaknesses in various companies.

Values used in calculating financial ratios are taken from balance sheet, income
statement and the cash flow of company, besides Ratios are always expressed
as a decimal values, such as 0.10, or the equivalent percent value, such as 10%.

Essence of ratio analysis:

Financial ratio analysis helps us to understand how profitable a business is, if it
has enough money to pay debts and we can even tell whether its shareholders
could be happy or not.

Financial ratios allow for comparisons:

1. between companies

2. between industries

3. between different time periods for one company

4. between a single company and its industry average
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To evaluate the performance of one firm, its current ratios will be compared with
its past ratios. When financial ratios over a period of time are compared, it is
called time series or trend analysis.

It gives an indication of changes and reflects whether the firms financial
performance has improved or deteriorated or remained the same over that period
of time.

It is not the simply changes that has to be determined, but more importantly it
must be recognized that why those ratios have changed. Because those changes
might be result of changes in accounting policies without material change in the
firms performance.

What does ratio analysis tell us?
After such a discussion and mentioning that these ratios are one of the most
important tools that is used in finance and that almost every business does and
calculate these ratios, it is logical to express that how come these calculations
are of so importance.

What are the points that those ratios put light on them? And how can these
numbers help us in performing the task of management?

The answer to these questions is: We can use ratio analysis to tell us whether
the business

1. is profitable

2. has enough money to pay its bills and debts

3. could be paying its employees higher wages, remuneration or so on

4. is able to pay its taxes

5. is using its assets efficiently or not

6. has a gearing problem or everything is fine

7. is a candidate for being bought by another company or investor

But as it is obvious there are many different aspects that these ratios can
demonstrate. So for using them first we have to decide what we want to know,
then we can decide which ratios we need and then we must begin to calculate
them.


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Which Ratio for whom:

As before mentioned there are varieties of people interested to know and read
these information and analyses, however different people for different needs.

And it is because each of these groups have different type of questions that
could be answered by a specific number and ratio. Therefore we can say there
are different ratios for different groups, these groups with the ratio that suits them
is listed below:

Investors: These are people who already have shares in the business or
they are willing to be part of it. So they need to determine whether they should
buy shares in the business, hold on to the shares they already have or sell the
shares they already own. They also want to assess the ability of the business to
pay dividends. As a result the Return on Capital Employed Ratio is the one for
this group.

Lenders: This group consists of people who have given loans to the company so
they want to be sure that their loans and also the interests will be paid and on the
due time. Gearing Ratios will suit this group.

Managers: Managers might need segmental and total information to see how
they fit into the overall picture of the company which they are ruling. And
Profitability Ratios can show them what they need to know.

Employees: The employees are always concerned about the ability of the
business to provide remuneration, retirement benefits and employment
opportunities for them, therefore these information must be find out from the
stability and profitability of their employers who are responsible to provide the
employees their need. Return on Capital Employed Ratio is the measurement.

Suppliers and other trade creditors: Businesses supplying goods and
materials to other businesses will definitely read their accounts to see that they
don't have problems, after all, any supplier wants to know if his customers are
going to pay them back and they will study the Liquidity Ratio of the companies.

Customers: are interested to know the Profitability Ratio of the business with
which they are going to have a long term involvement and are dependent on the
continuance of presence of that.

Governments and their agencies: are concerned with the allocation of
resources and, the activities of businesses. To regulate the activities of them,
determine taxation policies and as the basis for national income and similar
statistics, they calculate the Profitability Ratio of businesses.


12

Local community: Financial statements may assist the public by providing
information about the trends and recent developments in the prosperity of the
business and the range of its activities as they affect their area so they are
interested in lots of ratios.

Financial analysts: they need to know various matters, for example, the
accounting concepts employed for inventories, depreciation, bad debts and so
on. therefore they are interested in possibly all the ratios.

Researchers: researchers' demands cover a very wide range of lines of enquiry
ranging from detailed statistical analysis of the income statement and balance
sheet data extending over many years to the qualitative analysis of the wording
of the statements depending on their nature of research.

FINANCIAL RATIOS COMPARISON OF DELL AND HP

LIQUIDITY RATIOS:
The two liquidity ratios, the current ratio and the acid test ratio, are the most
important ratios in almost the whole of ratio analysis and they are also the
simplest to use.

Liquidity ratios provide information about a firms ability to meet its short term
financial obligations. They are of particular interest to those extending short term
credit to the firm. Two frequently-used liquidity ratios are current and quick ratio.

While liquidity ratios are most helpful for short-term creditors/suppliers and
bankers, they are also important to financial managers who must meet
obligations to suppliers of credit and various government agencies.

A company's ability to turn short-term assets into cash to cover debts is of the
utmost importance when creditors are seeking payment. Bankruptcy analysts
and mortgage originators frequently use the liquidity ratios to determine whether
a company will be able to continue as a going concern.

A complete liquidity ratio analysis can help uncover weaknesses in the financial
position of the business. Generally, the higher the value of the ratio, the larger
the margin of safety that the company possesses to cover short-term debts.

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1. CURRENT RATIO:

Current Asset
Current Ratio =
Current Liabilities

YEAR DELL HP
2007 1.12 1.21
2008 0.84 0.98
2009 0.91 1.22





Comments:

The ratio is mainly used to give an idea of the company3s ability to pay back its
short- term liabilities (debt and payables) with its short-term assets (cash,
inventory, receivables).

The higher the current ratio, the more capable the company is of paying its
obligations. A ratio in each year suggests that the company would be able to pay
off its obligations if they came due at that point, but the company has shown
constant decreasing trend in its financial health in subsequent years.

Since low current ratio does not necessarily mean that the firm will go bankrupt,
but it is definitely is not a good sign. Short term creditors prefer a high current
ratio since it reduce their risk.

0
0.2
0.4
0.6
0.8
1
1.2
1.4
2007 2008 2009
DELL
HP
14

Quick or Acid-Test Ratio

The essence of this ratio is a test that indicates whether a firm has enough short-
term assets to cover its liabilities without selling inventory. So it is the backing
available to liabilities that must be paid almost immediately.
There are two terms of liquid asset and liquid liabilities in this formula, Liquid
asset is all current assets except the inventories and prepaid expenses, because
prepaid expenses cannot be converted to cash. The liquid liabilities include all
current liabilities except bank overdraft and cash credit since they are not
required to be paid off immediately.

Quick Ratio = Liquid Asset

Liquid Liabilities

YEAR DELL HP
2007 1.08 0.45
2008 0.79 0.83
2009 0.87 1.00



Comments:

The acid-test ratio is far more forceful than the current ratio, primarily because
the current ratio includes inventory assets which might not be able to turn to cash
immediately.

Companies with ratios of less than 1 cannot pay their current liabilities and
should be looked at with extreme caution. Furthermore, if the acid-test ratio is
DELL
HP
0
0.2
0.4
0.6
0.8
1
1.2
2007
2008
2009
DELL
HP
15

much lower than the current ratio, it means current assets are highly dependent
on inventory.
SOLVENCY OR GEARING RATIOS:
Gearing is concerned with the relationship between the long terms liabilities that
a business has and its capital employed. The idea is that this relationship ought
to be in balance.

It is a general term describing a financial ratio that compares some form of
owner's equity (or capital) to borrowed funds. The shareholders and lenders of
long term loans may be interested in this ratio.

1. Debt Equity ratio:
This ratio reflects the relative claims of creditors and share holders against the
assets of the firm, debt equity ratios establishment relationship between
borrowed funds and owner capital to measure the long term financial solvency of
the firm. The ratio indicates the relative proportions of debt and equity in
financing the assets of the firm.

Debt equity ratio = Debt

Shareholders fund

The debts side consist of all long term liabilities of the firm. The shareholders
fund is the share capital plus $ reserve and surpluses.The lower the debt equity
ratio the higher the degree of protection enjoyed by the creditors.

The debt equity ratio defined by the controller of capital issue, debt is defined as
long term debt plus preference capital which is redeemable before 12 years and
shareholders fund$ is defined as paid up equity capital plus preference capital
which is redeemable after 12 years plus reserves & surpluses.

The general norm for this ratio is 2:1. on case of capital intensive industries as
norms of 4:1 is used for fertilizer and cement industry and a norms of 6:1 is used
for shipping units.
YEAR DELL HP
2007 0.11 0.44
2008 0.16 0.58
2009 0.26 0.63

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Comments:

In this ratio shareholders fund is the share capital plus reserve and surplus. In
case of high debt equity it would be obvious that the investment of creditors is
more than owners.

And if it is so high then it brings the firm in a risky position. Or if it is too low it
might indicate that the organization has not utilized its capacity of borrowing
which must be utilized and that is because the borrowing from outsiders is a
good source of fund for business with lower returns in compare to equity.
PROFITABILITY RATIO
As the name itself suggests, this ratio is calculated to determine profitability of
the firm. The basic objective of almost every business is to earn profit which is
essential for survival of the business.

A business needs profits not only for its existence but also for its expansion and
diversification. The investors want an adequate return on their investments,
workers want higher wages, creditors want higher security for interest and loan
and the list could continue.

It is a class of financial metrics that are used to assess a business's ability to
generate earnings as compared to its expenses and other relevant costs incurred
during a specific period of time.

For most of these ratios, having a higher value relative to a competitor's ratio or
the same ratio from a previous period is indicative that the company is doing well.


0 0.2 0.4 0.6 0.8 1
2007
2008
2009
DELL
HP
17

GROSS PROFIT RATIO:
The gross profit margin ratio tells us the profit a business makes on its cost of
sales. It is a very simple idea and it tells us how much gross profit our business is
earning.

Gross profit is the profit we earn before we take off any administration costs,
selling costs and so on. So we should have a much higher gross profit margin
than net profit margin.

High ratios are favorable in this, since it indicates the business is earning a good
return on the sale of its merchandise.

Gross Profit Ratio = Gross Profit X 100

Net Sales

YEAR DELL HP
2007 0.25 0.17
2008 0.24 0.19
2009 0.24 0.18



Comments:

This ratio indicates the relation between production cost and sales and the
efficiency with which goods are produced or purchased. If it has a very high
gross profit ratio it may indicate that the organization is able to produce or
purchase at a relatively lower cost.
DELL
HP
0
0.05
0.1
0.15
0.2
0.25
2007
2008
2009
DELL
HP
18

Gross profit is the profit we earn before we take off any administration costs,
selling costs and so on. Here company has achieved very good efficiency in
2007 compared to other financial years.

NET PROFIT RATIO:
This shows the portion of sales available to owners after all expenses. A high
profit ratio is higher profitability of the firm. This ratio shows the earning left for
shareholder as percentage of Net sales.Net Margin Ratio measures the overall
efficiency of production, Administration selling, financing, pricing and Taste
Management.

Net Profit Ratio = Net Profit After Tax X 100

Net Sales

YEAR DELL HP
2007 0.07 0.04
2008 0.07 0.05
2009 0.07 0.04



RETURN ON CAPITAL EMPLOYED
Return on capital employed (ROCE) is a measure of the returns that a
business is achieving from the capital employed, usually expressed in
percentage terms.
Capital employed equals a company's Equity plus Non-current liabilities (or Total
Assets Current Liabilities), in other words all the long-term funds used by the
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
2007 2008 2009
DELL
HP
19

company. ROCE indicates the efficiency and profitability of a company's capital
investments.
ROCE should always be higher than the rate at which the company borrows
otherwise any increase in borrowing will reduce shareholders' earnings, and vice
versa; a good ROCE is one that is greater than the rate at which the company
borrows.
ROCE = PROFIT BEFORE INTEREST AND TAX

SHAREHOLDERS FUND+LONG TERM BORROWING

YEAR DELL HP
2007 40% 21%
2008 38% 23%
2009 27% 19%




RETURN ON EQUITY
Return on equity (ROE) is the amount of net income returned as a percentage
of shareholders equity. It reveals how much profit a company earned in
comparison to the total amount of shareholder equity found on the balance sheet.
ROE is one of the most important financial ratios and profitability metrics. It is
often said to be the ultimate ratio or the mother of all ratios that can be obtained
from a companys financial statement. It measures how profitable a company is
for the owner of the investment, and how profitably a company employs its
equity.

0%
10%
20%
30%
40%
50%
60%
70%
2007 2008 2009
HP
DELL
20


ROE= NET PROFIT

SHAREHOLDERS FUNDS

YEAR DELL HP
2007 60% 19%
2008 79% 21%
2009 58% 19%




INVENTORY TURNOVER RATIO
The inventory turnover ratio is an efficiency ratio that shows how effectively
inventory is managed by comparing cost of goods sold with average inventory for
a period.
This measures how many times average inventory is "turned" or sold during a
period. In other words, it measures how many times a company sold its total
average inventory dollar amount during the year. A company with $1,000 of
average inventory and sales of $10,000 effectively sold its 10 times over.
This ratio is important because total turnover depends on two main components
of performance. The first component is stock purchasing.
If larger amounts of inventory are purchased during the year, the company will
have to sell greater amounts of inventory to improve its turnover. If the company
can't sell these greater amounts of inventory, it will incur storage costs and other
holding costs.
0% 20% 40% 60% 80%
2007
2008
2009
HP
DELL
21

The second component is sales. Sales have to match inventory purchases
otherwise the inventory will not turn effectively. That's why the purchasing and
sales departments must be in tune with each other.
INVENTORY TURNOVER RATIO = COST OF GOODS SOLD

AVERAGE INVENTORY

YEAR DELL HP
2007 5% 37%
2008 9% 32%
2009 6% 26%




EARNING PER SHARE
Earning per share, also called net income per share, is a market prospect ratio
that measures the amount of net income earned per share of stock outstanding.
In other words, this is the amount of money each share of stock would receive if
all of the profits were distributed to the outstanding shares at the end of the year.
Earnings per share is also a calculation that shows how profitable a company is
on a shareholder basis. So a larger company's profits per share can be
compared to smaller company's profits per share.
Obviously, this calculation is heavily influenced on how many shares are
outstanding. Thus, a larger company will have to split its earning amongst many
more shares of stock compared to a smaller company.
DELL
HP
0%
10%
20%
30%
40%
2007
2008
2009
DELL
HP
22


EARNING PER SHARE = NET INCOME - PREFFERED DIVIDEND

WEIGHTED AVERAGE COMMON SHARE OUTSTANDING

YEAR DELL HP
2007 1.14 2.82
2008 1.31 2.98
2009 1.25 3.14




INTEREST COVERAGE RATIO:
The interest coverage ratio (ICR) is a measure of a company's ability to meet
its interest payments. Interest coverage ratio is equal to earnings before interest
and taxes (EBIT) for a time period, often one year, divided by interest expenses
for the same time period.
The interest coverage ratio is a measure of the number of times a company
could make the interest payments on its debt with its EBIT. It determines how
easily a company can pay interest expenses on outstanding debt.
Interest coverage ratio is also known as interest coverage, debt service ratio or
debt service coverage ratio.
The interest coverage ratio is calculated by dividing a company's earnings before
interest and taxes (EBIT) by the company's interest expenses for the same
period.
Interest coverage ratio = EBIT / Interest expenses
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2007 2008 2009
HP
DELL
23


YEAR DELL HP
2007 68 31
2008 76 33
2009 34 32

Capital structure of Dell and HP
Both the companies have seen increasing long term debt in the companies
capital structures. However, the increase is sharp in Dell compared with HP. As
at end of January 2009, 63% of Dells capital structure consists of borrowings.
This is significantly debt heavy and impacts the future borrowing capacity of the
company.
HP vs. Dell capital structure changes
It is evident after markets become matured, the companies have been competing
hard for market leadership. Significant investments were made in the fronts of
research and development and product quality improvement areas.
Thus, the IT hardware companies have seen increasing debt as a natural
industry phenomenon. However, Dells significant investment in R&D and quality
improvement has placed a heavy debt burden on the companys capital
structure.
If the company could maintain its current market leadership position and capture
competitor market share based on these investments, even though Dell is
suffering in the short run, the company stands to benefit in the longer run.
0%
20%
40%
60%
80%
100%
2007 2008 2009
HP
DELL
24

However, it could benefit Dell if they would raise equity and balance the capital
structure amidst the global economic recession.
Performance ratios of HP and Dell
Dell and HP are two of the main players in the global IT hardware market. Both
are North American companies and have been competing with each other for the
market leadership continuously in the recent past.
Dell was founded in 1984 as a company which assembles and sells IT hardware
directly to the consumer while HP was established far back in 1939 as a tech
company.
Comparing the sizes of the businesses, HP is roughly four times (US$ 111Billion)
of the market capitalization of Dell (US$ 26 Billion). As the companies are from
the same industry and from the same geographical region, the comparability
between the companies is high.














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CONCLUSION
Understanding the presentation of financial information is necessary. There could
be instances that such information would need to be adjusted before taking a
decision.
For instance, there could be one off items included in the financial statements
that are not recurring (restructuring expenses) and for investing decisions, such
would be irrelevant. Thus, understanding the presentation of financials and
adjusting appropriately would be vital.
Further, it is important to ensure that comparing sets of accounts are prepared
using similar accounting policies. There could be different accounting practices
based on the industry, geography and cultural reasons. Such would have to be
neutralized if two sets of accounts to be compared with each other.
There could be industry specific norms which needs attention. For instance, if an
investor compares the dividend yields of the tech companies with other
industries, the dividend yield is very low.
However, the norm of the industry is to reinvest profits primarily in R&D and offer
capital gains to the investors. Such norms need to be clearly understood prior to
analyzing of financial information.
There could be errors in the financial statements (intentional or non intentional)
which can cause issues in understanding the true picture of the company through
financial analysis.
Thus an analyst needs to probe into any irregularities observed in financial
patterns to ensure the results are realistic. To eliminate such errors, sourcing
information from a reliable source is important.
Thus, financial analysis can reveal useful insights of the companies in concern.
However, the information used has to be sourced from a reliable source, probing
into irregular financial patterns, adjusting to neutralize any specificities would be
important in such an exercise.






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BIBLIOGRAPHY
http://www.readyratios.com/reference/debt/interest_coverage_ratio_icr.html
http://www.ukessays.com/essays/finance/performance-ratios-of-hp-and-dell-
finance-essay.php
http://en.wikipedia.org/wiki/Hewlett-Packard
http://en.wikipedia.org/wiki/Dell
https://www.google.co.in/search?q=money%20control.com&ie=utf-8&oe=utf-
8&aq=t&rls=org.mozilla:en-US:official&client=firefox-
a&source=hp&channel=np&gfe_rd=cr&ei=UwZaU-2pFIuK8Qfk8IHgBQ
https://brainmass.com/business/financial-ratios/504078