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Sunil’s reflection on Common Size Analysis of Dell from FY07 to FY09

Initial Assessment
For the most recent year, 2009 (Fiscal year Ended on 30 Jan 2009), Dells revenues (sales) rose
just 6.41% (Exhibit 1) while total assets rose a modest 3.37% (Exhibit 3). This indicates a slight
deterioration in operating efficiency from 2007 (Fiscal Year Ended on 2 Feb 2007).

Income Statement
Dell’s horizontal common-size income statement is presented in Exhibit 1. The vertical common-
size income statement is presented in Exhibit 2. Revenue grew 6.47% in 2008, but in 2009 it
actually went negative. This can relate the early warning of profits in mid-2008.
Nearly all of Dell’s other operating expenses rose at a higher rate than sales. Like almost every
other parameter, in 2008 this was bit exceeding, than on 2009, an effect of controlled measures
can be seen as well, which is due to global downturn as well.

Balance Sheet
Dell’s horizontal common-size balance sheet is presented in Exhibit 3. The vertical common-size
income statement is presented in Exhibit 4. The financial statements present only two years of
balance sheet data, which is the norm. Investors would have to search prior year documents to
compare longer-term trends.
From 2007 to 2009, Dell seems to improved the revenue by 6,41%, but if we actually see with
regard to total asset (7.51% up in 2008, but then only 3.37% in 2009), one would agree that in
year ending 30 Jan 2009, Dell was able to improve its operating efficiency.

Assets
Cash and cash equivalents were reduced by 18.33% during first year, but there was good
improvement of 6.16% (with base year 2007) in 2009.
Notes and accounts receivable increased in line with total assets, but not at a faster rate than the
sales. When receivables grow faster than sales, it could indicate that the company is having
trouble collecting from customers, is offering more lenient credit terms, or simply that more of the
sales took place later in the accounting period. Each of those can sometimes be innocuous, and
sometimes indicate deteriorating earnings quality. It is up to investors to smoke out the
underlying cause and evaluate whether it is significant.
Inventories rose 78.79% for in 2008 and fall back to 31.36% both of which are considerably faster
than either sales or assets. As is the case with accounts receivable, inventories are often tied to
the level of sales. Large increases in inventory at a retailer would typically be cause for concern –
namely that the company chose poor-selling merchandise. Even if sales slow down, the inventory
will remain valuable. In fact, if the prices rise the inventory will increase in value and the larger
dollar value of inventory likely consists at least in part of the same quantity of products to a higher
value.
Investments reduced to 72.66% and in 2009 only 21.15%, which indicates that company was
captious enough in downturn years. Other assets are almost same in 2009 as 2007.

Liabilities
As we see a good swing from positive to negative territories, year 2008 and 2009 are interesting
years. Loans payable increases 10.18% in 2008 and than reduce by 20.44% 2009. As noted in
NP’s post, long term debt have increased by $ 1536 Million in FY 09 for financing the short term
requirement which is contrary to the fundamental principle of finance.
Accounts payable is actually reduced by 9.33% which was faster than assets but not faster than
net income.

Further Notes

1. Common analysis gives a good indication towards the changing risk of


capital structure of the company as well. Higher the long term debt, higher
the risk. Dell’ has moved from 2.22% to 7.16% long term debt, which
cannot be said a healthy trend.

2. Dell has improved its working capital from 8% in 2007 to significant 20%
in 2009. But to take a complete snapshot of Liquidity, we should not miss
the current ration (Current assets/current liabilities), which has changes
insignificant 1.2% to 1.35%. This seems to be mostly affected by reduced
account payable.

3. We should not miss the increase in Dell’s Fiscal 2008 effective tax rate,
compared to Fiscal 2007, which is due to the tax related to accessing
foreign cash and the non-deductibility of acquisition-related IPR&D
charges offset primarily by the increase of consolidated profitability in
lower foreign tax jurisdictions during Fiscal 2008 as compared to Fiscal
2007. This is also coupled with tax reforms in incentives in China effective
from 1st January 2008.

4. There was a restatement for the previous years than 2007 (FI2003, 2004,
2005, 2006 and first quarter of 2007), after investigations by Audit
Committee, which has found questionable findings in Financial control in
Dell.
Exhibits