Essay: Investment Analysis of Dell

Essay: Investment Analysis of Dell
April 12, 2011 Comments Off on Essay: Investment Analysis of Dell Academic Papers on Information Technology,Sample Academic Papers admin

Sample Essay

Dell has mostly positive future free cash flows (as shown in figure 5 in appendixes 1). The value per share of this company is $40 and its market price per share is $ 14.9 on 12-Jan-2010, so the share of Dell is trading at the discount of 63.3 % as shown in figure 5. There are various possible reasons for this under pricing of its shares. One obvious factor is the global economic recession which has damaged the confidence of investors who prefer to invest in gold or safe investments rather than investment in risky shares.

By critically analyzing the data available, researcher found that most of the important financial ratios of the company are below the industry average for the year 2009. For example, revenue has shown almost zero growth from the year 2008 to 2009 (Dell, 2009). Share prices are also showing negative trend over the years (see figure 2). All the price and profit margin ratios are below the industry average figures (see figure 7). Though there is not a significantly decrease on the YoY basis in these ratios, yet company is under performing as compared to the industry averages. Both debt to equity ratio and times interest ratio, are high against the industry which means that at present, company has been using huge debt in its financing activates. However, at the same, it is generating good earnings from its investments to cover it finance cost. Return on Assets (ROA) and Return on Capital (ROC) are also less than that of the industry averages in the year 2009(see figure 7). Some possible reasons are the high amount of financial leverage and low revenue because of the economic recession. Poor assets management can be another reason of this phenomenon. Contrary to this, Return on Equity (ROE) ratio is above the industry average which means that company has used less equity which increases the amount of return per dollar of investment (see figure 7 in appendix 1). Earnings per Share (EPS) have also dropped by 5 % during the period of 2008-2009 which is due to the decrease in the sales and overall economic activity (see figure 7 in appendix 1). However, there are some positive things like company has taken measures to reduce its cost of distribution by eliminating the middle men and shortening the distribution channel (Dell, 2009). Where these factors will reduce the cost of warehousing and opportunity cost of inventory holding, it will also provide the opportunity to the company to offers its products at the competitive prices. It is expected that as soon as the economy shows some signs of recovery, company will yield pretty good returns to its investors as compared to its rival firms.

By considering all the above mentioned internal and external factors, it is suggested to the investors that they should hold the stock of Dell in order to earn handsome returns in the future because the current price is not reflecting its true price and there is chances of increasing in prices at least close to the intrinsic value of $31.

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