Dell Working Capital Case

Submitted by: Submitted to: Ishan Rishabh Kansal Dr. Yogesh Maheshwari PGP I, 2012PGP 139, Section: E Finance-I (Oct-Dec 2012) Brief Case Analysis 1 23, 2012

October

Dell’s Working Capital The Case: The case highlights the importance of Working Capital Management in a rapidly growing form like Dell. The Company: Dell Computer Corp manufactures sells and services high performance personal computers compatible with industrial standards. They follow built-to-order model which enables dell to have a much smaller working capital requirement compared to its competitors. It also allows dell to enjoy the benefits of reduction in component prices as well as it allows the company to introduce the new technology more quickly as compared to its competitors. The Issue(s): The issue is that the management needed a plan for financing the future growth of the company. Till now, dell had financed its growth internally. The Analysis: Particulars

1996

1995

1994

Current Assets Current Liabilities Net Working Capital

1957. 00 939.0 0 1018. 00

1470. 00 752.0 0 718.0 0

1048. 00 538.0 0 510.0 0

Current Ratio

2.08

1.95

1.95

Sales

Quick Ratio CCC (yearly avg.)

1.46

1.24

1.00

Cost of Sales

41.25

38.50

47.50

117.0 0 239.0 0 56.00 149.1 0

N/A

Net WC Turnover

NOPAT

179.0 0 450.0 0 211.0 0 268.1 0

Inventory Inventory Turnover Receivables Turnover Payables Turnover

N/A

OCA

FCF

57.10

93.10

N/A

OCL

OLA NOC Net Investment in OC

87.00 183.0 0

Particulars

1996

1995

1994

Net Income Shareholder's Equity

272.0 0 973.0 0

149.0 0 652.0 0

-36.00 471.0 0

0.28 5296. 00 4229. 00 429.0 0

0.23 3475. 00 2737. 00 293.0 0

-0.08 2873. 00 2440. 00 220.0 0

9.86

9.34

11.09

7.29

6.46

6.99

9.08

6.79

N/A

5.20 1210. 00 939.0 0 271.0 0

4.84 874.0 0 752.0 0 122.0 0

5.63 634.0 0 538.0 0

ROIC/ROE

NOWC

96.00

Dell commands a working capital advantage over its competitors and it can be seen in Table A, which contains DSI of Dell and its competitors. One way for us to quantify Dell’s competitive advantage is to calculate the increase in inventory Dell would have needed if it operated at competitor’s DSI level. Using Dell’s cost of sales (COS) for 1995 contained in Exhibit 4 and the information on DSI contained in Table A: Additional inventory at Compaq’s DSI = (Dell’s COS) (Compaq’s DSI – Dell’s DSI)/360 days = [($2,737)(73-32)]/360 = $312 million. Additional inventory at Apple’s DSI = (Dell’s COS) (Apple’s DSI – Dell’s DSI)/360 days = [($2,737) (54-32)]/360 = $168 million. Additional inventory at IBM’s DSI = (Dell’s COS) (IBM’s DSI – Dell’s DSI)/360 days = [($2,737)(4832)]/360 = $121 million. Also looking at the important ratios, we can tell that Dell has a good CCC and stable turnover ratios but Payables turnover ratio has increased which shows that the company has started paying off to its creditors faster. The company can reduce it CCC by differing the payment to suppliers to some extent. Though FCF is declining, it is not necessarily a bad thing if the company is re-investing all of their cash in business expansion. Overall the company has a good potential of funding the growth internally since it carries good amount of investments too which can be liquidated if needed.