Dell: A Financial Review for 2012
Running a successful business, large or small, can be a challenging endeavor. Success relies upon a company’s ability to positively respond to an ever changing set of market conditions. Dynamic customer preferences, varying product costs, and constant technological advancement make the field of computer sales and development more challenging than many other types of businesses. Among the brands competing for success in this field is Dell Computers. According to Michael Dell, CEO of Dell Computers, “[f]iscal year 2012 marked the best financial performance in [Dell’s] history.” (Dell, Fiscal Year 2012 Year in Review, pg. 1) So how did Dell achieve this unprecedented level of success? The answer can be found among the various financial statements that recap the company’s operational activities of 2012. The consolidated versions of Dell’s income statement, balance sheet, and cash flows provide investors (and the general public) with key indicators of company performance.
“An income statement, or profit and loss statement, indicates the amount of profits generated by a firm over a given time period, such as 1 year.” (Keown, 2013, pg. 52) Considering that profitability is one element that contributes to company success over time, it make sense that Dell’s income statement would indicate positive growth in 2012 compared to years prior. The consolidated statement provided on Dell’s company website (Dell 10-K, pg. 60) indicates that revenue grew by $577 million, gross margin increased by $2,415 million, and operating income increased by $998 million as compared with fiscal year 2011. This represents significant growth in both revenue and profits. In his annual fiscal review, Michael Dell states that, “[t]he solid financial performance of fiscal year 12 was driven largely by strategic moves to optimize our operations and invest in our end-to-end solutions and services capabilities.” (Dell, Fiscal Year 2012 Year in Review, pg. 1) Though the income statement shows some level of company success, we must turn to the consolidated balance sheet in order understand more about the actual 2012 operations of the company.
The balance sheet, “…provides a snapshot of the firm’s financial position at a specific point in time, presenting its asset holdings, liabilities, and owner-supplied capital (stockholder’s equity).” (Keown, 2013, pg. 56) Despite the obvious gains in revenue and profit margins presented by the income statement, the 2012 consolidated balance sheet (Dell 10-K, pg. 59) for Dell gives a bit more detail regarding the company’s financial activity. For example, even though we saw record increases in revenue and profit margins, Dell’s company assets only increased by $427 million compared to the year prior. Why such a small increase? Well, according to the balance sheet, company liabilities increased by $4,783 million in that same year. Among those liabilities, we see an increase in short-term debt ($2,016 million), accounts payable ($363 million), and long-term debt ($1,241 million). These increases in liabilities can be a concerning sign for investors – indicating that the company may be operating outside of its own means. How do we know for sure if this is a true sign of danger? We look further into the company accounting documents. Specifically, we will turn to the consolidated statement of cash flows.
In order to assess the true performance of business, we must evaluate how cash moves through the business itself. “…[C]ash flows focuses on identifying the sources and uses of cash that explain the change in a firm’s cash balance reported in the balance sheet.” (Keown, 2013, pg. 67) In business, cash is the most important indicator financial health. Though cash naturally moves into and out of a business, it is critical that the amount flowing out does not exceed the amount coming in. Otherwise, no amount of “profits” will be able to keep the company financially stable. In the 2012 consolidated statement of cash flows for Dell (Dell 10-K, pg. 61), we see significant flow in both directions. The operating activities of the company indicate a positive change in cash – increasing by $5,527 million for the year. This number indicates that the company is doing well with its day to day business activities (the core purpose of the company). However, as indicated in Michael Dell’s statement regarding “…invest[ment] in our end-to-end solutions and services capabilities….” (Dell, Fiscal Year 2012 Year in Review, pg. 1), we see a loss in cash as it applies to investing activities. In fact, we see an overall negative change in cash to the tune of $6,166 million for the year. Taken in consideration with a positive cash flow of $577 million from financing activities, the company reported a total negative cash flow of $61 million. According to the statement of cash flows, this is the only year between 2010 and 2012 to reflect a negative flow. On its own, it may not be a sign of impending danger, but it is a warning to investors to be on the lookout for future company issues. “In the words of author Jan Norman, ‘Even profitable companies can go broke.’”(Keown, 2013, pg. 65)
References
Dell Company Fiscal Year 2012 in Review [Michael Dell] Retrieved June 9, 2015, from http://i.dell.com/sites/doccontent/corporate/secure/en/Documents/FY12_YIR_FINAL.pdf
Dell Dell Inc. (4331) 10-K [Thomson Reuters Accelus] Retrieved June 9, 2015, from http://i.dell.com/sites/content/corporate/secure/en/Documents/FY12_Form10K.pdf
Keown, A., & Martin, J. (2014). Foundations of Finance: The Logic and Practice of Financial Management (8th ed). Upper Saddle River, NJ: Pearson Prentice Hall.