Dell Inc. Financial Analysis: Evaluating a Prospective Employer

Company Overview

Dell Inc. specializes in the sale of computer systems directly to its customers. Its Standard Industrial Classification (SIC) code is 3571: Electronic Computers. Companies within the manufacturing portion of this code carry SIC codes from 3571 to 3579, which authorizes them to manufacture and sell systems directly to consumers. When one compares Dell's SIC classification to its actual business as described in its 10-K filing, the two are closely aligned. Dell states that it sells systems directly to customers; however, the company description does not specify whether it manufactures those systems or purchases them from another manufacturer. The Shareholder Letter clarifies that many of the systems Dell sells are produced by remote partners (Shareholder Letter, p. 1). It is important for the company to use the correct SIC code to ensure accurate regulatory classification.

According to the letter to shareholders, Dell achieved record growth over the past several years, continuing to reach new sales levels and break records. The CEO and Chairman of the Board expressed optimism that this growth would continue into the future, attributing it to an approach that focuses on the customer. Dell planned to continue expanding its holdings on a global basis, particularly in the Asia-Pacific region, and expected to double its business in China and other emerging nations (Shareholder Letter, p. 1).

Customer experience is the pillar of Dell's strategic plan. Its ability to deliver what the customer wants, when they want it, is one of the key factors that drove Dell's past growth and is expected to contribute to its continued growth in the future (Shareholder Letter, p. 4). Dell's philosophy holds that the company is never fully satisfied and will continuously strive for improvement in both its products and its ability to meet customer expectations. Dell also maintains an active recycling program that encourages customers to return old computers, reusing the recovered materials in manufacturing processes (Shareholder Letter, p. 5). This focus on customer desires extends to attention to social responsibility.

Dell's marketing strategy remains consistent across each of its global enterprises. Its philosophy and overall business strategy are customer-driven. Dell collaborates with providers on a global basis, selecting partners based on compatibility with company philosophy and a shared commitment to quality (Shareholder Letter, p. 15). Dell manufactures approximately one-third of the computers it sells in the United States; the remainder are produced by Dell's many partners. Dell's leading selling point is its customer service centers, which offer support to its entire client base.

Dell systems serve as the backbone of many major global corporations, including DuPont and FedEx. Dell specializes in consumer systems including desktops and laptops, and also provides large business solutions such as servers and high-capacity storage systems (Shareholder Letter, p. 17). Its systems are known for ruggedness and durability.

The foundation of Dell's business strategy is its direct customer model, supported by a highly efficient manufacturing system. The strategy focuses on supply chain management and organization, operating on the belief that the most effective path to the customer is a direct relationship (Annual Report, p. 1). This model allows Dell to eliminate intermediaries and retail dealers, enabling customers to deal directly with the manufacturer and allowing Dell to maintain lower prices than its competitors (Annual Report, p. 1).

Business Strategy

Dell has the capability to custom-build units for clients with fast turnaround times and is directly accountable to its customers, bypassing the multiple layers of a retail chain (Annual Report, p. 2). This business model allows Dell to deliver the configurations customers want at competitive prices, while maintaining a reputation for excellent customer service. This approach forms the basis of Dell's competitive advantage.

Accounting practices differ among various corporate entities, and it is the accountant's responsibility to present information in the manner that most accurately represents the company. Accounting practices must comply with Generally Accepted Accounting Principles (GAAP); however, there is more than one acceptable way to present financial information. The notes section of a financial statement provides readers with guidance on how information was prepared, enabling a more accurate assessment of the financial data.

Notes to Financial Statements and Balance Sheet

Dell's Note 1 explains the length and timing of the fiscal year, principles of consolidation, use of estimates, and how investments are translated into cash equivalents (Annual Report, p. 41). This section also explains how tangible assets are valued and how investment instruments are considered in the financial statements. Because Dell operates in many countries outside the United States, it must additionally explain how it accounts for fluctuations in foreign currency (Annual Report, p. 42). These disclosures are essential for allowing readers to make informed comparisons; without them, the information presented could appear misleading.

Understanding the balance sheet gives investors a snapshot of a company's overall financial health. While the balance sheet alone does not tell the full story, it provides a foundational understanding of the overall picture. The balance sheet summarizes receivables and assets owned by the company against its liabilities and debt. Assets include receivables, inventory, tangible assets such as plant and equipment, and any funds received from short- or long-term investments. Liabilities include operating expenses, taxes owed, shares outstanding, and capital needed for projects.

Dell's most significant asset is cash and cash equivalents (Annual Report, p. 37). Its least significant assets are long-term receivables from financing. These proportions reflect the nature of Dell's business: Dell offers many financing solutions to customers and therefore receives considerable income from financing activities. Financing receivables classified as three months or less are recorded as cash and cash equivalents (Annual Report, p. 41). Long-term financing receivables stem from the financing of major systems sold to large corporations and from leasing property and other assets.

Dell's long-term financial obligations include the lease of property and equipment, such as manufacturing facilities and office space, as well as commitments and agreements with suppliers. In order to limit risk, Dell maintains diversified offerings and an active investment monitoring plan. In some cases, Dell contracts with a single supplier when it believes that supplier offers superior quality and an advantageous arrangement (Annual Report, p. 56). For most supplies, however, it retains alternative sources in case a single supplier cannot meet demand. This approach demonstrates sound risk management and planning for supplier failure.

Dell's balance sheet contains a category for "other assets" that were not defined within the notes to the financial statements; their amounts were insignificant and their nature is not disclosed. The statement also contains a section entitled "other non-current liabilities," but no further mention of these items is made in the notes or narrative.