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

Dells 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 Current Assets Current Liabilities Net Working Capital Current Ratio Quick Ratio CCC (yearly avg.) 1996 1957. 00 939.0 0 1018. 00 2.08 1.46 41.25 179.0 0 450.0 0 211.0 0 268.1 0 57.10 1995 1470. 00 752.0 0 718.0 0 1.95 1.24 38.50 117.0 0 239.0 0 56.00 149.1 0 93.10 1994 1048. 00 538.0 0 510.0 0 1.95 1.00 47.50 Particulars Net Income Shareholder's Equity ROIC/ROE Sales Cost of Sales Inventory Inventory Turnover Receivables Turnover Payables Turnover Net WC Turnover OCA OCL NOWC 1996 272.0 0 973.0 0 0.28 5296. 00 4229. 00 429.0 0 9.86 7.29 9.08 5.20 1210. 00 939.0 0 271.0 0 1995 149.0 0 652.0 0 0.23 3475. 00 2737. 00 293.0 0 9.34 6.46 6.79 4.84 874.0 0 752.0 0 122.0 0 1994 -36.00 471.0 0 -0.08 2873. 00 2440. 00 220.0 0 11.09 6.99 N/A 5.63 634.0 0 538.0 0 96.00

OLA NOC Net Investment in OC NOPAT FCF

87.00 183.0 0 N/A N/A N/A

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 Dells competitive advantage is to calculate the increase in inventory Dell would have needed if it operated at competitors DSI level. Using Dells cost of sales (COS) for 1995 contained in Exhibit 4 and the information on DSI contained in Table A: Additional inventory at Compaqs DSI = (Dells COS) (Compaqs DSI Dells DSI)/360 days = [($2,737)(73-32)]/360 = $312 million. Additional inventory at Apples DSI = (Dells COS) (Apples DSI Dells DSI)/360 days = [($2,737) (54-32)]/360 = $168 million. Additional inventory at IBMs DSI = (Dells COS) (IBMs DSI Dells 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.