Prior to being taken private by Michael Dell and Silver Lake Partners in 2013, Dell designed, manufactured, and sold a range of products including desktop PCs, notebooks, tablets, servers, networking and storage solutions, as well as software and services.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On February 21, 1995, the Company offered to pay a cash premium of $8.25 for each outstanding share of its Series A Convertible Preferred Stock... Holders of 1,190,000 shares of Preferred Stock elected to convert and, as a result, received an aggregate of approximately 5.0 million shares of common stock and $9.8 million in cash during the first quarter of 1996. The $9.8 million conversion premium and $0.5 million expenses of the conversion offer were treated as an additional dividend on the Preferred Stock for financial reporting purposes.
On October 20, 1999, the Company acquired all the outstanding shares of ConvergeNet Technologies, Inc. in exchange for 6.9 million shares of the Companys common stock and $4.5 million cash for total purchase consideration of $332 million. ConvergeNet is a developer of storage domain management technology for enterprise storage area networks. The consolidated financial statements include the operating results of ConvergeNet from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material.
During fiscal year 2002, the Company repurchased 68 million shares of common stock for an aggregate cost of $3.0 billion.
As of February 3, 2006, Dell's share repurchase program authorized the purchase of up to 1.5 billion shares of common stock at an aggregate cost not to exceed $30 billion. As of February 3, 2006, 123 million shares of common stock at an aggregate cost of $4.4 billion were available for future purchases under the share repurchase program. Repurchases from December 31, 2005 through February 3, 2006: 22 [M shares] at $30.20 per share.
On January 25, 2008, Dell completed its acquisition of EqualLogic Inc. ("EqualLogic"), a provider of high performance Internet Protocol (IP) iSCSI storage area network (SAN) solutions uniquely designed for virtualization and ease-of-use. Dell acquired 100% of the common shares of EqualLogic for approximately $1.4 billion in cash. Dell originally recorded approximately $969 million of goodwill and $486 million of amortizable intangible assets. This acquisition will strengthen Dell's product and channel position and assist Dell in its strategic efforts to simplify and virtualize IT for its customers globally. Dell acquired three other companies in Fiscal 2008, Everdream Corporation, Silverback Technologies Inc., and Zing Systems Inc. Dell also purchased CIT Group Inc.'s remaining 30% interest in DFS during Fiscal 2008. Total consideration for these purchases was approximately $553 million...
Since February 1, 2008, we have spent $2.5 billion on share repurchases - offset primarily by our $1.5 billion debt issuance and a $1.3 billion increase from cash flow from operations. The decrease in cash and investments from the second quarter of Fiscal 2008 was a result of spending $6.5 billion on share repurchases and $2.4 billion on strategic acquisitions since the third quarter of Fiscal 2008, partially offset by issuing $1.5 billion in long-term debt and internally generated cash flows.
On November 3, 2009, Dell completed its acquisition of all the outstanding shares of the Class A common stock of Perot Systems, a worldwide provider of information technology and business solutions, for $3.9 billion in cash.
On September 12, 2013, Dell stockholders approved the proposal in which Michael Dell, Dell's Founder, Chairman and CEO, will acquire Dell in partnership with global technology investment firm Silver Lake Partners. The merger transaction closed on October 29, 2013, and the company has commenced the process to delist its common shares from the NASDAQ Stock Market. Per the merger agreement, Dell shareholders are entitled to receive $13.75 in cash, in addition to a special dividend of $0.13 per common share.