Examine the handout on the next page that presents key financial ratios and back

Question

Examine the handout on the next page that presents key financial ratios and background information (Exhibit 1) of firms in the computer systems industry. The firms are: Dell (DELL), Hewlett-Packard Company (HPQ), Apple (AAPL), and Lenovo (LNVGY). As we discussed in class, the differences in financial ratios between firms in the same industry can tell us much more information than merely who has a “better” operating profit.

1.Examining the profitability ratios, provide an explanation for the variation in profitability across firms.
2.Compare the performance of Dell and Lenovo. Why is Dell’s ROE higher when Lenovo has greater growth?

DELL 56.98B 21.40% 5.29% 4.17% DELL 0.5 0.9 Indus try Avg HPO 119.93B 22.94% 9.56% -10.86% HPO Profitability AAPL LNVGY 55.97B 230.02B 41.91% 11.68% 33.46% 25.35% Sales 35.56% 18.45% 9.34% Gross Margin 2.18% 1.71% Operating Margin Net Profit Margin Financial Strength AAPL LNVGY LT DebtEqu Total DebtEquity Indus try Avg 0.2 0.2 2.67 DELL 5.15% 24.21% 1.24 DELL 1.41% -28.33% HPO -11.05% -41.53% 1.01 AAPL 24.94% 38.41% 1.07 LNVGY 3.56% 22.57% 2.23 Management Effectiveness Retum on Assets Retum on Equ Total Asset Tumover Indus try Avg 13.56% 19.39% Growth Sales (5Yr) EPS HP9 2.91% -331.12% AAPL 44.81% 25.58% LNVGY 16.17% 26.44% Indus try Avg 40.42% 14.31%

Explanation / Answer

1

Higher gross margin of AAPL because of higher margin allowed due to innovation

Difference in operating margin due to depreciation and amortization

Difference in net margin due to taxes and interest

2

RoE=Net profit margin*Asset turnover*Assets/Equity

Dell

Net profit margin=4.17%

Asset turnover=1.24

Assets/Equity=RoE/RoA=24.21/5.15=4.7

Lenovo

Net profit margin=1.71%

Asset turnover=2.23

Assets/Equity=RoE/RoA=22.57/3.56=6.34

Hence, due to higher profit margin, Dell has higher RoE compard to Lenovo

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