Illustration
7: Average and Marginal Returns - Dell
Dell
Computers was a growth success story during
much of the 1990s, using its cost advantages
and innovative marketing to gain market share.
Its success did draw imitators into the fray
and by the early part of 2004. Dell was faced
with slowing growth and decreasing margins.
In table 10, we estimate the average and marginal
returns on equity and capital at Dell from
1997 to 2007.
While
Dell's returns on equity and capital have
stayed at healthy levels over the entire period,
the marginal returns on equity and capital
have been volatile. One reason for the year-to-year
swings in return on equity is Dell's practice
of buying back stock, which results in big
changes in the book value of equity from period
to period.
Dell's
returns on equity and capital should provide
a cautionary note for those who put too much
weight on accounting returns. Even as operating
income has stagnated since 2004, Dell has
continued to report high returns on equity
and capital on its existing assets. Assuming
that Dell has significant new investments
that will continue to earn these returns would
be not only foolhardy but lead to too high
an estimate of value for the company.
Return to document index
