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Technology Stocks : Dell Technologies Inc.
DELL 133.20+5.7%Nov 26 3:59 PM EST
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To: BGR who wrote (103358)2/20/1999 2:40:00 PM
From: Chuzzlewit  Read Replies (1) of 176387
 
BGR, You asked ... what effect would (entry into the cheap PC market) have on DELL's ROIC (should bring it down, IMO)?

It depends entirely on Dell's situation. If Dell had slack capacity it would drive ROIC higher (because no additional capital investment would be required and we know from Dell's operating model that there would still be a negative CCC). If they need to build new capacity it would depend on the profit generated by the capacity divided by the net cost of the capacity (which should be less than the actual cost of the capacity due to Dell's negative CCC). If, for example, it costs $10MM (net) to build new capacity, and the capacity will generate $18MM or more in profits it will drive ROIC higher. If it generates $16MM or less in profits, it will drive ROIC lower.

But shareholder value will be built so long as the return exceeds the average weighted cost of capital, even if ROIC is lowered.

TTFN,
CTC
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