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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Lockeon who wrote (102806)	2/18/1999 6:43:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176387

Lockeon, you may not believe this, but that has been one of the themes that I have been banging away at for some time. Invested capital is the sum of equity plus long term debt. ROIC is the earnings divided by invested capital. No company that I know of has returns on invested capital that comes close to Dell's. But that is only part of the story. Earnings are fictions created by accountants. Cash flow is reality, and the cash flow generated by Dell is truly spectacular. The success in generating cash flow through a combination of production efficiency and superb financial management has allowed Dell to grow at stupendous rates without the need for external financing. That is the genius of this company. As you may guess, I like Dell. TTFN, CTC

To: Lockeon who wrote (102806)	2/18/1999 8:01:00 PM
From: MaryinRed	Read Replies (1) \| Respond to of 176387

The article on ROIC...reminds me of a research method...we use for marketing... it is called The Delphi Method" and is basically consensus reasoning... and helps one to understand...some of the examples he refers to. Typically a panel of "experts" reviews a problem...and develops a solution through "reiterative" questioning and modeling...it is fascinating... and it is.one of the ways..how stock analysts can develop pretty good estimations...of what businesses are doing/can be doing.. it goes beyond...looking at the numbers...and helps to fill in...."where no numbers are available"...laugh...like "back to the future.."...smile Here are some urls that discuss the Delphi Method... loc.gov pespmc1.vub.ac.be or look in any search engine for "qualitative analysis methods" smile....mary....(who has to rely on some of this stuff...in her work.)

To: Lockeon who wrote (102806)	2/18/1999 8:41:00 PM
From: stockman_scott	Read Replies (1) \| Respond to of 176387

Lockeon: Thanks for posting the link to the Slate article on ROIC....I especially liked the 2nd half of the article: << But the Dell sell-off is a mistake, a mistake grounded in a fundamental misconception about how companies should be valued. The conventional wisdom on Dell, after all, is somewhat schizophrenic. On the one hand, growth fund managers across the country own it, viewing it as one of those stocks that you just have to have in your portfolio (probably because it's risen more than 3000 percent since 1995). On the other hand, these same managers, along with most of the financial press, talk about Dell's sky-high price-to-earnings ratio and wonder whether even a company growing as fast as Dell should be valued this highly. In other words, everyone owns Dell but almost no one really believes that they should (a condition that may be characteristic of a lot of seemingly expensive tech stocks). The problem here really rests in the sanctification of the price-to-earnings ratio as the key tool people use to evaluate how much a company is worth. In the old days, it was thought that a company's P/E shouldn't exceed its expected growth in earnings. Today, with so much more money in the market, that simple rule doesn't really work, but "everyone" understands that a high P/E is a good sign that a stock is overvalued. Unfortunately, "everyone" is wrong. To begin with, academic studies suggest that there is no correlation--positive or negative--between a company's P/E ratio and the rate at which it grows in the future. In addition, "accounting earnings"--the earnings that a company reports--are complicated creatures, which often don't provide any sense of the actual amount of cash that the company's operations are throwing off (which is what would matter to you if you were actually running the business). Finally, a simple focus on the P/E blinds investors to the most important number to consider in evaluating a company, namely its return on invested capital (ROIC). What you really want to know about a company, after all, is how efficiently it's using its capital. You want a company to turn $1 in capital into $2 in cash, not $1 in capital into $1 in cash. And no company in America is better at doing the former than Dell. Its return on invested capital is historically above 200 percent, and has occasionally bettered that number. By getting money from customers before paying money out to suppliers, and by keeping inventories incredibly lean, Dell effectively lets its suppliers fund its operations. In effect, Dell is selling $18 billion of computers and servers a year while investing almost no money in the business. The interesting thing is that although ROIC remains a relatively unknown concept in the world of investing (as opposed to the world of business), many of the stock market's bellwethers--Dell, Microsoft, Coke, Cisco, Wal-Mart--have incredibly high returns on capital, as well as sky-high P/Es. In other words, investors appear to recognize that these companies deserve uniquely high valuations, even if most investors couldn't exactly tell you why...>> It can be a problem when investors get too wrapped up in P/Es without understanding the company behind those valuations. Regards, Scott