The trend in Figure 5 shows that both Dell and Gateway's inventory turnover ratio has increased over the five-year period, while their asset-turnover ratio has been decreasing over the same period.
Figure 5: Inventory Turnover Ratio
This is an indication of their business efficiency along the business cycle. HP suffers from a very low inventory turnover ratio at 6.14 compared to the industry average of 34.28. This very low inventory turnover ratio in this industry leads to obsolete inventories and further financial losses. Since HP could use some extra cash, we recommend HP shrink their inventory to increase their cash supply and in conjunction decrease their obsolete inventories by increasing efficiencies in operations. HP can also establish a better financial and sales forecasting system by determining how much money to set aside and to set realistic sales revenue goals without having excess inventories.
OVERALL ANALYSIS
After evaluating each company's ratios, it becomes obvious that the cash conversion cycle is at the heart of their operations. Any working capital strategy plan has to consider this very carefully. The components of working capital constantly change with the cycle of operations. The total amount of working capital is fixed. The computer hardware industry has been hit hard in the past five years by decreasing demand for their products, shrinking corporate technology budgets, and a sluggish economy. All of which are factors that are revealed by our analysis of their financial data. There are four questions that we must ask ourselves when developing a working capital strategy.
