Letter sent to Business Week

Business Week, July 3, 2006, lists Dell as the second most profitable company among its Information Technology 100. Investors are more sanguine. The stock has declined 40% from a year ago. More to the point, the stock is down 58% from its all time high of $59.69 achieved in March 2000. Investors who bought this stock back in July 1998 are still more than 10% in the red - so much for Dell’s profitability. During the past 10 years, Dell supposedly earned $19.5 billion; but shareholders' equity increased by only $3.1 billion. The anomaly can be explained. Dell paid employees in stock and then applied its inflated profits to repurchase the same. The cost of paying wages in kind did not show up on the income statement, and the cash expensed to repurchase the stock showed up on the cash flow statement as a financing activity, a pseudo-allocation of capital. The divergence between Dell's GAAP-based profitability (a mirage) and the performance of its stock price (a reality) is an indictment. The accounting process with its many participants delivers fatuous information. In ranking technology companies, Business Week should consider disregarding financial information in favor of more reliable and relevant criteria, however hard to find.

Albert J Meyer