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Word Count: 409
In analyzing the profitability of Compaq I came to the following conclusions The gross profit is the difference of total revenue and total cost of products and services In 1998 the gross profit was 719 billion and in 1997 it was 675 billion and in 1996 it was 515 billion Due to lack of information other profitability ratios can not be determined such as the current ratio quick ratio ROE and ROI The total revenue has increased by approximately 5 billion each year Cost for services has increased six fold from 1996 to 1998 while the cost of products has gone down steadily The increase in cost of services overshadows the decrease in cost of products Thus the percentage in cost of sales has increased causing a decrease in gross profit from 1997 to 1998 whereas in 1996 to 1997 the percentage in cost of sales has decrease causing an increase in gross profitIn 1996 and 1997 the percentage of moneys used in research and development averaged 34 of total revenue In 1998 research and development increased to 44 of total revenue This translated to an increase of 536 million In 1998 with the acquisition of Digital Compaq acquired approximately 32 billion in obsolete technology To keep up with competitors Compaq had to allocate more money for research and development which ought to lead to greater returns in the future In 1996 and 1997 the gross profit was greater then the total operating expenses therefore positive incomes of 275 billion 1997 and 188 billion 1996 resulted However in 1998 operating expenses exceeded gross profit resulting in a 266 billion loss This loss was due to an increase in research and development restructuring costs after the acquisition asset impairments and purchasing other technologies The loss would have resulted in a federal tax return of 932 million and a foreign tax return of 40 million however Compaq had to pay a US statutory 35 tax on the
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