Dell (NASDAQ:DELL) encouraged few in reporting earnings last week.

If you haven't yet seen the numbers, here's a brief recap:

  • Net revenue fell 16% while the cost to produce that revenue fell 14%.
  • Net margin fell from 4.8% last quarter, and 4.2% a year ago, to 2.6%.
  • Mobile revenue declined 17%, and desktop revenue plunged 27% year over year.

Yet despite this, Dell produced $690 million in free cash flow last quarter -- $473 million if you strip away add-backs related to stock-based compensation.

Wait, it gets better!
Both numbers are impressive. Neither, however, reveals just how excellent Dell has become at squeezing cash from its operations. Consider last quarter's working capital outlays.

Dell benefited heavily from aggressive cash collections and streamlined inventory. Specifically, the PC maker derived $753 million from fewer accounts receivable, and $244 million from reduced inventory expense. Yet those savings were spent and then some in payments to creditors -- Dell spent an additional $1.1 billion to settle its accounts payable.

There are no artificial sweeteners here. Instead, Dell is taking painful steps to eke out cash flow. Layoffs are part of that equation, just as they have been for IBM (NYSE:IBM), Cisco (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT), and Seagate (NYSE:STX).

Even Hewlett-Packard (NYSE:HPQ), whose EDS unit recently signed a 10-year, $1 billion services contract with U.K. insurer Aviva, has cut staff, according to TechCrunch's layoff tracker. Attacks on its cash-rich printing segment can't be helping, nor can a rough-and-tumble market for servers.

Not Dell 2.0; more like Dell 1.1
Yet HP was generating a near-10% operating margin on all of its tech wares as of October, more than doubling Dell's performance. HP's margins have also been steady recently. Dell, not so much, and that's a concern for my Foolish colleague, Anders Bylund.

"The company remains profitable and cash-flow positive, which gives Mike Dell and his crew some time to right this floundering ship. But it's still going down as we speak," he wrote last week.

Right the floundering ship? If cash is what matters -- and it does -- then Dell can cut margins as much as it wants to, so long the underlying operation generates cash at that margin. At 2.6%, Dell produced more than $400 million in moola after accounting for stock-based compensation. I'd call that anything but floundering.

For clarification: I treat stock-based compensation as if it were cash because it's roughly equivalent to salary, and salary is always paid in cash. And yes, I realize that Dell's diluted share count accounts for the expected impact of options exercises.

Even after you account for its options largesse, Dell is a cash creator. Rarely has that been more important than it is now, when netbooks are assaulting margins and slowing the once-unstoppable march of Apple's (NASDAQ:AAPL) Macs.

Dell may even be the best positioned to supply these cheapies and still turn a profit. And even if it isn't the best positioned -- Taiwan's Asus may be -- Dell's balance sheet, flush with more than $9 billion in cash and investments versus just $2 billion in debt, should be able to absorb any short-term losses.

Proceed with caution, not panic
You'll find few Fools who've been more bearish about Dell's prospects over the years than I have been.

In 2007, I argued that Michael Dell's return to the CEO job wouldn't matter. I've also gone on record saying that the company needs innovation more than cost cuts. I still believe that, but costs cuts have proven effective -- just look at the cash flow statement.

And today, more than 45% of Dell's market value is tied up in liquid assets, entirely disconnected from the underlying operation. A business that, caught in the throes of a brutal recession, is still producing cash.

Isn't that at least worth a place on your watch list, investors?

Dell and Microsoft are Inside Value picks. Apple is a Stock Advisor selection. Try either of these Foolish services free for 30 days. There's no obligation to subscribe.

Tim had stock and options position in Apple and a stock position in IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is hungry. (Hangs "Out to Lunch" sign.)