Hayden Johnson

Accounting 1120 10:00-11:20

Shauna Hatfield
4/20/16
Analysis Paper
IBM Analysis Paper
The company IBM or International Business Machines is a large American
company with offices all around the world that has a reputation of being a profitable
and a successful company. In order to see if it that is still true today one must
analyze the company and see which way the company is headed, to do this there
are various ratios used in order to get a real picture of what the numbers mean.
Ratios take away the disproportions of a larger companys data to a smaller
companys making it easier to compare the two different types of companies.
Though ratios by themselves always dont tell the whole story they are important. In
order to get the whole picture from a ratio it needs to be compared to other results
of the same ratio such as the companys own previous year and to the industrys
average. This enables a proper and complete analysis of a company. This paper will
go over various ratios as there are many aspects to a business and each one needs
to be taken into account.
Because there are many different types of ratios they are classified into
different categories those being profitability, risk both short-term and long-term,
efficiency, and stockholder relations. Each one of these categories shows the
different aspects of a business and helps each one to be analyzed separately. The
first category that will be discussed is profitability, starting with the first ratio called
the profit margin ratio. This ratio shows the percent of each dollar from all revenues

that was earned as net income or earned as profit, it also could be thought of as for
every dollar of revenue a company earns how much of it is earned in net income.
The industry average for the profit margin ratio is 1.0% meaning that for every
dollar of revenue they earn one percent is earned as net income. While IBMs profit
margin for 2014 was 13% which shows that compared to the industry average they
are more profitable in the sense that for every dollar of revenue they earn 12%
more of it becomes earned in net income than the industry average. That is
promising for the company but when we compare it to their own prior year we see a
different story. For the year 2013 their profit margin was 16.8% which is 3.8% more
than this year meaning that not as many revenue dollars ended up as profit. To
conclude according to IBMs profit margin they are more profitable than the industry
average but not as profitable as last year.
The next ratio in the profitability category is the rate of return on total assets;
this ratio shows the ability a company has to use its assets to make a profit, or the
ability to turn assets into income. For the year 2014 IBMs return on assets was 39%
meaning that thirty nine percent of their assets were used to earn profit. This is
much better than the industry average which is only 1.6% of assets that are used to
earn income. But once again when this years ratio is compared to the prior year it
shows a decline is the companys profitability. It decreased from 56% to 39% a 17%
difference, which even though seventeen is a big difference this years ratio is still
well above the industry average so even with the decrease there isnt too much
reason to worry about it.
Next is the ratio called rate of return on common stockholders equity, or just
return on equity. This ratio shows the relationship or the difference between
stockholders and the net income available to them and the average amount of

equity that they have invested in the company. The industry average for this ratio is
3.94% and the return on equity for IBM in 2014 was 69% which once again is a lot
great than the average. This means that there is almost 65% more of net income
available to IBMs common stockholders than the industry average. But when
compared to IBMs prior year it is less once again, for 2013 the ratio was 77%. This
is starting to show a trend that in the category of profitability IBM is well above the
industry average but each ratio is worse in the year 2014 than it was in the year
2013.
Another ratio in this category of profitability is the gross profit percentage
which can be one of the most important ratios in analyzing profitability. This is
because it shows a companys ability to earn profit off of their merchandise
inventory. This is important because that is the whole point of a merchandising
company to earn money from their inventory. IBMs gross profit percentage for
2014 was 73% which is below the industry average of 80.1%. This is the first
Profitability ratio below the industry average and even though its only by about 7%
this is a could be a cause for concern seeing how a company needs a high gross
margin to be able to pay off expenses and earn income. This could be an area that
IBM needs to address, but it isnt all bad when compared to 72% in 2013 it shows
that they are improving even if only by a little amount it is better than a decline.
The final and one of the most important ratios of profitability is earnings per
share or EPS, it is the most used ratio in analyzing a business. It is the only ratio
that a business is required to disclose in their financial statements. Earnings per
share shows the amount of net income for every share of their outstanding common
stock, the higher the number the more net income there is for each share of stock
which is obviously better and what a company wants. For 2014 IBMs EPS was 11.97

which are well above the industry average of 2.66 meaning that IBM has more net
income for every share of common stock than the industry does. This is promising
but comparing the ratio only to the industry average doesnt show the whole
picture, the prior year needs to be analyzed as well. IBMs EPS for 2013 was 15.06
which are greater than it was in 2014 meaning that their EPS declined over that
year. This is a cause for concern because companies want their EPS to go up every
year to be able to keep up with the industry so a decrease isnt what they should be
looking for. They need to generate more net income so as to increase this ratio and
keep progressing.
The next category of ratios used to evaluate a business is called risk which is
divided in two parts first liquidity or short-term risk, and then solvency or long-term
risk. Starting with liquidity, this shows the ability a company has to pay their debt or
obligations that will be due within a year, called their current liabilities. The first
ratio looked at to analyze how well a company can pay back their current liabilities
is called the current ratio which measures how well a company can pay their short
term obligations with their current assets, which are cash or items to be cash within
a year. The current ratio for IBM in 2014 was 1.25 which is a little below the industry
average of 1.86 meaning that compared to the industry IBM doesnt use as much of
their current assets to pay their liabilities which isnt a positive thing, that is an area
to focus on. It is also down from 1.28 in 2013 meaning that they werent able to
improve from last year. IBM should then focus on using their assets more efficiently
to pay their debts to bring up their current ratio.
The next ratio used to analyze a companys liquidity is called the acid test
ratio, or the quick ratio. This ratio is similar to the current ratio but instead of using
all current assets in the numerator, only cash or quick to cash assets are used.

Basically this ratio shows the ability a company has to pay all of their current
liabilities if they were due today. The acid test ratio for IBM in 2014 was 1.02
meaning that with their cash and quick to cash assets IBM can pay their current
liabilities a little more than one time over. This is good but whoever still down from
the prior year which was 1.07 for 2013. Finally comparing this to the industry
average which was 1.57 it shows that they are below what they should be at. The
industry can pay their current liabilities more than one and a half time over while
IBM can only barely do it once. This shows that they need to increase the cash and
quick to cash assets they have so as to be more secure in their ability to pay their
debts.
The next section of the category risk is called solvency or a companys longterm term. Instead of evaluating the ability to pay short term debt; solvency
determines the ability to pay long term debt. The first ratio that in solvency is called
the debt ratio this ratio shows how much of a companys assets are financed by
debt. The higher the debt ratio the more assets are financed with debt and by the
owners of the business, or equity. This shows that the lower the debt ratio the lower
the financial risk for the company. The debt ratio for IBM in 2014 was 89% meaning
that of all of their assets eighty nine percent of them are financed using debt, this is
alarming and a cause for concern because this shows that if they arent able to use
debt to finance their assets anymore their company would fall apart, basically they
are very financially risky. Again the current year isnt as desirable as the prior year
which was 82% for 2013. But neither of those years results even come close to the
industry average which is 59.3%. IBM needs to start using their owners to finance
more of their assets to bring down debt ratio and their financial risk.

The next ratio in long-term risk is the debt to equity ratio, this ratio is also
used to evaluate debt in a company but instead of comparing it to assets it
compares debt to equity. It shows the proportion of liabilities relative to equity,
therefore a debt to equity ratio greater than one signifies that their assets are
financed with more debt than with equity. And vice versa that if it is less than one,
then more equity is used than debt to finance assets. Similar to the debt ratio the
higher the debt to equity ratio the higher financial risk there is for the company. The
debt to equity ratio for IBM in 2014 was 8.78 which are a lot more than one making
it obvious that IBM uses a lot more debt to finance their assets than equity. Making
them more risky in 2014 than 2013 which was 4.51, still not a very good ratio but
still better than this year. Comparing that to the industry average of 1.46 its clear
that IBM is headed in the wrong direction in financing their assets and need to make
a change of more equity than debt they use to do so.
The final ratio used to analyze solvency is called the times interest earned
ratio. Unlike like the previous two ratios in solvency the times interest earned ratio
measures a companys ability to pay their interest expense. Therefore a higher the
number in this ratio the more easily a company is able to pay their interest expense
and the lower the more difficult. In 2014 this ratio for IBM was 34.59 showing that
they can easily pay their interest expense thirty four times over to be exact. This
being a positive thing it still was lower than the year before of 50.37 in 2013,
showing that IBMs ability to pay their interest expense or the money they owe
extra on their loans. This being said the industry average of 2.9 is well below that of
IBM demonstrating that in this area IBM is where they want to be.
The next category of ratios used to analyze and evaluate a company is
efficiency which can be separated into smaller parts. The first smaller category

being inventory management, then receivables or collecting money, then assets

management, and finally cash flow management each of these sub-categories
having their own ratios related to them. In the inventory management the first ratio
used is called inventory turnover which measures the number of times a company is
able to sell their average inventory level over a period a higher inventory turnover
shows how many more times a company can sell its inventory. For IBM their
inventory turnover in 2014 was 4.14 meaning that they sold their inventory four
times over during the period, this being a little lower than the prior years of 4.79 in
2013. This seems like a decent result but when compared to the industry average of
17.56 its evident that IBM needs to improve their inventory turnover by selling
more or holding less inventory.
The last ratio in inventory management is the days sales in inventory this
measures the average number of days that inventory is held by the company. This
ratio various depending on the specific industry for, for IBMs industry the average
is 20.79 meaning that in their industry inventory should be held for about twenty
one days. The days sales in inventory for IBM in 2014 was 88.16, or they held their
inventory for eighty-eight days before it was sold this is well above the industry
average and also above last years number of 76.2. IBM needs to improve in this
area by maybe lowering the average amount of inventory they hold at a time.
The next sub-category in efficiency is the ability a company has to collect on
their receivables. Starting with the first ratio of receivables turnover which
measures the number of times that a company collects their average accounts
receivable balance in a year, the higher the faster the cash collections. That being
said a ratio that is too high could discourage and diminish sale to good customers
so this ratio can depend on the industry. For IMB in 2014 their receivables turnover

ratio was 2.91 which is lower than last years rate of 3.15 meaning that this year
compared to last they didnt collect as fast on their receivables. Also compared to
the industry average of 5.89 IBM was slower in both 2013, and 2014. This is related
to their low inventory turnover showing that they maybe dont sell as much as the
industry average or they just need to be more efficient at collection on their
receivables.
The next and final ratio in this sub-category is days sales in receivables
which shows the number of days it takes to collect on the average number of
accounts receivables For the industry average this ratio is 62 meaning it takes that
many days to collect on their receivables. For IBM the number of days it took in
2014 was 125.43 and for 2013 115.87, which shows that it took them a lot longer to
collect their receivable than the industry average. This could mean that they need
to reconsider how long they are letting their customers have to pay their debts, or
maybe a more efficient way to collect on them. But in any case this is an area that
IBM should try to improve on.
The next subcategory in efficiency is asset management; this only has one
ratio which is the asset turnover. This ratio measures the amount of revenue a
company is able to generate from its average number of assets, or how well they
use their assets to make money. The asset turnover for the year of 2014 for IBM was
.29 which is lower than 2013 which was .32. Both of these are well below the
industry average which is 1.6 more than triple IBMs number. This shows that IBM
doesnt generate very much of its revenue from its assets which isnt very efficient
they need to work on using their assets better.

The final sub-category of efficiency is cash flow management which is like it

says in the name an evaluation of how a company uses its cash. The first ratio in
this sub-category is called free cash flow which is used to show how of a companys
operating cash they will be able to use to pay expenses and liabilities after
dividends and capital assets are taken out. The free cash flow for IBM in 2014 was
5,869 million dollars which is more than the prior year of 2013 which was 2,140
million dollars, meaning that IBM has more money for operating expenses than they
did the prior year which is a promising direction for the company to go.
The next ratio in this sub-category is called cash flow to assets which is
calculated by dividing total operating cash by the average amount of assets, which
shows the relationship between how much operating cash a company has to their
assets. For IBM their cash flow to assets in 2014 was .53 which was a little less than
the previous year of 2013 which had a cash flow to assets ratio of .56. The change
between the two years was miniscule meaning that there isnt too much cause for
concern with nearly identical years. They would like to see an increase but such a
small decrease is decent.
The last ratio in cash flow management is Cash flow per share which shows
like the previous ratio the relationship operating cash has with other parts of a
company. But this time instead of comparing it to total average assets it compares it
to the number of outstanding common stock. For the year of 2014 IBM had a cash
flow per share of 17.03 which was an increase from the previous year of 2013 which
had a cash flow per share ratio of 16.58 showing an improvement. But when 2014 is
compared to the industry average there wasnt any improvement. The industry
average was 30.2 almost twice as much has IBM in 2014 which helps show that this
is an area of improvement for their company.

The final category of ratios used in analyzing business is investment

attraction or stockholder relations, basically everything else that has to do with an
owners part of the company. The first ratio to start out in this category is called the
price-earning ratio compares the market value of a share of a companys stock to
their earnings per share. This shows how much more they are earning for their
earnings per share on every stock. The price-earning ratio for IBM in the year 2014
was 13.4 which was an improvement from 2013 which was 12.45 which shows that
the company is going in the right direction. This means that their stock is selling at
13.4 times one years earnings, though this is still lower than the industry average
that which was 19.3. IBM then wants to keep up the growth that they experienced
over this year to get closer to the industry average.
The next ratio is called dividend yield which measures the percentage of a
stocks market price that is returned to the stockholders through dividends, this is an
important ratio for preferred stockholders which IBM doesnt have any. Even still this
is an important ratio in analyzing the progress of a company. The dividend yield for
IBM in 2014 was 2.7% which shows an increase from 2013 which was 2.1%. This
type of growth is always good to see for stockholders. Also it is promising when
compared to the industry average which was 2.2%. What IBM will want is for this
positive growth to continue in years to come to attract more potential investors.
The next ratio for this category is called dividend payout which shows the
percentage of earnings that are paid through cash dividends annually to
stockholders of common stock. The dividend payout for IBM in 2014 was 36% this
was a big improvement from the prior year which was 25%. However it was still
lower than the industry average that was 42.1%. This helps show the progress of
IBM in improving the amount payed out to common stock holders in cash dividends

but it also shows that they still have a ways to go to reach the industry average.
This ratio is closely related to the ratio of dividends per share which for IBM in 2014
was 4.31 and in 2013 were 3.85. Meaning that the amount of dividends paid to each
share of common stock was improving from 2013 to this year of 2014 which is a
good thing for a company to have to attract and keep stockholders.
The final two ratios used to evaluate a company are both have reference to
shares of stock in a company the first one is called revenue per share which like it
says in the name shows the relationship of how much of a companys revenue is
compared to the total number of common stocks they have issued. For IBM in 2014
this ratio was 92.4 which was a good increase from 2013 which was 89.9 showing
an increase. This is a positive thing for a company to have showing that for every
share of stock they are earning more revenue. The final ratio is called book value
per share; this shows the relationship of the book value of a stock to its value in a
company. This ratio for IBM in 2014 was 11.98 which was a decrease from 2013
which was 21.75 this is a significant difference which should cause some concern for
IBM showing that this is an area that they can improve on.
To conclude this analysis of the company IBM, let us restate some of the
results found in each category. The first being profitability which showed that even
though most years went down from the prior year overall they had promising results
for their ability to earn money or their profitability. When analyzing IBMs short-term
risk or their liquidity it showed they were close to the industrys averages but still
with need for improvement, also most prior years meaning 2013 in this category
were more desirable than in 2014. Even still these results showed promise for IBM in
their ability to pay off their short-term debt. This cant be said for their ability to pay
long-term debt or solvency, each year decreased from the prior year and every ratio

was well below the industry average which points out a cause for concern for IBM, if
these numbers continue to decline it could cause some real problems for their
company. Next when discussing their efficiency it showed that their use of their
inventory and the management of their receivables were below the industry
average and like every other category declined mostly from the previous year. This
is one area that IBM should put more focus on and try to improve their efficiency of
their use of their inventory. Finally in the category of stockholder/investor relations
they had more promising results. With most of the ratios improving from the prior
year and being above or around the industry this shows that they have a good
relationship with their stockholders which are important in keeping their equity up.
Over all IBM is an average company when compared to the rest of their industry but
has a company as a whole it seems like they are in a decline from the year 2013 to
2014 which doesnt mean that they should abandon ship but they should be careful
and watchful because if these declines continues in the coming years then drastic
measure will need to be taken to keep the company running and profitable.