CASH & MARKETABLE

SECURITY MANAGEMENT

GROUP 6
Apoorva Charu (117)
Swati Seshadri (118)
Meenal Shah (119)
Ankit Sharma (418)
Arpit Vijay (419)
Divi Khanna (420)
Juhi Rupani (421)
CASH MANAGEMENT
Juhi Rupani
MBA Tech (Telecom)
Roll No : 421
 CASH MANAGEMENT
• It is the maintaining of liquidity of a firm to minimize the risk of
insolvency.
• It is also about the proper balancing of keeping cash without
letting it idling around.
• Good cash management means:
 Knowing when, where, and how your cash needs will occur.
 Knowing what the best sources are for meeting additional cash
needs.
 Being prepared to meet these needs when they occur, by
keeping good relationships with bankers and other creditors.
 MOTIVES FOR HOLDING CASH
• The 3 motives for holding cash as advocated by the British
Economist, John Maynard, are:

1. Transaction motive:
 Maintaining cash for the purpose of meeting cash needs arising in
the ordinary course of doing business.
 Includes regular payments like wages, utilities, acquisition of fixed
assets and inventories.

2. Speculative motive:
 Holding cash for potential profit making situation like purchasing
raw materials in bulk in anticipation of a fall in price.
 MOTIVES FOR HOLDING CASH contd.
3. Precautionary motive:
 Maintaining of cash balance as buffer for UNEXPECTED needs that
may arise.
Either holding in cash or marketable securities that can be liquidated
easily

• Marketable securities are very liquid securities that can

be converted into cash quickly at a reasonable price and
tend to have maturities of less than one year.
CASH MANAGEMENT SYSTEM
 CASH MANAGEMENT SYSTEM contd.

• From the figure we can see that the firm will benefit by
“speeding up” cash receipts and “slowing down” cash
payouts.

• The firm wants to speed up the collection of accounts

receivable so that it can have the use of money sooner.

• Conversely, it wants to pay accounts payable as late as is

consistent with maintaining the firms credit standing
with suppliers so that it can make the most use of the
money it already has.
 CASH MANAGEMENT SYSTEM contd.

• CASH COLLECTION:
It is the management of receivables, customer
payments and incoming cash flows of a firm.

• CASH DISBURSEMENT:
A payment of money or simply a payment. Usually, the
writing of a check to pay for an item previously
obligated to be paid, such as loan payment, salary
payment or accounts receivable payment.
 HP AND IBM

Parameter HP IBM
MARKET Approx 95004 Approx 563490
CAPITALIZATION crores crores
SUBSCRIBER BASE
45 million 119.68 million
(JUNE 2008)
PRESENCE Global Global
ORIGIN California New York
LISTED ON NYSE NYSE
RANKING IN INDIA 5 7
• HP specializes in developing and manufacturing
computing, storage, and networking hardware, software
and services. Major product lines include personal
computing devices, enterprise servers, related storage
devices, as well as a diverse range of printers and other
imaging products.

• IBM manufactures and sells computer hardware and

software (with a focus on the latter), and offers
infrastructure services, hosting services, and consulting
services in areas ranging from mainframe computers to
nanotechnology.
Speeding Up Cash Receipts &
Slowing Down Cash Payments
Apoorva Charu Sawhney
MBA Tech (IT)
Roll No : 117
 SPEEDING UP CASH RECEIPTS

• Acceleration of Collections:

1. Early preparation and mailing of invoice

2. Accelerate payment from customers

3. Reduce time when payments remain uncollected funds

• COLLECTION FLOAT: Total time between the mailing of the check by

the customer and the availability of cash to the receiving firm.
 COLLECTION FLOAT TIME-LINE

BOB JONES 2048

ORDER
OF

Customer mails Firm receives Company deposits Company’s bank

check check check account credited

PROCESSING FLOAT AVAILABILITY FLOAT

MAIL FLOAT

DEPOSIT FLOAT

COLLECTION FLOAT
 WAYS TO REDUCE COLLECTION FLOAT

• Earlier billing/Outsource the billing function

• Pre-authorized debt
• Use of Lockbox systems
• Concentration banking

– Depository transfer check

– Automated Clearing House (ACH) Transfer
– Wire Transfer
 EARLIER BILLING

• Accelerated preparation and mailing of invoices

• Use of computerized billing/ fax

• Enclose invoices with shipped goods
• Request for advance payments of goods

• Outsourcing the billing function:

– Allows firm to focus on clients
– Allows firm to save labour costs
– Allows firm to relocate resources
 PRE-AUTHORIZED DEBT

• Arrangement that allows firms to transfer payments directly from

customer accounts to firm’s accounts, with customer's advance
authorization.
• Reduces mail float and processing float

• ADVANTAGES:
– Eliminates billing and postage costs, clerical processing costs
– Eliminates regular billing for customers
– Increased working cash
 LOCKBOX SYSTEM
• Firm sets up a lock box service with their bank , customers send their
payments directly to lockbox.
• The bank deposits payments directly to the company's account.

• ADVANTAGES:
– Reduces mail float and processing float
– Reduces clerical functions (bank handles receiving, totaling,
depositing)
– Early knowledge of dishonored checks
 CONCENTRATION BANKING

• Firms move funds from several geographically situated regional banks

to a main concentration account in a primary bank.

• ADVANTAGES:

– Improves control over cash inflow/outflow

– Reduces idle balances

– Allows more effective investments
 DEPOSITORY TRANSFER CHECKS (DTCs)

• Firms use pre-printed, non-negotiable check drawn on a local bank,

payable to a single company account at a concentration bank.

• ADVANTAGES:
– Lower levels of excess cash
– Eliminates billing, postage and clerical processing costs
– Reduces mail float and processing float
• DISADVANTAGES:
– funds not immediately available on DTC receipt
– Mail-based collection of check
 AUTOMATED CLEARINGHOUSE TRANSFER

• The Automated Clearing House is an electronic system used to

transfer funds between banks.

• ADVANTAGES:
– Electronic version of DTC, hence is faster
– Funds available 1 business day later
– Better coordination between bank branches
• DISADVANTAGES:

– Hard to stop payment on the physical check

 WIRE TRANSFER

• Electronic transfer of funds using two-way communications system

• Primary bank sends message to the receiving bank requesting them

to effect payment in accordance with the instructions given.

• ADVANTAGES:

– Simple procedure; funds available immediately

• DISADVANTAGES:
– expensive
 SLOWING DOWN CASH PAYOUTS
• DISBURSEMENT FLOAT:
– The total time period between when a check is prepared by the
firm and when the check is presented for payment. 

BOB JONES 204

ORDE
8
R OF

Firm mails Creditor Creditor Firm’s account

check receives check deposits check is debted

DELIVERY FLOAT PROCESSING TRANSIT FLOAT

FLOAT

DISBURSEMENT FLOAT
 NET FLOAT
• NET FLOAT:
– The total amount of float in a bank account.
– The net float, when added to or subtracted from the book
balance, shows how much money is in the bank account.
– Accurate estimation is necessary for ‘playing the float’.

NET FLOAT = DISBURSEMENT FLOAT – COLLECTION FLOAT

Money spent by money deposited

the firm but not yet by the customer
taken out of its but not yet cleared
account to firm’s account
 CONTROL OF DISBURSEMENTS

• Centralized disbursement system

• Payable through drafts (PTD)

• Zero-Balance Accounts
• Controlled disbursements

• Remote Disbursements
• Outsourcing
 CENTRALIZED SYSTEM

• Payables centralized into one account.

• Sophisticated computer system that provide necessary information

about excess funds.
• ADVANTAGES:
– Excess funds transferred automatically from other accounts
– Disbursements made precisely when required
• DISADVANTAGES:
– Operating procedures should be common for all accounts and
well-established
 PAYABLE THROUGH DRAFT (PTD)
• It is Payable-on-demand
• When presented to issuer’s bank for collection, bank presents it for
acceptance. The funds are disbursed after acceptance.

• ADVANTAGES:
– Delays the time firm has to maintain funds to cover the draft
– Allows firm to maintain smaller bank balances
– Payment can be stopped if necessary

• DISADVANTAGES:
– Banks impose higher service charge for drafts
 ZERO BALANCE ACCOUNT (ZBA)

• One master account services subsidiary accounts.

• Just enough cash is transferred daily from the firm’s master account
to subsidiary accounts to maintain zero balance account
• ADVANTAGES:
– Allows more control over cash outflows
– No idle cash in subsidiary accounts
• DISADVANTAGES:
– Daily transfer of cash required
– Efficient management of master account required
 OTHER METHODS

• CONTROLLED DISBURSEMENTS:
– Bank provides a daily report, that provides the amount of
disbursements that will be charged to the firm's account.
– This early knowledge of daily funds requirement allows firm to
invest any surplus in intra-day investment opportunities.
• REMOTE DISBUSREMENTS:
– Payments are issued through a remote branch of a bank and firm
is able to delay the payment due to increased float time.
• OUTSOURCING:
– Firm can hire outside services to perform disbursement functions.
Electronic Commerce and
Outsourcing
Ankit Sharma
MBA Tech (Telecom)
Roll No : 418
 ELECTRONIC COMMERCE

• Electronic commerce is the exchange of

business information in an electronic format as
an alternative to the paper based system.

• EC spectrum can be divided into:

– Unstructured messaging: utilize
technologies such as faxes and e-mails

– Structured messaging: utilize technologies

such as electronic data interchange (EDI)
 ELECTRONIC DATA INTERCHANGE
• It involves the transfer of business information such as
invoices, purchase orders, and shipping information in a
computer readable format.
• It involves direct computer to computer data transfer as well
as transfer through physical storage such as CDs, disks etc.
ELECTRONIC DATA
INTERCHANGE

ELECTRONIC FINANCIAL
FUNDS TRANSFER EDIs
 ELECTRONIC FUNDS TRANSFER
Electronic transfer of a certain monetary value takes place in
which a depository institution sends or receives electronic
payments. It can be applied to:
• Cardholder-initiated transactions, where a cardholder makes use
of a payment card
• Direct deposit payroll payments for a business to its employees,
possibly via a payroll services company
• Direct debit payments from customer to business, where the
transaction is initiated by the business with customer permission
• Electronic bill payment in online banking, which may be delivered
by EFT or paper check
• Wire transfer via an international banking network (generally
carries a higher fee)
 ELECTRONIC FUNDS TRANSFER contd.
Instruction for transfer set by two major societies:
• SWIFT (Society for worldwide interbank financial
telecommunication)
• CHIPS (Clearing house interbank payment systems)

In January 1999, a regulation passed required all federal

government payments except tax refunds and special
waiver situations, be made electronically This will:
• provide more security than paper checks and
• be cheaper to process for the government.
 FINANCIAL EDI
• Is the computer-to-computer exchange of payment and
payment-related information between companies using a
standard format.

• A bank must be involved.

• The buyer and seller must work closely with their respective
banks to effect a Financial EDI transaction.

• Examples include:
– Lockbox remittance information
– Bank balance information
 STEPS IN FINANCIAL EDI
• The buyer, or originator, electronically extracts payment information
from the company's accounts payable system.

• The buyer formats the data into an EDI ANSI standard, the ANSI 820
transaction set using an EDI software.

• The buyer then transmits an ANSI 820 format to bank for processing.

• The bank then takes the 820 data and puts it into a format so that it
can be sent through the Automated Clearinghouse.

• The ACH network then delivers the payment data to the seller's, or
receiver's, bank.
 COSTS AND BENEFITS OF EDI
Costs
• Computer hardware and
software expenditures
• Increased training costs to
implement and utilize an EDI
system
• Additional expenses to
convince suppliers and
customers to use the
electronic system
• Loss of float
Benefits
• Information and payments
move faster and with greater
reliability
• Improved cash forecasting and
cash management
• Customers receive faster and
more reliable service
• Reduction in mail, paper, and
document storage costs
 OUTSOURCING
• Shifting an in-house operation to outside firm in a view to
reduce company’s costs

• Operation to be outsourced is critical but non-core process of

the company

• The subcontractor uses special expertise and economies of

scale to perform an outsourced business operation

• The company gets the service it needs at a lower cost and

higher quality; can focus on its core business
 OUTSOURCING: IBM
The company’s major operations in outsourcing are:
• Global technology services: Comprehensive IT services
integrated with business insight working with clients to reduce
costs and improve productivity through accepting the
outsourcing of processes and operations
• Global business services: primarily provides professional services
and application outsourcing services, delivering business value
and innovation to clients through solutions which leverage
industry and business process expertise.
• IBM leverages its supply-chain expertise for clients through its
supply-chain business transformation outsourcing service to
optimize and help operate clients’ end-to-end supply-chain
processes, from procurement to logistics.
REVENUE FROM OUTSOURCING: IBM
 CASH BALANCES: HEWLETT PACKARD
• Total cash and cash equivalents declined approximately 10% to
$10.2 billion in 2008 from $11.3 billion in 2007 due to increased
investment spending on acquisitions and increased borrowings.

• Cash balances according to them are sufficient to cover cash

outlays expected in fiscal 2009 associated with additional stock
repurchases, acquisitions, company bonus payments, and other
operating cash requirements.
Investments in Marketable
Securities
Arpit Vijay
MBA Tech (Telecom)
Roll No : 419
 GENERAL SCENARIO
• In general, firms try to maintain some target level of cash for meeting :
– Transaction requirement
– Compensating Balances requirement
• Beyond this, they invest in marketable securities as near-cash
investments
– Interest lost on idle cash balances
– Greater opportunity cost incurred on maintaining idle cash
balances
• Securities are called marketable securities when :
– The firm can readily convert them into cash and
– Intends to do so when it needs cash

• If this does not apply, it is called as Investment in securities

 BALANCE SHEET REPRESENTATION
Cash Equivalents
• Most liquid assets found within any firm’s balance sheet.
• Readily convertible into cash
• Maturity with 3 months
• Low risk, Low Return
• Includes Treasury Bills, Bank Certificate of Deposits, Other money
market instruments.

Short Term Investments

• Securities that are held for less than one year
• Return on investment in form of :
– Financial income i.e. dividend income, interest income
– Capital appreciation
 VALUATION OF MARKETABLE SECURITIES
At Acquisition
• Marketable Securities are initially recorded at acquisition cost which
includes purchase price plus any commission, taxes or other costs
related to acquisition.
• This the same rule as the general rule for valuing assets at acquisition.

After Acquisition
• Because there exists a market value, marketable securities can be
reliably written up or down to the market value giving a more current
estimate of economic worth
• This also results in a holding gain or loss which is not due to the normal
operations of a firm.
 THREE CLASSES OF MARKETABLE SECURITIES
• For the purposes of valuation after acquisition, there are three classes
of marketable securities:

– Debt held to maturity

– Trading securities

– Securities available for sale

 DEBT HELD TO MATURITY
• Debt securities for which a firm has both the positive intent & ability
to hold to maturity

• Shown on the balance sheet at the amortized acquisition cost

• Amortized acquisition cost means that the securities are amortized

like a mortgage or bond
– The acquisition cost is assumed to be the present value.
– The maturity value and maturity date are known from the bond
certificate.
 TRADING SECURITIES
• Trading securities are assumed to be held for short-term profit

• Characterized by frequent & active buying & selling with the object of
generating profit

• Typically only financial institutions hold trading securities

• Since trading securities are acquired for short-term profit, unrealized

gains or losses that result from adjustments to market value pass
through the income statement & increase or reduce net income
before there is a sale of the securities
 SECURITIES AVAILABLE FOR SALE
• Securities available for sale are neither trading securities or securities
held to maturity. They are an intermediate class and are typically tied
to a specific cash need.
• They are held by non-financial companies
• For example, a manufacturing firm may build a large fund of securities
to pay for a renovation to its plant or to retire bonds that will come
due.
• Since they are acquired for longer-term return, unrealized gains or
losses that result from adjustments to market value do not pass
through the income statement but stay on the balance sheet as an
equity account.
 COMPARISON
Trading Securities
• The unrealized holding gain
or loss for trading securities
is considered income; it is
close to income and
increases or decreases net
income.
Securities Available for Sale
• While the unrealized
holding gain or loss for
available for sale securities
is not closed but remains on
the balance sheet. When
these securities are sold,
this account must then be
closed.
MARKETABLE SECURITIES PORTFOLIO

Ready cash
Free cash segment
segment (F) (R)

Controllable
cash segment
(C)
 READY CASH SEGMENT (R)
• Optimal balance of marketable securities held to take care of probable
deficiencies in the firm’s cash account
• Can be sold quickly to build up cash
• Ideally, Cash Inflows >= Cash Outflows, each day

Ready
Free cash cash
segment segment
(F) (R)

Controllable
cash
segment (C)
 CONTROLLABLE CASH SEGMENT (C)
• Market securities held for meeting controllable (knowable) outflows
such as taxes and dividends
• Accumulated funds for such purposes can be invested temporarily to
earn interest

Ready
Free cash cash
segment segment
(F) (R)

Controllable
cash
segment (C)
 FREE CASH SEGMENT (F)

“free” marketable securities available for unassigned purposes

• It is just extra idle cash with the company invested in Marketable

securities.

Ready
Free cash cash
segment segment
(F) (R)

Controllable
cash
segment (C)
 VARIABLES FOR SELECTION

• Variables for selection for Marketable Securities :

– Safety
– Marketability
– Yield
– Maturity
 SAFETY

• With regard to the principal amount

“ Refers to the likelihood of getting back the same number of

rupees you originally invested (principal) “
 MARKETABILITY
• Also known as Liquidity

“ The ability to sell a significant volume of securities in the short

period of time in the secondary market without significant price
concession “
 YIELD
• Also known as Return

“ The variability in the market price of a security caused by the changes

in interest rates “

Yield

Time
 MATURITY

“ The life of a security i.e. amount of time before the principal

amount of a security becomes due “

• Longer the maturity, greater the yield , but also more exposure to
yield risk.
 MARKETABLE SECURITIES
IBM
• IBM ended 2008 , with $ 12.9 billion of marketable securities
• Cash and Cash equivalents : $ 12,741 million
• Short term marketable securities : $ 166 million

HP
• HP ended 2008, with 10.2 billion of marketable securities
• Cash and Cash equivalents : $ 10,153 million
• Short term Investments : $ 93 million
 CONTROVERSY ABOUT MARKETABLE SECURITIES

• The accounting for marketable securities has been controversial. The

accounting issues are:

– Whether to report these instruments at historical cost (or some

method based on historical cost) or at market value, and

– If at market value, whether to report the changes from period to

period as part of that period’s income or to await the period when
the firm sells or otherwise disposes of the instrument to record
the gain or loss in income.
Common Investment
Instruments
Meenal Shah
MBA Tech (IT)
Roll No : 119
 Money Market
• A segment of the financial market in which financial instruments
with high liquidity and very short maturities are traded.

• There are two modes of investment in money market viz

– Direct Investment in Money Market Instruments &
– Investment in Money Market Funds.
 Common Money Market Instruments

• The money market encompasses a wide range of instruments

with maturities ranging from one day to a year, issued by the
government and by banks and corporates of varying credit
rating, and traded in markets of varying liquidity.
• The money market is also intimately linked with the foreign
exchange market
• Consequently, they are considered to be near-cash equivalents.
 Common Money Market Instruments

Treasury Bills
• Short term borrowing instruments issued by Central Bank (RBI in
India) on behalf of Government of India
• Minimum of 25000 and its multiple
• Sold at a discount and repaid at maturity

• Yield determined by money market forces

• one of the safest money market instruments
 Common Money Market Instruments

Certificates of Deposit
• Unsecured interest paying negotiable instruments issued by
commercial banks and also financial institutes
• Having maturity ranging from 30 days to 3 years.
• CD’s are issued in denominations of Rs. 0.5 million.
 Common Money Market Instruments

Commercial Paper
• Money market instrument introduced by RBI and consists of
short term, unsecured promissory notes
• Generally issued by finance companies with sound financial
position and a high credit rating.
• Commercial Paper is issued at a discount which is determined by
the money market forces
• It can be issued in denomination of Rs 5 lakh or in multiples of it
for 15 days to 1 year
 Common Money Market Instruments

Inter- corporate Deposits

• Inter-corporate deposits are unsecured loans offered by one
company to another company, and usually carry a term of six
months
• Advantage : no legal issues
• Disadvantage : high risk
 Common Money Market Instruments

Ready Forward or Repo or Buyback

• Short term loans in which two parties agree to sell and repurchase
the same security.
• Between the parties approved by RBI
• Repo - the seller sells securities with an agreement to repurchase
the same at a mutually decided future date and price
• Reverse Repo - the buyer purchases the securities with an
agreement to resell the same to the seller on an agreed date at a
predetermined price.
 Common Money Market Instruments
Bill of Exchange
– Issued in the form of promissory notes usually for the purpose of some transactions
consisting of goods and services.
– It is a buyer’s promise to pay to the seller a certain specified amount at certain date.

– The same is guaranteed by the banker of the buyer in exchange for a claim on the
goods as collateral.

Bill Discounting
– While discounting a bill, the Bank buys the bill before it is due and credits the value of
the bill after a discount charge to the customer's account.
– The transaction is practically an advance against the security of the bill and the
discount represents the interest on the advance from the date of purchase of the bill
until it is due for payment.
 Common Money Market Instruments

Short Term Debentures

• Issued by corporate bodies
• The funds borrowed are in excess to the funds already available
to the corporate from its consortium bankers.

Fixed Deposits
• FDs are fixed-income debt securities issued by banks.
• Putting money into an FD is like giving a loan to the bank, in
return for which the bank pays you interest.
 Common Money Market Instruments

Mutual Funds Schemes

• Mutual fund is the most popular investment instrument for a
common man as it offers a diversified professionally managed
basket of securities at a low cost.
• The mutual fund industry offers various types of investment
schemes like equity instrument, debt instrument or balanced
instruments. These could be broadly classified as
– Open-ended scheme.
– Close-ended scheme
– Interval scheme
Selecting Securities for Portfolio Segments
 Selecting Securities for Portfolio Segments

Ready Cash Controlled Cash Segment Free Cash Segment

Segment
Criterion 1. Safety and 1. Date to cash should 1. Base choice on yield
2. ability to be known subject to risk-return
convert to cash 2. Mature at time of trade-offs.
cash needs 2. Marketability with
some loss of principal
tolerable if yield is
high

Select Treasuries CD’s, commercial paper, Any money market

and inter-corporate instrument may be
deposit selected for this segment
 Portfolio Management

• A portfolio is a group of investments. A well-managed portfolio is

diversified to ensure a continuous ROI over time.
• There are three major portfolio management policies:
– Aggressive policy: (capital appreciation)
– Defensive policy: (capital preservation)
– Balanced policy: (Total Return)
RATIO ANALYSIS
Swati Seshadri
MBA Tech (IT)
Roll No: 118
 CURRENT RATIO
FORMULA : CURRENT ASSETS + CURRENT INVESTMENTS
CURRENT LIABILITIES + SHORT-TERM DEBT

2007-08 2006-07 YOY (%) INDUSTRY

AVERAGE
HP 0.98 1.21 (19) 1.4
IBM 1.15 1.2 (4)

• The current ratio for both HP  and IBM has plummeted for the year 2008. The YoY
decrease is more for HP showing its lack of liquid assets in the year 2008.
• Current ratio of HP has reduced from 1.21 to 0.99 (less than 1).This indicates that HP’s
ability to meet its payment obligations was very poor in FY 07-08.
• The cash and cash equivalents with the total value of $2250 million decreases over the
FY 07-08. This and the decrease in marketable securities and financing receivables led
to a decrease in the solvency of IBM.
 ACID TEST RATIO
FORMULA :
CURRENT ASSETS + CURRENT INVESTMENTS – PREPAID EXPENSES - INVENTORY
CURRENT LIABILITIES + SHORT-TERM DEBT

2007-08 2006-07 YOY (%) INDUSTRY

AVERAGE
HP 0.75 0.96 (22) 0.8
IBM 0.99 1.05 (6)

• The Quick ratios for both the companies have shown a decrease, with HP showing a
greater decrease (0.22) as compared to IBM(0.06). This shows that IBM has greater
solvency as compared to HP.
• Quick ratio shows that IBM is much more liquid than HP according to the current
industry averages.
 LIQUIDITY RATIO ANALYSIS
HP
• Cash and cash equivalents at October 31, 2008
totaled $10.2 billion, a decrease of $1.1 billion
from the October 31, 2007 balance of $11.3
billion.
• The amount and terms of any acquisition-related
borrowings affects liquidity and financial condition
and potentially credit ratings. Thus HP's liquidity
reduced in 2008 due to it acquisition of EDS.
• HP uses cash generated by operations as the
primary source of liquidity. Internally generated
cash flows support business operations, capital
expenditures and the payment of stockholder
dividends.
IBM
• IBM's liquidity positions were strong as the cash
on hand was $12,741 million. Total debt
decreased $1,349 million year to year, and the
company generated $18,812 million in operating
cash flow in 2008.
• The company provides for additional liquidity
through several sources: maintaining a sizable
cash balance, access to global funding sources, a
committed global credit facility and other
committed and uncommitted lines of credit
worldwide
 DEBT TO EQUITY RATIO

FORMULA : TOTAL DEBT

SHAREHOLDER’S EQUITY
2007-08 2006-07 YOY (%)
HP 0.46 0.21 119
IBM 2.52 1.23 105

• In the case of HP the total debts have shown an substantial increase in the year 2008
as compared to the previous year whereas the stockholder’s equity has remained
almost constant. This shows that the debts used to finance the company is increasing
compared to the equity.
• In this case IBM has a lesser difficulty with creditors even if the debt to equity ratio has
increased because their total debts have shown a decrease in the FY 08 with the
shareholder’s equity being halved.
 DEBT TO TOTAL ASSETS RATIO
FORMULA : TOTAL DEBT
TOTAL ASSETS
2007-08 2006-07 YOY (%)
HP 0.16 0.09 77
IBM 0.31 0.29 7

• In IBM the total assets have decreased more as compared to the total debts. Thus
showing an increase in the YOY ratio.
• In case of HP the debts are increasing substantially as compared to the total assets.
• IBM has a higher debt to total asset ratio showing that it has higher financial risk in
terms of the total assets accumulated by the firm.
 LONG TERM DEBT TO TOTAL CAPITALIZATION RATIO

FORMULA : LONG-TERM DEBT

TOTAL CAPITALIZATION
2007-08 2006-07 YOY (%)
HP 0.13 0.10 30
IBM 0.34 0.30 13

• IBM shows a decrease in the total capitalization whereas HP shows an increase in it.
• In case of HP the long term debts are increasing substantially leading to an increase in
the ratio (though not substantial as total capitalization is also increasing)
• Long term debt and total capitalization in case of IBM have both decreased though the
decrease in the long term debt is less as compared to decrease in the total
capitalization.
 DEBT RATIO ANALYSIS

IBM:
• Global Financing is a segment of the company and as such, is supported by the company’s
overall liquidity position and access to capital markets. Cash generated by Global Financing
was primarily deployed to pay intercompany payables and dividends to the company in order
to maintain an appropriate debt-to-equity ratio.

• Stockholders’ equity decreased $15,004 million, net of tax, primarily as a result of changes
from pension re-measurements and current year activity within accumulated gains and
(losses) not affecting retained earnings. This is a non-cash impact to equity and does not
affect the company’s access to capital markets or its ability to meet its obligations.

• Stockholders’ equity of $13,465 million decreased $15,004 million versus 2007. 

Total debt of $33,926 million decreased $1,349 million from prior year-end levels. and the 
company generated $18,812 million in operating cash flow in 2008. 
Within total debt, on a net basis, the company utilized $2,444 million in net cash to retire
debt versus $12,112 million in net cash proceeds in 2007. The net cash used to retire debt in
2008 was comprised of: $10,248 million in cash payments to settle debt and net payments of
$6,025 million in short-term borrowings, partially offset by $13,829 million of new debt
issuances.
 INTEREST COVERAGE RATIO
FORMULA : EBIT
INTEREST EXPENSES
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 31.83 30.17 6 24.2
IBM 25.84 24.71 5

• This ratio shows the company’s ability to meet its interest payments to avoid
bankruptcy. It shows a firm’s capacity to take new debts. Higher ratios are preferred.
• Both HP and IBM have shown amore interest paying capacity year on year showing
that both of them are strengthening their capacity to pay back long term debts.
• Hp’s interest coverage ratio is better than that of IBM.
 RECEIVABLE TURNOVER RATIO
FORMULA : ANNUAL NET CREDIT SALES
RECEIVABLES
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 6.13 6.53 (6) 4.8
IBM 3.67 3.34 10

• Receivable turnover ratio of HP is greater than that of IBM. Infact it is also greater that
the industry average(good sign). This shows that the collection methods are better
managed by HP.
 RECEIVABLE TURNOVER IN DAYS
FORMULA : DAYS IN A YEAR
RECEIVABLE TURNOVER RATIO
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 60 56 7 77
IBM 100 110 (9)

• The increase in receivable turnover in days for HP was due primarily to a higher
accounts receivable balance during the fourth quarter of fiscal 2008 compared to the
same period in fiscal 2007 and the effect of the EDS acquisition.
• Receivables in case of IBM have reduced thus the ratio has increased and the
receivable turnover in days i.e average collection period has decreased which is a good
sign as it “speeds” up the receivables.
RATIO ANALYSIS
Divi Khanna
MBA Tech (Telecom)
Roll No: 420
 PAYABLE TURNOVER RATIO
FORMULA : ANNUAL NET CREDIT PURCHASES
PAYABLES
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 6.35 6.64 (4) 6.99
IBM 8.09 6.89 17

• Cash generated by Global Financing was primarily deployed to pay

intercompany payables and dividends to the company (IBM).Hence the
payables showed a decrease which increases the payable turnover
ratio.
 PAYABLE TURNOVER IN DAYS
FORMULA : DAYS IN A YEAR
PAYABLE TURNOVER RATIO
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 53 55 (4) 53
IBM 46 53 (13)

• The slight decrease in payable turnover in days for HP was due primarily to purchasing
linearity and improved 66 accounts payable management.
• In fact the payable turnover in days is less than the industry standards showing that it
pays back its debts faster than the other firms.
 INVENTORY TURNOVER RATIO
FORMULA : COST OF GOODS SOLD
INVENTORY
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 11.37 9.78 16 11
IBM 20.99 20.91 0.4

• Commercial financing receivables relate primarily to inventory and accounts receivable financing
for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory and
accounts receivable financing generally range from 30 to 90 days. Accounts payable drove a use
of cash of $718 million; and A decrease in cash of $284 million driven by growth in inventory. The
net impact of the purchases and sales of marketable securities and other investments resulted in
an increase in cash of $642 million.
 INVENTORY TURNOVER IN DAYS
FORMULA : DAYS IN A YEAR
INVENTORY TURNOVER
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 32 37 (14) 34
IBM 18 18 (0)

• The decrease in inventory turnover in days for HP was due primarily to

more efficient inventory management, higher cost of goods sold during
the fourth quarter of 2008 as a result of increased revenues and the
effect of the EDS acquisition.
 OPERATING CYCLE
FORMULA : INVENTORY TURNOVER IN DAYS + RECEIVABLE TURNOVER IN DAYS
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 92 93 (1) 110
IBM 118 128 (8)

• IBM is making attempts to reduce its OC .This is shown by the greater

decrease in the OC as compared to that of HP.

• IBM maintains a very short inventory turnover in days .However its receivable
turnover in days is very high, leading to its greater operating cycle.
 CASH CYCLE
FORMULA : OPERATING CYCLE – PAYABLE TURNOVER IN DAYS
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 34 38 (11) 58
IBM 72 75 (4)

• The combined effect of changes in the payable, receivable and inventory

turnover ratios for HP(as already mentioned above) contributed to the
decrease in FY 2008 cash conversion cycle compared to the prior year.
• IBM’s cash cycle is quite high as compared to HP. Thus to a certain extent HP’s
cash management is better as it is quick to collect cash from its sales once the
purchases  have been paid for.
 TOTAL ASSET TURNOVER RATIO
FORMULA : NET SALES
TOTAL ASSETS
2007-08 2006-07 YOY (%) INDUSTRY
AVERAGE
HP 1.04 1.17 (11) 0.8
IBM 0.92 0.8 15

• IBM’s asset turnover ratio has increase by 15 % due to increase in sales and a decrease
in the total assets (Total assets decreased $10,907 million).
• Hp’s asset turnover ratio is quite high as compared to industry standards showing very
good management of assets in the sales. It is also because the OC and the CC are high.
• From the cash flow statement of IBM it can be seen that the net gain on asset sales is
very high for the year 2008.
 GROSS PROFIT MARGIN
FORMULA : NET SALES – COST OF GOODS SOLD
NET SALES
2007-08 (%) 2006-07 (%) YOY (%) INDUSTRY
AVERAGE
HP 24.07 24.37 (1) 23.5
IBM 43.88 42.04 4

• Gross profit margin is a financial ratio used to assess the profitability of a firm's core
activities, excluding fixed costs. Gross profit margin indicates the relationship between
net sales revenue and the cost of goods sold. A high gross profit margin indicates that
a business can make a reasonable profit on sales, as long as it keeps overhead costs in
control.
 PRE-TAX MARGIN
FORMULA : EBT
NET SALES
2007-08 2006-07 YOY (%) INDUSTRY
(%) (%) AVERAGE
HP 8.88 8.39 6 6.6
IBM 16.54 15.02 10

• It shows the rate of earning on sales after the interest cost but before the tax. It
indicates the margin to be included in sales to meet all expenses.
• Pre-tax income from continuing operations grew 15.4 percent and net income from
continuing operations increased 18.4 percent reflecting an improvement in the
company’s tax rate.
 NET PROFIT MARGIN
FORMULA : EAT
NET SALES
2007-08 2006-07 YOY (%) INDUSTRY
(%) (%) AVERAGE
HP 7.06 6.99 2 5.6
IBM 12.2 10.8 13

• It measures profitability of sales after adjusting all income, expenses and taxes.
• A low profit margin indicates a low margin of safety: higher risk that a decline in sales
will erase profits and result in a net loss.
 PROFITABILITY RATIO ANALYSIS

IBM
• Gross profit margins improved, reflecting the shift to higher value
businesses, pricing for value and the continued focus on productivity and
cost management
• Increase in Net cash used in investing and financing activities

HP
• Total company gross margin decreased slightly in fiscal 2008 from fiscal
2007.
• There was a favorable currency due to movement of the dollar against the
euro
 RETURN ON INVESTMENT
FORMULA : EAT
TOTAL ASSETS
2007-08 (%) 2006-07 (%) YOY (%) INDUSTRY
AVERAGE
HP 7.35 8.19 (10) 23.9
IBM 11.26 8.65 30

• It is the ratio of money gained or lost on an investment relative to the

amount of money invested.

• IBM has shown a substantial increase in the ROI due to decrease in total
assets and an increase in the net income.

• 10% decrease in case of HP because of a decrease in total asset turnover

ratio and net profit margin increased only marginally.
 RETURN ON EQUITY
FORMULA : EAT
SHAREHOLDER’S EQUITY

2007-08 (%) 2006-07 (%) YOY (%) INDUSTRY

AVERAGE
HP 21.39 18.85 14 49.7
IBM 91.6 36.59 150

• Return on Equity measures the rate of return on the ownership interest of

the common stock owners.
• It measures a firm's efficiency at generating profits from every unit of
shareholders' equity
• IBM has very firm investment opportunities for its future stakeholders.
• IBM is a better investment firm for its stakeholders.
DU PONT APPRAOCH ROI AND ROE
FORMULA(ROI) : NET PROFIT MARGIN x TOTAL ASSET TURNOVER
2007-08 (%) 2006-07 (%) YOY (%)
HP 7.34 8.18 (10)
IBM 11.22 8.64 30

FORMULA(ROE) : NET PROFIT MARGIN x TOTAL ASSET TURNOVER x

EQUITY MULTIPLIER
2007-08 (%) 2006-07 (%) YOY (%)
HP 21.36 18.86 13
IBM 91.25 36.55 150
 SUGGESTIONS

• Curtail cash expenditure and increase cash in hand, cash at bank, and
marketable securities.

• Increase liquid assets and decrease current liabilities so that firm can
meet out the current liabilities.

• Increase other current assets for payment of short term liability.

• Curtail long term borrowings from short term funds so that financial
obligation may be managed properly.