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IBM Analysis Paper

IBMs Financial Standing

I have been doing research on IBMs 2013 and 2014 fiscal year ends, analyzing them to

see if they have grown and become more efficient or if they have had a set back and have

downsized from 2013 to 2014. We know that a companys efficiency matters in their overall

wellbeing, so I have taken into account a few equations to analyze not only efficiency but also

their profitability, if they are risky (such as being able to pay short term debts) and their

stockholder/investor relations.

I would like to first start with the risk category. The first two ratios that I would like to go

over are short term risk analyzers, the current ratio and the acid-test (or quick) ratio. These ratios

answer the question of how well a company can satisfy their current liabilities, or how much

money do they have to pay off debt. The current ratio from 2014 is 1.25 and in 2013 it was 1.28.

When we are talking about this ratio we need to know that the higher the number the less risky a

company is. Here we can see a slight decrease in their ability to pay off their short term debt. The

industry average is 1.86, so we can see that IBM is well under the industry average. This now

brings us to our second ratio on short term risk, the acid-test ratio. This is a companys ability to

turn their assets into quick cash to pay off liabilities. This ratio is also one that the higher the

number the less risky the company will be. IBM had a number of 1.19 in 2014 and 1.22 in 2013.

Once again we see a slight decrease in the numbers for IBM. Then industry average is 1.57 and

this is well above the numbers that IBM generated in the past couple of years.

There are two sides to risk, short term and long term. We have covered the short term

aspects of risk and now we will move onto the long term risk ratios. There are three ratios that I

will mention in the long term risk section. They are the debt ratio, the debt to equity ratio and the

times interest earned ratio. The debt ratio is one that you want to be lower. The higher the

number in the debt ratio, the more that a company has to depend on borrowing money and

leverage to pay off debts. 2014 comes out to be 77% and in 2013 it was 64%. This is more than a

slight increase in this area. The industry average is 59.3% and IBM is well over this industry

average. The debt to equity ratio is where the stockholders equity is taken into the equation. It is

evaluated how much equity is in a company and how much they rely on that support from the

stockholders. 3.44 is the calculated number for 2014 and 1.74 for 2013. Just like the debt ratio a

company wants a low number, the lower the better to help us know if a company is less or more

risky. The industry average is 1.46. In 2013 IBM was doing very well and seemed to be very

healthy in this aspect of long term risk, but in 2014 it sharply rose to make us a little weary to

what had happened. The third and final ratio for long term debt is times interest earned ratio.

This ratio is to see how well a company can pay off debt payments and interest payments. In

2014 IBM had a number of 5.1 and a stellar 6.1 in 2013. The industry average is 2.9. 2.9 is great,

and IBM has had a 5.1 and a 6.1. They can pay their interest 6 times over with the income from

one year. If a company can do it that many times off of one income it is safe to say that they are

very healthy. In the long haul IBM has stayed fairly constant. They have had a slight decrease in

most of the ratios but they seem to be doing very well still. There was a sharp increase in the debt

to equity ratio but that is the only thing and it shouldnt hurt them very bad at all. As an overall

outlook IBM has little risk attached to it, short term as well as long term risk.

If a company is not profitable then we know that they are not going to make it very far

and they are not going to be around for very long. I have assessed the profitability of IBM with

the earnings per share ratio, gross profit percentage, profit margin, return on equity and the return

on assets ratio. The earnings per share ratio (EPS) has to do with your net income and

outstanding shares. The higher your net income and the fewer your shares the higher your

earnings per share will be. EPS for 2014 was 5.51 and 5.73 for 2013. The industry average is

2.66 per share. IBM is doing very well regarding their earnings per share, the higher the better

here. The gross profit percentage, or gross profit margin, is the amount of money left over after a

company has taken into account the cost of goods sold and then divided it by the revenue. A

company wants this percentage to be higher, the higher the percentage the more profitable a

company is. The industry average here is 80.1%, so how does IBM compare? For 2014 they had

a 50% margin and in 2013 they had 48.6%. Looking at the company itself, we can see that they

became slightly more profitable. Regarding the industry average, you may need to be concerned

about the profitability percentage gap here. We need to keep in mind that companies with an 80.1

percent profit margin are very healthy and as it goes down the less healthy and less profitable a

company is. Next is the profit margin ratio; this ratio focuses on how much money is left over

from sales after all expenses have been satisfied. The industry average is 1.0% and that of IBM is

well above that. In 2014 IBM had a profit margin of 22.74 and in 2104 it was 22.57. We can see

a very slight decrease from 2013 to 2014 but that is not of great value when it is compared to the

industry average. IBM is very healthy in the area of having funds from sales left over after

paying off their expenses. We now come to the return on common stockholders equity. This ratio

helps us see how well a company generates profits for the common stock shareholders. Just like

a lot of other ratios we have looked at, a high number here is preferable. IBM did great in this

area; in 2013 they had a 7.25% return on equity and in 2014 they had an 8.38%. The industry

average is 3.94%, and as we can see IBM is well above the industry average. They are doing a

good job on paying their stockholders equity accounts and keeping the investors happy. This now

brings us to our final ratio of profitability, the rate of return on total assets. The rate of return on

assets is how well a company can generate earnings using its assets. The industry average is

1.6% and we know that healthy companies are in this percent range. IBM in 2013 and 2014 had

9.86% and 13.84% return on assets respectively. IBM is doing well because they are

significantly better at generating earnings from their assets than their competitors are at this

moment in time. To conclude on this section, IBM is well ahead of the field in regards to

profitability. They generate profit from assets, have profit left over after the paying of debt and

they satisfy their stockholders.

I would now like to assess how efficient IBM has been and how they compare to the

industry average. Efficiency is broken up into four categories; inventory management,

receivables/collectibles, asset management and cash flow management. First I would like to

assess their inventory and see how well they handle it. I would like to mention two ratios to

assess how well they are doing in this area. One is the inventory turnover ratio and the second is

the days sales in inventory. The first ratio, inventory turnover, is a measure of how many times a

company sales or uses up their inventory in a given amount of time. In 2013 IBM sold inventory

22.18 times and in 2014 they sold it 22.06. This shows that IBM became slightly less efficient in

selling off of their inventory. The industry average is still well under the inventory turnover of

IBM at 17.56. We can see that IBM is ahead of their competitors at getting their inventory in

stock, but at also getting rid of it very quickly. The second ratio to assess inventory management

is days sales in inventory. Looking back at the inventory turnover, IBM sold their inventory

more times throughout the year. Now what do we think is going to happen in the days sales in

inventory? If they sale their inventory more times throughout the year then that means there are

going to be less days of sales in the inventory. In 2013 they had 16 days of inventory and 17

days of inventory in 2014. They became slightly less efficient from one year to the other; they

couldnt seem to get the inventory off of the shelf quite as quick as they could in 2013. As we

can see we want a very high inventory turnover and a very low days in inventory. The industry

average is 20.79 days of sales in inventory. IBM is much more efficient on selling inventory.

Now we will assess the receivables/collections. Which include; accounts receivables turnover

and days sales in receivables. Accounts receivables turnover is one that we want to be very high

so that it shows that we are collecting on the receivables. For 2013 IBM had a 9.53 turnover and

a 10.21 turnover in 2014. They became more efficient on collecting receivables from 2013 to

2014. The industry average is 5.89. That is a very solid number and as we can see here IBM is

well over it and they are following through on their receivables to collect on them. The days

sales in receivables, like the days in inventory we just covered, we want to be very low. This

then shows that a company turns their receivables into profit very quickly and they do not have

to wait around for it to come in. In 2013 IBM had 9 days sales in receivables and 10 in 2014.

They became slightly less efficient with their receivables. They are sitting for a day longer

compared to 2013. Compared to the industry average they are doing very well. The industry

average for days in receivables is 62 days. IBM is collecting on their receivables at a very

accelerated rate compared to the industry average.

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