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Nhi Nguyen

Accounting 1120
TR 11:30 am
04 December 2016
Financial Statement Analysis.
In this text, I will analyze the IBMs financial statement between 2013 and 2014 which
compares to the industry average to know how IBMs business is working from the prior year to
the present. The analysis is divided in four main categories: risk, profitability, efficiency and
stockholders relation.
Firstly, there are some ratios evaluating how risky affected on the IBMs business which
are divided into two parts: short-term and long-term. In short-term investment, the current ratio
helps the investors and creditors understand the risk of the company and how easily that
company will be able to pay off the debts. The current ratio of 1 or more means the company
should not face any liquidity problems. The current ratio has decreased not too much from 2013
to 2014 which means it goes down from 1.29 to 1.25. And considering to the industry average
with the result data is 1.86, the ratio of two year are both lower than the industry, but its not
extremely far distance. This indicates that IBM is remaining steady in its ability to pay its current
debts. Both years are above 1.00 which considered a less risky investment. Besides, the company
measures the ability of the company to pay its current debts as quickly as possible with cash by
using acid test ratio. IBMS acid test ratio of 0.94 in 2014 and 1.02 in 2013 means that the
business has $0.94 and $1.02 of quick assets to pay each $1.00 of current debts. However, both

acid test ratios are lower than the industry average with 1.57 of acid test ratio. It may suggest that
IBM is taking too much risk by not maintaining an appropriate buffer of liquid resources.
In long-term investment, the debt ratio shows the proportion of assets financed with
debts. the higher the debt ratio, the higher the companys financial risk. From year 2013 to 2014
of IBMs long-term investment, the debt ratio of both are very higher than 59.3% of the industry
average with 82% in 2013 then speeds up quickly into 90% of 2014. This indicates the
significantly high-risk position. IBM company has the debt to equity ratio to measures the
financial leverage which means the higher the debt to equity ratio, the greater the companys
financial risk. The IBMs debt to equity ratio in both 2013 and 2014 of 8.78 and 4.5 are very high
which indicates an extremely high-risk position compare with the industry average debt to equity
of 1.46. Moreover, IBM evaluates the ability to pay interest expense when having time-interestearned ratio method which demonstrates the high-interest-earned ratio shows the ease in paying
interest expense. This companys times-interest-earned ratio of 29.73 for 2014 and 34.18 for
2013 are significantly higher than the industry average of 2.9 times which means the company
appears to have very easy paying its debts. Therefore, after evaluating the risk of short-term and
long-term investment in IBM company, it indicates the company has significant risk in long-term
investment, but has steady ability to pay liabilities in short-term.
Secondly, these ratios: profit margin, gross profit margin, return on asset, return on equity
and earning per shares, are involved in the profitability category of the IBM business. Profit
margin ratio shows how much net income a business can earns on every $1.00 of sales. IBM
strives for a high profit margin because the ratio of 13% for 2014 and 17% for 2013 are both
very significantly high and identify the company is more successful than the industry average
which profit margin ratio is 1%. The gross profit ratio helps IBM measures the profitability of

each sales dollar above the cost of goods sold when this ratio stay almost the same of 50% for
2014 and 49.5% for 2013 which signifying IBM is have the same percentage of gross profit on
its sales. But, IBM is significantly lower than the industry average of 80.1%. So, IBM should
consider increasing the amount of profit it is earning on its merchandise inventory.
The companys rate of return on total assets ratio of 10% for 2014 and 14% for 2013 are
much better than industry average of 1.6% which indicates the company is very successful in
using assets to earn profit. Then, earning per share reports the amount of net income for each
share of the IBM companys outstanding common stock. Although the IBMs EPS decreases
significantly from 15.1 in 2013 to 11.97 in 2014, but it is higher than the industry average of
2.66. So, it indicates the company is working very well and the company should keep going to
make it increase more. During evaluating the profitability of the IBM business, we can see this
company is successful in this category but it should consider increasing the amount of profit it is
earning on merchandise inventory to make their business going better.
Next, I will analyze the IBMs efficiency for ability to sell merchandise inventory and
collect receivables. The inventory turnover ratio measures the number of times a company sell its
average age level of merchandise inventory during a year. The IBM companys inventory
turnover of 21.01 times for 2014 and 21.62 times for 2013 which mean the company has enough
inventory to handle sales for almost 18 days. Both years are high for the industry average of
17.56 times per year. The company doesnt have to improve and keep going like it used to do. By
the way, days sales in inventory ratio is one of the ratios showing the efficiency of IBM
company which measures the average number of days merchandise inventory is held by the
company. IBMs days sales in inventory is 17.37 days in 2014 and 16.88 days in 2013 which are

lower than the industry average with 20.79 days. It identifies the company is working very well
because the days sold out the inventory are quicker than the industries average.
Furthermore, IBMs efficiency result is concerned to the accounts receivable turnover
ratio that measures the number of times the company collects the average receivables balance in
a year. The higher the ratio, the faster the cash collections. The IBM companys ratio is 9.31
times in 2013 and increase into 9.49 times in 2014 are much higher than the industry average of
5.89 times per year. Connecting to the account receivable turnover ratio is days sales in
receivable which indicates how many days it takes to collect the average level of receivable. The
shorter the collection period, the more quickly the organization can use its cash. IBM companys
ratio shows that 35.76 for 2014 and 38.83 for 2013 average days sales remain in accounts
receivable and need to be collected. The companys ratio for both year are very low than the
industry average with 62 days sale remain. The length of the collection depends on the credit
terms of the sale. Therefore, IBMs efficiency is working well same as its profitability when the
days the company sold out the company are significantly quicker than the industry average. And
the times the company collects the receivable are extremely faster than the industry average.
Finally, the stockholders relation is evaluated to know how the investors purchase stock
to earn a return on their investment. Using the price/earnings ratio to show the value the stock
market places on $1.00 of a companys earnings. IBMs P/E ratio for 2014 of 13.4 and for 2013
of 12.42 means that the companys stock is selling at 13.4 times and 12.42 times one years
earning. IBM would like to see this ratio increase in the future years in order to be more in line
with the industry average P/E of 19.3. Besides, dividend yield ratio helps measuring the
percentage of a stocks market value that is returned annually as dividends to stockholders. An
investor who buys IBMs common stock can expect to receive 3.0% of the investment annually

in the form of cash dividends. But, the industry average is paying out 2.2%. So, an investor
might have the higher dividends if the stocks market price is growing. And the dividend payout
ratio helps to measure the percentage of earnings paid annually to common shareholders as cash
dividends. IBMs dividend payout ratio of 36% in 2014 and 25% in 2013 are less than the
industry average of 42.1%. IBM might be retaining more its earning for growth and expansion.
The investor who buys IBMs common stocks would want to see higher market prices and higher
asset turnover for IBM in the future. After evaluating the stock as an investment, these ratios
indicated IBMs common stock is strong enough for the investors should trust and invest to be
more successful.
After analyzing IBMs financial statement by going through four main categories: risk,
profitability, efficiency, and stockholders relation, this company has both positive and negative
aspects. IBM is a company has significant risk in long-term investment, but has steady ability to
pay liabilities in short-term. This company is successful in profitability category, but it should
consider increasing the amount of profit it is earning on merchandise inventory to make their
business going better. IBMs efficiency is working well same as its profitability when the days
the company sold out the company are significantly quicker than the industry average. And the
times the company collects the receivable are extremely faster than the industry average. Lastly,
IBMs common stock is strong enough for the investors should trust and invest to be more
successful.

Work Citation.
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http://accounting-simplified.com/financial/ratio-analysis/quick-acidtest.html
http://www.myaccountingcourse.com/financial-ratios/cash-ratio
http://accounting-simplified.com/financial/ratio-analysis/current.html
http://accountingexplained.com/financial/ratios/current-ratio
http://www.readyratios.com/reference/cashflow/price_cash_flow_ratio.html
Horngrens accounting text book