IBM Corporation Assignment

1. Decompose IBM’s ROE and discuss the factors (and trends) that contribute to Big
Blue’s profitability:
a. ROE = Net Income /Shareholder’s Equity. I have used December of each year to
decompose ROE for IBM
 Dec 1999 ROE = 2,089/20,511 = 10.18%
 Dec 1998 ROE = 2,346/19,433 = 12.07%
 Dec 1997 ROE = 2,093/19,816 = 10.56%
 Dec 1996 ROE = 2,023/21,628 =9.35%

ROE for IBM increased from 9.35% in December of 1996 to 12.07% in December of
1998. There are several factors that can be attributing to this increase. First, we see a
decrease in the operating expenses from 1996 to 1999, from $6,425 million to $5,861
million respectively, as seen in exhibit 3. Another factor can be that outstanding shares
decreased by $319.8 million from September 1996 ($2,087.4 million) to June 2000
($1,767.6 million), as shown in exhibit 2. There were variations in revenue from 1996 to
2000 with certain high points possibly due to seasonal trends, (ex. December revenues
were usually higher), but there was a general increase in revenue. This is seen in exhibit
3, with a starting amount of $18,062 million in September 1996, with a steady increase
to $19,348 million in March 2000.

2. Evaluate IBM’s revenue growth, receivables, and gross margins over the period:
a. Regardless of revenue fluctuations, there was a steady increase in revenue
overall. As stated previously, we see this growth in exhibit 3, showing an
increase of $1,286 million from September 1996 ($18,062 million) to March 2000
($19,348 million). We can assume a seasonal trend with revenues being higher
during the December months, seen on exhibit 3. Receivables, inventory, and pre-
paid does not show a big increase or big decrease, as shown on exhibit 6. From
this we can assume that there is not much change happening in the
management of terms of credit and their policies for debt collection have
remained constant and steady. Per exhibit 4, gross margins increased from
$30,539 million in 1996 to $31,929 million in 1999, giving us a total increase of
$1,390 million. However, when we calculate based on percentage, the gross
margin percentage for 1996 was 40% and in 1999 it was 36%, showing a
decrease in gross margin per exhibit 4. Costs of goods sold showed an increase
which can be the reason for the decrease in gross margin percentage. This
would show that the company may look into cutting costs and bettering
efficiency to increase their percentage.
3. Evaluate IBM’s earnings per Share (basic), and identify the factors most responsible
for the increase in IBM’s earnings:
a. On exhibit 2, we see the earnings per share (EPS) of common stock (basic). What
we see is an increase from September 1996 of $0.62 to $1.10 for June 2000. The
increase in revenues would be the main factor for this increase in EPS. As stated
previously, we see this growth in exhibit 3, showing an increase of $1,286 million
from September 1996 ($18,062 million) to March 2000 ($19,348 million). This
increase can also be attributed to personal computers becoming more
‘affordable’ and more people wanting the commodity of a personal computer.
This would increase revenues. Between the increase in revenue and the
decrease in operating expenses as shown in exhibit 3, there is bound to be an
increase in EPS.