Dylan Chisholm

Accounting 1120
Shauna Hatfield
11/20/14

IBM Financial Statement Analysis

The International Business Machines Corporation (IBM) is a consulting and technology
corporation that specializes in computer hardware and software and IT consulting. The following
is an analysis on their financial statements addressing risk, profitability, efficiency and
investment attraction/stockholder relations.

Risk
We evaluate risk using several ratios. When addressing short-term risk we want to use the
Current Ratio and Acid-Test Ratio. Those two ratios evaluate the liquidity or ability to generate
cash to pay for debts and obligations due within the year. Long-term risk ratios like the Debt
Ratio and Times Interest Earned Ratio, let companies know how solvent they are or their ability
to pay long tern debts and obligations.

Short-term
IBMs current ratio states that for every dollar of debt they have coming due within one
year they have 1.2 dollars of resources, including inventory, currently available to pay it. It
hasnt improved since last years ratio provided a 1.2 as well, but considering the industry
average is 1.3, IBM is in good shape and has nothing to worry about.
In the event that their debts are due immediately, their ability to pay those debts with
cash, short-term investments and receivables, not including inventory sales, would be at .95
dollars for every dollar of debt. The industry average is .9 and last year results stated at .95 as

well; but considering a company isnt safe unless the acid-test ratio proves 1 dollar or greater,
IBM should consider trying to improve it to at least a result of 1.
Their short-term risk and ability to pay current debts and obligations is good, but not
great. They can definitely improve on their liquidity in the future. Bringing the current ratio to at
least industry average and the acid-test to at least 1 would be better for the company.

Long-term
When addressing long term risk we have to assess how much debt one company has for
every thing that they own. In IBMs case their debt ratio states that they rely on financing their
assets with debt to keep the business running. This makes for a risky business. Their debt ratio is
73%, down from last years 77%, but still more than the industry average of 62%.
IBMs times interest earned ratio, which lets us know a business ease in paying interest
every year, increased from the prior year of number of 34.2 to 47 times. IBM is slightly less
risky in terms of paying interest compared to the competitors average of 46.3.
They improved on their numbers from the previous year in dealing with long-term debt;
short-term ratios stayed the same. IBM is not a risky business. They can cover most of their
obligations quite easily. The only possible risky solution, that they would most not likely
encounter, is if they have to sell everything they own to cover debt. In which, they would not be
able to do so.

Profitability
We can assess how profitable a company is by using several ratios. Gross Profit Margin,
Profit Margin, Return on Equity, Return on Assets and Fully Diluted Earnings per Share. The
ratios address the ability to make a profit or net income, while still paying for the operating costs
and expenses a company endures while in business.

Gross profit margin reflects a businesss ability to earn a profit on their inventory. For
IBM its 37%. The industry average is 36.84% so theyre almost the same. IBM did increase
their number by 1% (36% last year). Having a high gross profit margin means that you are
making a lot of money off of your inventory when the costs of that inventory are included.
IBM has a profit margin of 9% (9.15% last year). For every dollar of sales or service they make
9 cents. That is double the industry average of 4.34% and makes IBM very profitable. IBM is a
servicing and merchandising company so their gross profit margin includes both sources of
revenue.
IBMs success in using assets to generate income is measured by their return on assets
ratio and comes out to be 9%. Down from last years 9.6%, but still nearly double the industry
average of 4.9%. They are very profitable at using assets to generate income for their company.
Return on equity measures how much income is available for stockholders for every dollar
invested into the company. With IBMs being 40% last year and 35% this year it is down a little.
Having said that, the industry average is 13.5%, so they are still extremely profitable for
stockholders. IBMs fully diluted earning per share obliterates the competition with an amazing
4.44 dollars last year and 4.35 dollars per share earned this year. The average for other
companies fully diluted earnings per share is just .86 dollars. IBM is leaps and bounds more
profitable to investors than all other competitors.
Even though most of their ratios did decrease slightly this year, theyre still exceeding the
industry averages in every category of profitability, especially in fully diluted earnings per share.
Not only does that make the margin of profit in the industry widen, it makes IBM more
appealing to investors.

Efficiency
IBM is a merchandising and service revenue company so we will be evaluating their
entire business efficiency. We do that by looking at how well they manage their inventory,
receivables/collections, assets and cash flow.

Inventory Management
Examining how many times IBM sells their average amount of inventory can be
measured by the inventory turnover ratio. For IBM it is 5.8 times a year. Not so good when
compared to the industry average of 9.1 times yearly and definitely down a little from last years
6.1 times a year. A high rate in inventory turnover indicates the ease in selling their inventory to
customers. IBMs low rate shows that they have trouble doing so. Their competition is more
efficient in selling their inventory.
With their inventory turnover being so low it is no surprise that their days sales in
inventory, which is 63 days; up from last years 60 days, is substantially higher than their
competitors (40 days). This means that other companies are selling their inventory faster and
more efficiently than IBM.

Receivables/Collections
The accounts receivable ratio measures the number of times a company collects a balance
every year. You want a high number because that means youre getting cash more frequently.
IBM collects on its receivables 2.97 times a year. Competitors collect on them about 3.9 times a
year. IBMs ratio last year was 3 times so you can hardly tell a difference.
Days sales uncollected coincide with receivable turnover ratio. A low turnover ratio
means high days sales uncollected and thats what IBMs is. At 123 days worth of sales

uncollected, its enormously high. The industry average is 84.85 days. They are less efficient at
receiving cash and that is less cash that is available for IBM to use.
IBM is having some difficulty selling their products to consumers. Not selling inventory
quickly and receiving cash from sales slowly, is something that IBM needs to take note on for
future efficiency matters.

Assets
IBM barely falls short again in efficiency comparison with competitors. With an asset
turnover ration at just .97 times, its less than the average of 1.1 times and down just a little from
last years 1.0 figure. The asset turnover ratio measures the amount of income for each dollar of
assets invested. IBM doesnt necessarily need to figure out how to generate more income using
its assets because there gross profit percentage is nothing to worry about.

Cash Flow
The cash provided to the company from its operating activities compared with its assets is
.161 to 1. Last years cash flow to asset was .105 to 1. It increased quite a bit this year. Which is
higher than the competitor average cash flow to asset ratio of .103 to 1. IBM is more efficient at
generating cash with their operating activities. Their ability to generate cash on a per share basis
overwhelmingly exceeds the industry. IBMs cash flow per share is 8.3 dollars and the average is
1.89 dollars. With such a high increase from last years 5.3 their efficiency in generating cash this
year was incredible.
When taking a look at IBMs overall efficiency its not very good. While most of the
ratios provide poor results, one rate of efficiency does stand out and that is their ability to
generate cash flow. Its incredibly high and makes every low efficient rating not seem so bad
after all.

Investment Attraction/Stockholder Relations

If IBM does one thing well, its making money for investors. They had revenue per share
ratio of 50.14 last year and 49.84 this year. A small decrease; but compared to a 20.57 industry
average, they are still leading the industry. Book value per share of 13.7 compared to 6.62 and up
from last years 11.6. IBM has a dividends per share of .55 (.52 last year) compared to .19
competitors average. IBM tops the industry in every aspect of good investment return
opportunity.
IBM may need to take a look at their inefficiencies and make adjustments this coming
year, but other than that they did very well this year. They certainly made profitable adjustments
from last year, making their company an even bigger powerhouse than it already is. They
showed themselves to be profitable this year especially in comparison to other companies. As an
investor, look for opportunities in the future to have a go with this company. Their margin on
earnings is outstanding.