Angela Martin

11/26/14

IBM Financial Statement Analysis Review

Introduction
This is a Financial Statement Analysis paper reviewing IBMs (International Business
Machines Corporation) current financial status. I will analyze and compare IBMs profitability,
shot-term risk, long-term risk, and efficiency by comparing the current-year to the prior-year and
to the industry averages.

Profitability
I will begin with profitability. Profitability consists with the reports regarding profit
margin, gross profit margin, return on equity, return on assets, and days sales uncollected.
Profit margin is the amount that revenue from sales exceeds costs in a business. Profit
margin measures profitability and is proffered to be a high percent, this would mean the
company has a higher profitability percent. This year IBMs profit margin is 8.99%, and last year
it was 9.15%. The industry average is 4.34%. IBM has a high profit margin percent compared to
the industry average, which means IBM is more profitable than the industry in this area. But
IBMs profit margin percent decreased this year. We were less profitable this year compared to
last year by 0.16%.

Gross profit margin is very similar to profit margin. Its the measure of gross profit
percent of sales. For example, other companies will look at IBM to see how profitable we are as
a merchandiser. This being the case, it is preferred for the gross profit margin to be a high
percentage, which would mean we are getting our merchandise at a low price, or something
similar along those lines.
IBMs gross profit margin is 37.01% for this year, and 36.26% for the prior year. The
industry average percent is 36.84%. IBM was more profitable this year than the prior year, but
only by 0.75%. We are also above the industry average this year by 0.17%, but last year we were
right under the industry by 0.58%. Overall, we are really close to having the same profitability as
the rest of the industry.
Return on equity measures our efficiency at generating profits from every unit of equity.
We would rather have a high profitability percentage to be more profitable. IBMs return on
equity for the current year is 35.07%, and 39.73% for the prior year. The industry average is
13.5%. IBMs return on equity percent is dramatically higher than the industry average, which
means we were more profitable than the industry. But IBMs return on equity profitability
decreased this year compared to last year by 4.66%. This is a higher profitability difference in
percentage for IBM than our other profitability differences.
Return on assets gives an idea as to how profitable IBM is at changing its assets into
earnings. A higher percent of our return on assets will mean that we are more profitable. IBMs
return on assets is 9.01% for the current year, and 9.60% for the prior year. The industry average
is 4.9%. IBM is more profitable than the industry in both the current year and the prior year.

Although, IBMs return on assets profitability is higher than the industry, we decreased from the
prior year to the current year; making us less profitable this year.
Days sales uncollected is the number of days, on average, that a company must wait to
receive payment for credit sales. A lower percent is preferred, because that would mean we are
collecting from past sales more often and this is considered more profitable. IBMs days sales
uncollected is 123 days for the current year and 120 days for the prior year. The industry average
is about 85 days. IBMs days sales uncollected is much higher than the industrys, which means
we wait longer to collect from our sales compared to the industry. We are less profitable in this
case.
Overall, IBM is more profitable than the industry average, but less profitable compared to
our prior year. Except for our gross profit margin, we were more profitable this year than the
prior year. We were less profitable on our days sales uncollected compared to the industry
average as well.

Short-Term Risk
Short-term risk is the measure of how risky a business is in a short-term, or within one
year of the business activity. For IBM, I will be discussing our current ratio and acid-test ratio.
Current ratio shows the amount of current assets to current liabilities. This ratio is used as
an indicator of a company's risk and liquidity. A high current ratio is preferred so a business can
be less risky, or liquid. IBMs current ratio is $1.21 for the current year, and $1.21 for the prior
year. This means we have $1.21 of resources currently available to pay for every $1 of debt or
obligations coming due within the next year. The industry average is $1.30. IBM is more risky,
or liquid than the industry due to the low current ratio.

The acid-test ratio measures the ability of a company to use its quick assets to retire its
current liabilities. Quick assets include those current assets that can be quickly converted to cash.
A high acid-test ratio is preferred be less risky. IBMs acid-test ratio is $0.95 for both the current
and prior years. The industry average is $0.90. IBM is less risky than the industry average.
Overall IBM is more risky/liquid for the current ratio and less risky/liquid for the acidtest ratio compared to the industry average.

Long-Term Risk
Long-term risk the measure of how risky a business is in a long-term, or over/more than
one year of the business activity. For IBM, I will be discussing our debt ratio and times interest
earned.
Debt ratio is the ratio of total debt to total assets. A low debt ratio is preferred because
that would mean we are less risky, or solvent. IBMs debt ratio is 73% for the current year, and
77% for the prior year. The debt ratio for the industry average is 62%. Compared to the industry,
IBM is more risky, or solvent.
Times interest earned is a measure of a company's ability to honor its debt payments. It is
preferred to have a high times interest earned because this means we would earn interest more
often over a specified time period, and we would be less risky/solvent. IBMs times interest
earned is 47.02 times for the current year, 34.23 times for the prior year. The industry average is
46.3 times. In the prior year, IBM was more risky than in the current year compared to the
industry average.

Overall IBM was more risky regarding debt ratio compared to the industry average. But
IBM was less risky in their times interest earned compared to the industry average this year.

Efficiency - Inventory Management

Inventory management efficiency is the measure of how efficient a business is regarding
their inventory activities. I will present IBMs inventory turnover and days sales in inventory
reports.
Inventory turnover is the number of times inventory is sold or used in a time period. A
high number of times the inventory is turned over are preferred because that means we sold more
inventory in a specific time period. IBMs inventory turnover is 5.8 times for the current year and
6.1 times for the prior year. The industry average is 9.1 times. IBM is not efficient on their
inventory turnover for both years, but the current year is still more inefficient than the prior year.
Days sales in inventory is the amount of days it takes for inventory to turnover. A low
number of days are preferred so the inventory is turned over more often during the year. IBMs
days sales in inventory is 63 for the current year, and 60 days for the prior year. The industry
average is 40 days. IBM is not turning their inventory over in an efficient number of days
compared to the industry average.
IBM is not efficient in either their inventory turnover or days sales in inventory
compared to the industry average.

Efficiency Receivables/Asset Turnover

Receivables and asset turnover measures the efficiency of processing receivables and the
amount of times assets are turned over. I will review asset turnover and accounts receivable
turnover and compare them to the industry average.
Asset turnover measures the efficiency of a company's use of its assets in generating sales
revenue or sales income to the company. A high number of times the assets are turned over is
preferred, because that means we have processed a large number of assets. IBMs asset turnover
is 0.97 times for the current year and 1.01 times for the prior year. The industry average is 1.1.
IBM is not turning their assets over efficiently compared to the industry.
Accounts receivable turnover measuring how efficiently a business uses its assets.
Accounts receivable turnover is preferred to be a high turnover so the company receives more
accounts receivable. IBMs accounts receivable is 2.97 times for the current year and 3.03 times
for the prior year. The industry average is 3.9 times. IBM is not turning their accounts
receivables over efficiently either years compared to the industry.
Overall, IBM is inefficiently turning their assets and accounts receivables over.

Efficiency Cash Flows

Cash flows measure how efficiently a company is operating their cash flows during the
period. I will review the cash flow to total assets and cash flow per share.
Cash flow to total assets measures the cash inflow and outflow of total assets. A high cash
flow is preferred. IBMs cash flow to total assets is 0.161 to 1 for the current year and 0.105 to 1
for the prior year. The industry average is 0.1033 to 1. In both years IBM is more efficient that
the industry. Also in the current year IBM was more efficient than in the prior year.

Cash flow per share measures the amount of cash flow going in and out of the companys
shares. A high cash flow is preferred because the higher dollar amount per share means more
cash inflow. IBMs cash flow per share is $8.28 per share for the current year and $5.26 per share
for the prior year. The industry average is $1.89 per share. IBM is more efficient than the
industry. IBM also became more efficient in the current year than the prior year.
IBM is more efficient in their cash flows compared to the industry. They are becoming
more and more efficient over time.

Efficiency Per Shares

Per Shares is the efficiency of the amount of cash per shares. I will discuss dividends per
share, book value per share, and revenue per share.
Dividends per share is the total dividends paid out over an entire year divided by the
number of outstanding shares. A low dividends per share is more efficient. IBMs dividends per
share is $0.55 per share for the current year and $0.52 per share for the prior year. The industry
average is $0.19 per share. IBM is inefficient compared to the industry average for both, current
and prior years.
Book value per share is the amount of book value in return of every share for the
company. A high book value per share is efficient. IBMs book value per share is $13.70 per
share, and $11.56 per share. The industry average is $6.62 per share. IBMs book value per share
is more efficient than the industry, and is more efficient in the current year than in the prior year.
Revenue per share is the amount of revenues received from the companys shares. A high
number of revenue per share is preferred because that is the amount of revenue they receive per

share, this will make them more efficient. IBMs revenue per share is $49.84 per share for the
current year, and $50.14 for the prior year. The industry average is $20.57. IBM is producing
revenue per share more efficiently than the industry average. IBM did become more inefficient
this year compared to last.
IBM is inefficient in their dividends per share, but they are efficient in book value per
share and revenue per share.

Conclusion
Overall, IBM is more profitable than the industry average, but less profitable compared to
our prior year. Except for our gross profit margin, we were more profitable this year than the
prior year. We were less profitable on our days sales uncollected compared to the industry
average as well. IBM is more risky/liquid for the current ratio and less risky/liquid for the acidtest ratio compared to the industry average. IBM was more risky regarding debt ratio compared
to the industry average. But IBM was less risky in their times interest earned compared to the
industry average this year. IBM is not efficient in either their inventory turnover or days sales in
inventory compared to the industry average. IBM is inefficiently turning their assets and
accounts receivables over. IBM is more efficient in their cash flows compared to the industry.
They are becoming more and more efficient over time. IBM is inefficient in their dividends per
share, but they are efficient in book value per share and revenue per share.We are about average
compared to the industry figures as a whole and our inefficient and efficients average each other
out.