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Submitted on 5/6/2015
Following are the findings for the company IBM, based on data collected from Research insight.
1
The Stock price is taken from Google Finance as of 5/4/2015.
2
The value of the stock price is collected from Google finance as Stock Price at the end of year for 2013 (ACN,
HPQ), 2012 (IBM), and rest years for all companies.
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market capitalization $66,961.95 $46,834.85 $27,231.33 $52,873.19 $95,335.91
ROA 0.049 0.048 -0.116 0.055 0.071
ROE 0.185 0.185 -0.554 0.183 0.218
Profit Margin 0.045 0.046 -0.105 0.056 0.070
Asset Turnover 1.080 1.063 1.107 0.982 1.012
stock price $33.651 $28.192 $13.682 $25.762 $42.102
According to the tables above, a steadiness in revenue can be seen for company IBM whereas there is
growth in revenue of Accenture. The Revenue of HP is steady for two years then there is a sudden
increase after which it fell down and staid almost same for another two years. HP have double the
NOPAT that of Accenture while IBM have double the NOPAT as that of HP. I calculated Market value by
two methods, one by Price * # of Shares outstanding and the other by Market value taken from
Research Insight. Both values for all companies are similar if not the same. Again while Market value of
HP is greater than Accenture, IBM wins here as well. Though HP has higher Revenue than Accenture, its
profit margin is too low which is causing to drop Asset turnover and ROA. There is a reverse curve in
Stock price and Market capitalization as that of Revenue for Accenture. For HP the first two years in
table the value of the stock price is dropping until the third year, and then the stock price grew though
Industry in brief
IBM, Accenture and Hewlett-Packard (HP) works in Information technology services industry in
Technology Sector. Services such as software support, computer systems design, and data processing
facilities management are provided by the companies in this Industry. The major companies in the
industry are HP, Accenture and IBM (US based), Cap Gemini (France), Tata Consultancy services (India),
3
http://www.hoovers.com/industry-facts.information-technology-services.1119.html
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The revenue of the industry has increased by average six percent between 2010 and 2011, totaling $606
billion in 2011. Only in Unites States itself there are more than 100,000 software and information
technology (IT) services companies exists, from which more than 99 percent are small and medium-sized
firms (i.e., under 500 employees). This total includes software publishers, suppliers of custom computer
programming services; computer systems design firms, and facilities management companies. The
industry draws on two million and growing number of highly educated and skilled U.S. workforce.4
IBM’s current global business strategy is based on three pillars: Cloud, data and engagement. Embracing
cloud technology is effort evoking. It means that all the clients who are using the services at their sites
will access it remotely. For this matter the use of Watson – supercomputer will help the transition.
Because cloud computing keeps the technology at the provider’s site rather than client site, it reduces
the risk of piracy and will help lower the cost of technology. As a result, clients in emerging markets can
access that technology even if the intellectual property protection in their country is low. Second, use of
data as natural resource and refine to gain important insights about the frontier market. Help clients
and understand data to enhance their profit, lower the cost and wastage of resources. Advances in
cloud computing and data refinement would matter only if the users are engaged with these advances.
“Engagement is the framework through which IBM thinks about innovations in mobile computing, social
networks, and security”. Though there is much has been written about the mobile revolution in frontier
markets, the security of using the cloud technology is discussed very little.
4
http://selectusa.commerce.gov/industry-snapshots/software-and-information-technology-services-industry-
united-states.html
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Recent events:
IBM has announced to partner with leading Pharmaceutical Company Johnson & Johnson, an Irish
medical device company Medtronic and Apple Inc. It has also acquired two Medical data companies, in
order to enter into healthcare data services. IBM will use its data analysis experience and will develop a
new generation app for patients and health providers. IBM, J&J and Medtronic will share revenue from
the sale of app whereas Apple will get a cut from the apps sold through App Store.
For the 12th straight quarter, IBM’s hardware sales are declining. The first quarter this year marked the
hardware sales at $1.7 bln which was $2.4 bln last year same quarter. Revenue dropped from $19.59 bln
from 22.24 bln due to surging US dollar and shrinking hardware sales combined. As a new strategy IBM
plans to continue in Software and cloud based services with a budget of $4 bln this year which last year
generated $25 bln in revenue. IBM hopes to grow this Revenue to $40 bln this year.
Japan post, the biggest bank of the world and largest insurer of Japan, having 24000 post offices
throughout Japan have teamed up with Apple and IBM to deliver the better service to its elderly
customer of Watch Service started in late 2013. IBM will design a software app for iPads which will assist
the elderly; reminding them about their medication, exercise tips and also protecting them from scam
that target elderly. Japan post watch service is on small scale right now with 100 customers but they
plan to increase about 1000 more later this year. Company also aims to turn this program into regular
business starting April 2016 and reach 4 mln customer base by year 2020. The service fee for now is
about $8.40/month, though the later service fees and charges yet to decide.
5
http://www.wsj.com/articles/BT-CO-20150413-710214
6
http://www.wsj.com/articles/ibm-reports-another-revenue-decline-1429561027
7
http://www.wsj.com/articles/BT-CO-20150430-710539
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IBM vs. HP vs. Accenture - business model difference and similarity:
IBM is working in multiple fields in Information technology sector. It has Software and Hardware
divisions. IBM is doing IT consulting services as well. HP like IBM is working in consumer as well as
corporate hardware and software market also HP has BPO and consulting division. Accenture, unlike
IBM and HP, is not into hardware manufacturing business, though it is one of the top IT consulting firm
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Sales Operating cost
$140,000.00 $6,000.00
Sales in millions of $
OC in millions of $
$120,000.00 $5,000.00
$100,000.00 $4,000.00
$80,000.00
$3,000.00
$60,000.00
$40,000.00 $2,000.00
$20,000.00 $1,000.00
$- $-
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal Year Fiscal year
NOPAT in millions of $
$120,000.00 $16,000.00
$14,000.00
$100,000.00
$12,000.00
$80,000.00 $10,000.00
$60,000.00 $8,000.00
$6,000.00
$40,000.00
$4,000.00
$20,000.00 $2,000.00
$- $0.00
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year
$4,000.00
FCF in millions of $
$4,000.00
$2,000.00
$3,000.00
$2,000.00
$-
$1,000.00
$(2,000.00) $-
$(4,000.00) $(1,000.00)
$(6,000.00) $(2,000.00)
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year
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Three Financial statement items:
For the company IBM, there are three items which seized my attention; those are Tax, Net cash from all
activities, Market to Book value. Regarding the Tax and Tax rate, when I calculate the Tax rate from the
ACN HPQ IBM similar situation and in addition to that in 2012 the
EBIT for HP falls below zero whereas the Tax is above zero. Based on some research I found that the Tax
again drops more than $1.5 bln below zero. Here the total net cash flow from Investment and Financing
activities are generating negative cash flow except the year 2011 where IBM lowered investments
causing lower negative cash and in year 2013 the additional long term debt issuance caused lower
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negative cash. Thereby with other cash it is forcing total net cash flow to positive. Similarly HP has
decrease their investment over the years and increased financing activities because of which even
though their operating cash flow is consistent, overall their net cash flow is improving after a slight
curve. Unlike HP and IBM, Accenture with consistent operating cash flow has seen increasing investment
activities and decreasing cash flow from financing activities forcing decreasing net cash flow every year.
Note: Please see the Statement of Cash flow for the values in operating, Investment and financing
activities supplied in Appendix.
The interesting fact about Market to book, similar to IBM’s financial items, the stockholder’s perception
about IBM’s value is more than its actual/book value. Also the investor’s perception is almost consistent
Here it is interesting to see that HP’s Market to book value is decreasing from year 2009 to 2011 which
was the financial crisis duration, which also caused HP to see drop in EPS below zero from year 2012.
After that HP has succeeded in earning investor’s trust. Accenture on the other hand has seen consistent
Market to book value from 2009 to 2012 which is about average 8, then it started falling. This coincides
with its negative cash flow and it must be result of increasing book value of equity since market value is
The Differed Tax from statement of cash flow of IBM has a sudden drop in year 2013, which is not the
case for HP at first look. Also Accenture’s differed Tax has a curve from negative to positive and back to
negative. After investigating the item and looking up for what differed tax means, “Deferred tax assets
generally arise where tax relief is provided after an expense is deducted for accounting purposes.
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a company may accrue an accounting expense in relation to a provision such as bad debts, but
A company may incur tax losses and be able to "carry forward" losses to reduce taxable income
in future years.”8
By the definition and table below, it can be seen that differed tax coincides with the increase in
investment as a result of allowing Tax depreciation on fixed assets. As we can see, in case of IBM in year
2012 the investment has increased by 150% increasing the fixed assets which compounded the
depreciation tax increasing differed tax from 34% to 302% from previous year. On the other hand, HP
has already seen high investment in year 2012 with 913% high investment than previous year. As a
result of high investment the differed tax has also increased. Though it can be seen the period of
differed tax and investment for IBM are different (2012 and 2013) where in case of HP those are same
(2012), it is due to the relationship of sale of fixed assets. In the year 2012, HP sold more than previous
year and also the investment is increased due to which the sudden increase in differed tax.
8
http://www.investopedia.com/terms/d/deferredtaxasset.asp
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Relation of current events effects on financial statement:
The healthcare industry is one of the biggest in the world and it has proven the growing market for data
analysis in order to help better serve patients. Use of data analysis is helping healthcare to early on find
out the outburst of a disease in any area as well as the best way to cure it. By entering into healthcare
for data IBM is committing to its strategy, the use of data. I believe, the investors will look at it
positively. From the second event, it is clear that IBM is not doing well in hardware sells and it would be
good to shift the focus from hardware to software consulting. For the same matter, IBM has acquired
few other companies which increased the total assets, equity and liability as well. The declining
hardware sells is putting pressure on revenue and the in hand inventory would likely to increase at the
end of the year if IBM don’t manage to sell. It can be seen the inventory has been consistent around
2400 on average for past 5 years. On the other hand partnering with Japan post for their Watch service,
software consulting and development division will benefit a lot, from the perspective of sales as well as
reputation and maker reach. Elder citizens of the world is the market which is largely untouched from
modern technology and by expanding to that market will help IBM’s total revenue in future if not now.
So overall, due to work in healthcare industry and Japan post’s watch service software, IBM’s service
revenue will increase though hardware sales are falling for the last 3 years.
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Ratio analysis:
OPM in %
PM in %
0.15 5%
0.1 0%
-5%
0.05 -10%
0 -15%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year
1.6
ATR in %
0.78
0.73
1.1
0.68
0.63 0.6
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year
ROA ROE
30% 100%
20% 50%
ROA in %
ROE in %
10%
0%
0%
-10% -50%
-20% -100%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Fiscal year Fiscal year
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The relation of ROA, ROE, Profit margin and Debt ratio
Hence, when Profit margin and Asset turnover increase, it amplifies the ROA. On the other hand ROE
and ROA can only be equal in situation where Asset and Equity are exactly same, that is based on
This case is rare for large companies where they generally poses some sort of debt such as Note
payable, Bonds and so on. Which shrinks the Equity and thereby amplifying ROE and abbreviate ROA. In
another words Debt increase ROE and decrease ROA whereas Profit margin and asset turnover
The relation between ROA, ROE and Tax, Net cash flow and Market to Book value
Items discussed previously in this paper, Net cash flow from all activities has similar impact on ROA and
ROE whereas Tax and Market to Book value have no direct impact on ROA and ROE. The net cash flow
from activities increase, if keeping sales constant, the investment activities will produce either higher
assets by purchase or higher short/long term investments. Similarly increase in financing activities will
increase debt or reduce cash by distributing dividends. Also increase in sales increase the total cash in
hand thereby increasing total current assets but reducing Inventory and adding up to COGS. Overall the
positive net cash flow either increase assets or liability and not both, which as discussed above, decrease
Similarly, Tax increases the liability (TAX payable) and as well as cash at the same time canceling the net
effect on ROA and ROE. Also Market to book value does not impact ROA and ROE since it is an indicator
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of market perception of the over/under statement of companies’ book value than its market value and
company is doing well/poor on its return on asset, although the ROA and ROE might affect Market to
Book value.9
IBM is a conglomerate in Information technology sector with Hardware, software and IT business
consulting service divisions. Like IBM, HP also works similar way except dedicated software
consultation to business where Accenture works entirely in IT consulting. The business model of
IBM helps them to work innovatively since IBM is one of the pioneer in Technology innovation as
well as designer and manufacturer of devices such as Servers, computers which are used by
businesses. These helps IBM to conduct parallel business activities where they provide
software/consultation services to their hardware clients and sell hardware to their software clients.
Majorly in past IBM’s focus have been in hardware than software. HP on the other hand provides
hardware to business with hardware focused business model. Also Accenture give competition to
Because of these similar but different business model, there are few prominent effects can be seen
on financial statements, such as Accenture doesn’t possess inventory which causes proportionate
decrease in Assets. Hence even though Accenture’s net income is lower than IBM, the Return on its
asset is comparative to IBM’s ROA. Whereas HP’s higher inventory putting pressure on its ROA
keeping it below 10% for last 5 years. Similarly capital structure of Accenture, IBM and HP have
impact on their debt ratio as well. As already discussed above, Accenture’s debt is lower than that
of HP and IBM which decreases it’s ROE. Due to lower Asset (no inventory) in case of Accenture, it
9
http://www.investopedia.com/articles/fundamental/03/112603.asp
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wins the Asset turnover ratio over IBM and HP where their asset turnover fall below 1.2 due to
inclusion of inventory and higher other current assets as compared to their sales. Finally, as
Accenture is pure service based company, its profit margin falls between HP and IBM. Here IBM
takes advantage of diversification in the IT sector (declining Hardware, inclining software and IT
consulting service revenues) where HP loses the battle again due to hardware focused software
consultation.
Note: For the charts please see Profit Margin, Debt Ratio, Asset turnover ratio, ROA and ROE for
three companies.
Along with the strategy shift of IBM from Computer hardware manufacturing and selling firm to
Software consulting and cloud technology based software Development Company, I believe there
are 3 items which would be affected by the events discussed above in Current events section: ROA,
ROE, and Profit Margin. IT Healthcare is another booming industry currently and IBM is willing to
take advantage of demand and also its technology innovation ready to be used for the industry. The
impact of such business would improve service revenue along with slight increase in SG&A cost. As
IBM has already worked on the required technology for being healthcare data broker, it will benefit
IBM to keep SG&A cost at almost constant level while increasing revenue. As service will not incur
any COGS costs, the item will be at minimum for this business. This in turn increase the Net income
and if IBM doesn’t invest a lot in Assets by purchasing new, it will either keep steady or increasing
ROA.
On the other hand the declining sales of computer hardware will impact the inventory and COGS. As
COGS is recorded under matching principle, it will be less in case of less sales and there by less
revenue. As SG&A costs are fixed costs, even sales and COGS reduce, SG&A will stay same and thus
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resultant Net income would be less for hardware division. This will again impact ROA along with
Finally the same argument of increasing ROA and PM in case of health data industry applies to
project of Japan Post. The project will also create a new market pool, if adapted by other countries,
and will enhance IBM’s revenue multifold keeping it’s SG&A cost almost steady due to existing
technology and knowledge base developed for Japan post, increasing Net income.
Similarly ROE (the ratio of Net income to Equity) will increase with increase in Net income and
steady equity if the debts are kept constant. A pattern one year of negative and 2 years of positive
debt change can be seen from the cash flow statement of IBM. If the pattern follows through 2014
as well, then IBM’s debt will increase nullifying effect of the Net income from the above mentioned
Conclusion:
After studying three companies’ financial statements, related current business events and relation
between business model and strategy of those three companies, IBM, HP and Accenture, the finding in
the summary of this paper are justified. Increasing and then decreasing revenue for IBM is the result of
strategy shift and new investments as well as new project undertaken. Also IBM is taking advantage of
diversified business services to increase and be on top in terms of Profit margin. I believe the estimated
revenue will cross $100 bln for IBM for the year 2014. On the other side, Accenture with targeted
business model in IT consulting and HP with Hardware and BPO/IT consulting are having significant
impact on market with large revenue share. The average revenue for Accenture is $28 bln which is high
for industry with only IT consulting services and HP with $119 bln which is above IBM’s $101 bln. Even
though Revenue is good indicator of business making money, other factors such as ROA, ROE and debt
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ratio, where HP is always falling behind IBM and Accenture, indicating that the other companies are
In conclusion, for the decision of making an investment in these three, I would make a portfolio, based
on P/E ratio and other factors, Accenture with higher weightage, IBM and HP with equal weightage.
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