IBM FINANCIAL STATEMENT ANALYSIS

IBM FINANCIAL STATEMENT ANALYSIS

Ethan Shiveley
Salt Lake Community college

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

The purpose of this paper is to conclude on the financial statements for IBM by analyzing
its risk management, profitability, efficiency, and the way it takes care of its owners. The
numbers used were calculated using their financial statements for the current and prior year. This
paper will show that IBM effectively managed their company, while they have areas to improve
on one of the biggest indicators will be how often it is about the industry average and by how
much; as well they manage to improve from their prior year on many of the ratios.

Risk Management
In order to understand how IBM managed its debt we need to look at both the short term
and long term debt. Analyzing the short term debt will show how liquid the company is or how
much the company can easily be converted into cash.
For Short-term debt we first look at the working capital, this helps us to understand the
ability of the company to meet Short-Term obligations with current assets (or a resource the
company can expect to profit from, i.e. cash). For the current year IBM Working Capital is
$7,342,000,000, for the prior year they reported $7,474,000,000. Therefore IBM has the ability
to pay its short term debts and still have over 7 billion dollars remaining. There are several ratios
that are based on the idea of working capital including the Current Ratios, and the Acid-Test
Ratio.
By analyzing the Current Ratio it illustrates the companys ability to pay its current
liabilities, or debt due within a year, with its current assets, again those resources the company
can expect to profit from and are easily converted into cash. For the current year they reported
1.21 compared to last year 1.20 and the industry average 1.3. While slightly below the industry
average they still improved from last year. IBM could be lower than the average for a few

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

reasons, but if the number were too high, it would mean that they would be holding onto a lot of
cash, rather than using it to invest, or pay off debt.
The Acid-Test is a way to show IBMs ability to off current liabilities or debts, if it were
due immediately. It is stricter because it only accounts for the most liquid, or easiest to convert to
cash, assets. IBM stated .95 for both the current and prior year, compared to .9 for the industry
average. They appear to be in a good position to pay off debt if needed.
Upon examination of the ratios relating to Short-Term debt IBM appears to be in a strong
position to pay off any debt coming due within the current year. They are less risky in short term
debt compared to last year. Now we will look over their ability to pay long term debt or that
coming due after one year. This helps us understand if the company were going to close what
kind of position would they be in, would they profit or come in at a loss? We will use the Debt
Ratio, the Debt to Equity ratio, and the Times-Interest Earned ratio.
The Debt Ratio represents how much of total assets are financed by debt. For IBM that
ratio for the current year is 73% and 77% for the prior year. The industry average was 62%. They
made progress on getting rid of some of their debt or at least acquired more cash or other assets.
They do have higher risk then the industry by 11%.
The Debt to Equity ratio shows the relationship between debt and equity, or the owners
investment in the company. IBMs ratios for the current and prior year were 2.73 and 3.28
respectively. These numbers reflect that the company is financed heavily by debt, and that it
does carry risk, but they have made an improvement from the prior year.
A huge factor when considering long term debt is interest due on it, the Times-InterestEarned ratio helps us account for that factor when looking at a companys ability to debt. For the

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

current year IBM reported 47, and 34.2 for the previous year. This ratio related to the industry
average of 46.3. When this number is higher a company can better pay its interest owed. So the
company improved its ability to pay interest from the previous year, and is ahead of the industry
average.
All the ratios stated thus far reflect the companys relationship with debt, and overall they
appear to be managing it well, they appear to be paying off debt, which is an important mark of a
company. While these ratios are important, it is very important to look and see if the company is
profitable and by how much, after all no one goes into business to just make a little money.

Profitability
Profitability is a very exciting section to analyze, the company has done a good job at
being profitable, and we will determine that by looking at their Gross profit percentage, profit
margin ratio, return on assets, return on equity, and their Diluted earnings per share.
The Gross profit percentage is 37% for the current year and 36% for the prior year. This
percentage is a good indicator of a companys ability to make money off of their inventory. The
fact that they have improved is a really good marker to show profitability, in addition, they are
over the industry average which was 36.84%, it may not seem like much but being over last year
and above the average are both good indicators that they are profitable.
The profit Margin Ratio reflects how much the company brings in off of every dollar they
sell. If a company has a high percentage then they make more off of every sale. IBM reported
9% for both this year and the prior. This gets really significant when compared to the industry
average of 4.34%. They are more than double what the industry shows to be earning in net
income off their sales.

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

IBMs return on assets ratios shows how well the company uses its assets (or resources)
to generate profit. The return on assets ratio was calculated as 18% for the current year, and 19%
for the prior. While the decrease may be grounds for concern it is very interesting to compare to
the industry average of 4.9%. They are more than three times the industry average which is very
interesting. It is very promising to see the company being so profitable from their assets. It is
also important along with that to understand the rate of return on equity ratio. They calculate in
at 35% for the current year and 40% for the former year. While again the decrease is concerning
it is very interesting to see these numbers compared to the average of 13.5%. That is very
exciting to see such results.
The Earning per Share ratio is the only required ratio the company has to report on its
financial statements. It has for the $4.44 for the prior year and $4.35 for the current year. While
there was a slight drop comparing it to the industry average gives it significant hope, the average
was $0.86. That is incredible, about five times greater than the average. This company is very
profitable for its investors.
These ratios show significant strength in the ability to be profitable; they were often high
above the industry average. These numbers are very promising and put it in a good spot as an
investment.

Efficiency
An important area to analyze is the companys efficiency. We will look at it in 4 pieces,
Inventory Management, Receivables/Collections, Asset Management, and Cash flow
Management. To begin analyzing we will look at Inventory Management and use Inventory
Turnover and Days Cost of Sales in Inventory.

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

Inventory turnover represents how many times a company sells its average inventory
levels. With this ratio I will first show the industry average of 9.1, so roughly 9 times the
industry sells its average inventory. IBM for last year did it 11.70 times, and for the current year
got it up to 11.93. That is a huge improvement; it is not surprising based on what we have
already learned about its profitability. This company continues to present above industry
numbers as it has here.
The Days Cost of Sales in Inventory shows how many days worth of inventory the
company has. While it is important to have enough to meet your level of demand a company
does not want to tie all its money up in its product. While the proper amount would vary
depending on what type of merchandise you sell, the average here would give good direction
coming in at 40. For the current year they had 30.60, and the prior year 31.20. This appears very
promising because it shows that the company has not put all its money into its inventory that sits
around waiting to sell. For Inventory Management the company did very well in beating the
industry and its prior years numbers. This was a very strong section for them.
Now we turn our attention over to Receivables/ Collections ratios; these include
Receivables Turnover and Days Sales in Receivables. The Accounts Receivables Turnover
indicates the number of times the average receivable is collected for the year. A high number
shows that they collect the amount they should receive more often. For IBM for the current year
they had a turnover of 2.97 times for the year and 3.03 last year. They did not improve compared
to last year and are a little behind compared to the average of 3.9. This is an area the company
can improve on.

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

Our next ratio is Days Sales in Receivables, which indicates how long it takes to collect
the average level of receivables. This company shows 122.7 for the current year and 123 for the
prior year. With a slight improvement they still have a long ways to catch up to the average of
84.85. These two ratios show that IBM does not do a very good job with its accounts
Receivables/Collections.
Our next section is on Asset Management. The Asset Turnover Ratio measures the
amount of net sales created for each average dollar of total assets invested. While last year they
had $0.98 generated, for the prior year they had $0.97 generated for every dollar invested. This is
an area where the company weakened. In addition they are behind in compared to the industries
$1.1. The company did not do a good job managing their assets overall.
Our final section for efficiency is Cash Flow management. We will explore two ratios in
this section including Cash Flow to Assets, and Cash Flow per Share. The Cash flow relates to
net income or profit. Cash Flow is what it sounds like, does the money flow into the business or
out. In understanding Cash Flow to assets think of how much Cash Flow is generated by the
companys assets. In IBMs case they generated $0.21 for every dollar in assets they had for the
prior year and $0.33 for the current year. This was a significant improvement and is really
positive. When compared to the average of $0.1033 per dollar it is very significant. This is
strength for IBM.
The Cash Flow per share is another area of strength for the company. They reported
$5.26 compared to $8.28 for the prior and current year respectively. The industry average is 1.89.
That is a very large difference. This shows that the net cash amount the company can produce for
every share of stock they have. This is really big strength that they made such improvements in a

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

year, and are so above the industry. For this section of efficiency IBM does a really good job
with its Cash Flow Management.
To summarize on the entire efficiency section the company did pretty good they are weak
in their Collections section and Assets management, but are really strong in the other two
sections.
Our last section will relate to the attractiveness of the business to investors, the effect on
stockholders, and the owners. The ratios used here are the earnings per share, Book Value per
Share, Revenue per Share, and Dividend per Share.
The Earnings per Share was discussed earlier, I felt it worth mentioning here again,
because it shows how well the company has taken care of its stock holders. Remember it was 5
times over the average return for the industry, incredible.

Investment attraction/Owner relations

This section is the final section of study this paper will look over and it has to do with something
very important and that is the how attractive this company is as an investment and the way it takes care of
its investors. We will use three ratios here to determine if this is a good company to its investors, the
Book Value per Share, the Revenue per Share, and the Dividend per Share ratios. We will The Book

Value per Share was 13.7 for the current year and 11.56 for the prior year. They increased by
$2.14. That seems very promising especially when compared to the average of 6.62 per share. It
is more than double what the industry is reporting. This number reports what the shareholder
would receive after liquidating the company. That makes this an appealing investment.
Another indicator that can signal good news to investors is the Revenue per Share.
Revenue per share shows the revenue earned divided by the number of share outstanding. This

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Ethan Shiveley
Accounting 1120
Salt Lake Community College

indicates what profit was generated by the amount of shares purchased. They reported $5.01 for
the prior year, the current year they calculate in at $4.98; already the signal with this decrease
that things have not improved. By looking at this and comparing it to the industry it comes in at
20.57. That is more than 4 times greater, this is an area that IBM can work on and improve.
The final ratio is the Dividend per Share ratio, the Dividend per share is how much a
company is paying out per share. IBM is a strong company and that is demonstrated by yet
another ratio, they had $0.55 per share for the current year and $0.52 per share for the prior year.
This improvement signals that they are putting more money in its owners hands, and signals this
company takes care of its investors especially when compared with the industry which only
reported $0.19 per share.
While there was one area where they could improve overall they did really well taking
care of its investors and owners, it is definitely attractive to investors searching the market for
good investments.
In Conclusion IBM is a strong company with a lot of potential; they have displayed the
ability to make good profits and had strong control on their debt. While they can improve on
issues related to their inventory management they still had some really good strength in that area.
This is a company worth ones time and money. They show no signs of slowing down and they
have time to back up the fact that they are here to stay.