MEMO

To: The President

From: Elizabeth Rojas
Date: April 26, 2015
Subject: Analysis of Ratios Comparison
In this memo I will be talking about the International Business
Machines (IBM) ratios according to their financial statements. I will be
explaining each one individually and how it affects the company and
their performance in the following categories: Profitability, Risk,
Efficiency, and Stockholders/Investor Relations. I will be comparing
each ratio with the current year of 2014 and the previous year of 2013,
following a comparison of the industry average of IBM.
The first category I will begin with is Profitability where in this
sort there are five ratios. I would like to start with Profit Margin. In the
current year of 2014, the profit margin was 12.9% and for prior year of
2013 it was 16.7%. This tells us that for the year of 2013, the company
was more profitable and they had more control over their budgets. This
also tells us that for every dollar that they spent, they company had a
$0.12 income added for the year of 2014 and $0.16 for the year of
2013. Comparing this to their Industry average, the companies in both
years are meeting the 1.0% and were profitable by generating income
by sales.

The Gross Profit Ratio explains the sales of inventory for a

company, the higher the percentage the more profitable. In this case
for the current year the gross profit was 71.5% and the previous year
was 71%. With this information we can say that for the current year
they slightly had higher gross profit than the previous year. The
company was able to retain a $0.72 for every dollar received as profit
in the current year. And for the previous year they earned $0.71 for
every dollar received as profit. This may sound acceptable, but this
does not meet the requirements for the industry average. They are
below the 80.1% average. This tells us that they are not as profitable
because they are not able to retain as much gain to take care of its
other cost and duties.
I will now talk about Return on Assets. For the current year they
had a 10.2% return and for the previous year they had a 13%. This
teaches us that during the prior year, the company was more profitable
in changing their assets to income than the current year. Comparing
this to the industry average of 1.6%, in both years the company was
able to exceed the average and was more profitable than expected
because for every dollar, the company earned $0.13 for the prior year
and $0.10 in the current year as profit.
When it comes to Return on Equity, this current year, the
company had a profitability ratio of 6.3% and for the previous year it
had 7.2%. This shows us that for the previous year the company was

more profitable in making income from investments of the stockholders

equity. So for every dollar, the company earned $0.63 for the current
year and $0.72 for the previous year. The industry average is 3.94%
therefor the company is above the average and was profitable in both
years.
The last ratio in Profitability in Earnings Per Share, and it tells us
that in the current year, for every dollar, they earned $0.14 per share
outstanding. And for the previous year for every dollar, they earned
$0.24. This means that for the prior year, the company was more
profitable in spreading the profit to the shareholders.

The next category that I want to discuss is Efficiency. And this

category has four groups: Inventory Management, Receivables, Assets
Management, and Cash Flow Management. Each group includes two
different ratios which will be discussed.
The first ratio under Inventory Management is Inventory Turnover
and it explains how many times a company can sell their inventory
over a certain period of time and replace it. In the previous year the
company sold their inventory 22.5 more times than the current year of
21 times. Comparing these two tells us that in the previous year, they
had a higher efficiency in controlling the inventory than in the current
year. However comparing these two years to the industry average of
17.56, they have a high efficiency in controlling their inventory

because they are turning over their inventory more times in both
years.
The second ratio in this group is Days in Sales in Inventory. For
the current year it is 17.3 Days in Sales and the previous year it was
16.2 days. This tells us that for the previous year the company was
more efficient is managing inventory by savings in costs and other
expenses than the current year. However they are both just as efficient
when we compare both years to the industry average 20.79 days since
they take fewer days to turn over their inventory.
The next group is Receivables and the first ratio is Receivable
Turnover. When measuring this ratio for the current year the company
turned over their average account receivables 5.44 times where as the
prior year was 7.47. Comparing these two together tells us that in the
previous year the company was more efficient in collecting or turning
over their receivables more often. Comparing this shows that the
industry average of 5.89, the previous year is meeting that average
with a higher volume where as the current year is not.
In measuring the second ratio, Days Sales in Receivables for the
current year the company had 94.6 days of uncollected sales and in
the prior year they had 98.7 days. Comparing these two tells us that
the current year was more efficient in collecting their sales than the
previous year. The Companys industry average is 62 days so

comparing the two years, the company is not as efficient because they
are taking too long to collect receivables.
The third group is Assets Management, and it has the ratio of
Asset Turn Over, and in the current year the company was more
efficient in making profit 0.78 times than the previous year of 0.77
times. This means that the current year was able to use its assets more
efficiently to make sales. However when we compare this to the
industry average of 1.6 times they are not as efficient in using their
assets for net income.
The last group is Cash Flow Management and I will first explain
Free Cash Flow. This is where the company is able to create cash to
expand its assets, and because it deals with dollar amounts, it is not
expressed as a ratio. For the current year, the company had a free cash
amount of $13,089 and the previous year totaled $13,717. In this free
cash flow comparison we can say that the prior year was more efficient
in cash flow than the current year to generate cash.
Cash Flow Assets is the second ratio and during the current year,
the company had 10% of cash flow assets and the previous year they
had a 13%. This tells us that for every dollar of assets, the current year
was able to generate $0.10 of cash and for the prior year they were
able to generate $0.13 of cash. So in other words, the prior year was
more efficient in generating cash than the current year.

Lastly in this group is Cash Flow Per share. For the current year,
the company was able to generate $0.17 per dollar for every operating
cash per share outstanding and for the previous year they generated
$0.16 for every operating cash per share.
Now I will talk about Risk Analysis. In the Short term Liquidity
section. The ratios are categorized under ability to satisfy current
liability. The first ratio in this category is Current Ratio. For every dollar
of debt or obligation, the company had $1.11 for the current year
available to pay off current liabilities and $1.22 for the prior year.
Comparing this to the industry average that is $1.86, the company is
still not able to pay all of its current liabilities that are due the following
year.
When we compare Acid Test ratio, in the current year the
company had $0.12 of short-term resources to pay a current liability
without involving inventory sales and $0.14 for the previous year. It
also tells us how fast the company has been able to turn their assets
into cash to pay those current liabilities. The industry average is $1.57;
the company has not been able to meet that proportion in both years
to pay current liabilities with fast cash.
Debit Ratio is another risk analysis, and when we compare the
current year, they are 35% of debt financed and the prior year was
31% debt financed. This means that the previous year was less risky in
the ability to pay its long-term debts and is has a higher equity finance

percentage. When comparing this to the industry average of 59.3%,

the company is actually more likely to pay its long-term debits from
both years and has more assets to pay those liabilities.
When we talk about Debit to Equity Ratio, for every dollar of
equity the company owes $8.8 of liabilities for the current year and
$4.5 for the previous year. The previous year is less debt financed than
the current year. This tells us that comparing to industry average,
which is 1.46, both years owe too much to its creditors and does not
have a strong equity status and this proves that it possesses more risk.
In Times Interest Earned in the current year the company had a
4.1 times more ability than the previous year of 5.0 to meet its interest
debts in periods of declaring sales, which is less risky. When we
compare this to the industry average, which is 2.9, the company is
significantly higher in being able to pay its interest in both years.
Finally, the last category is Stockholders Relations. This category
has four ratios, Earnings Per Share, Price Earning Ratio, Dividend Yield,
and Dividend Payment. When we compare Earnings Per share the
amount that the company will receive per stock for the current year is
$1.40 and for the previous year is $2.40. This teaches us that in
previous year the company had more net income per share that was
outstanding than the prior year. It also tells us that in the previous year
they were more profitable as an investment owner. When we compare

this to the industry average of $2.66, they are not as profitable as

investment owners for net income per share.
Price Earnings is another ratio that compares the companies
current ratio to its share earnings. For the current year it was $70 and
the previous year was $45. This tells us that for every dollar, the
company has a higher current share price in the current year than the
prior year. However, when we compare this to the industry average of
19.3, the company is assuming better earnings.
An additional ratio is Dividend Payout and for the current year it
was 33.3%. We know that they had a higher percentage rate from last
year of 22.2% of their earnings for payout in annual dividends. When
we compare this to the industry average of 42.1%, they are still not
able to payout as much to shareholders.
Another Ratio is Dividend Yield. The current year had a 2.6%
higher rate than the previous year of 2.1% of having cash dividends
paid through out shareholders by market value per share. However
when we compare this to the industry average of 2.2%, the company is
still exceeding in returning dividends depending on the market price.
Price to Free Cash Flow is an additional ratio that compares the
market price to the annual free cash flow. For the current year the
company had a $12.90 higher price than the prior year of $12.50. This
means that in the current year the company had higher efficiency to
increase their assets. Comparing this to the industry average of

$30.20, during both years the company still did not have a high price
to keep their annual free cash flow at an efficient level.
Lastly, I will talk about Book Value Per Share that is a
measurement of per share value based on the companys equity. The
prior year had a dollar amount of $231.60 remaining of higher value
than the current year that had a value of $121.35.
In summary, each of ratios I have explained are a summary of
how the IBM Company has been performing for the current year of
2014 and the prior of 2013. These ratios were all supported with the
IBMs financial statements.