IBM Financial Statement Analysis Paper
2014
John Kingston
Accounting 1120
Mrs. Shawna Hatfield
12/1/15
IBM Financial Analysis Paper
In this financial statement analysis of IBM, I will be using the ratio analysis method to analyze
and compare the current year 2014 to prior year 2013 of IBM’s financial statements. In comparing the
two years, we will be using ratios based on the companies financial information to better predict the
following: profitability, risk, efficiency, and stockholder/investor relations’ aka stockholder happiness.
Furthermore we will be comparing their numbers to the industry average to find out where exactly they
fit in today’s market place, and whether or not they are a secure company for investors.
Profitability
Profitability is a must for companies that want to grow and be successful in the long run. It
measures how much a company is earning whether it is from sales or services. IBM definitely did better
in 2013 than in 2014 you can tell just by looking at the income statement. However these ratios will help
us get a better understanding of what happened and why.
IBM’s profit margin for 2014 was 47% about 13% points lower than the previous year which was
60%. This drop in percentage shows a new net income of $0.47 for every $1.00 earned in sales as
opposed to $0.60 in 2013. However looking at the industry average, which is 1%, this is still good but it is
declining.
The gross margin ratio is currently 73.4% as opposed to 71.5% in 2013. This is good because
unlike the profit margin, gross margin subtracts the cost of goods sold. So it is basically saying that in
2014 IBM had more money to service our other obligations such as selling expense and other expenses.
Even though IBM had an increase in gross margin, it is still below the industry average, which is 80.1%.
They can increase this number by buying cheaper goods or finding a more efficient way to make their
products.
IBM’s return on assets for 2014 is 10.3%, which is good because the industry average is only
1.6%. However based from the previous year 2013 it had a decrease of 3.5% from 13.8%. This tells us
that they were able generate more return from investing in assets in 2013 than 2014.
Return on equity measures the amount of profit IBM generated with the money made by selling
stock. This is a good indicator of whether or not management is using stockholders investments in the
best way. In 2014 IBM’s return of equity is 23.1% as opposed to 2013, which is 31.6%. This decrease isn’t
that big of a drop considering the industry average is only 3.94%. However they had more profits per
stockholders investments in 2013 than in 2014.
Times interest earned is a great way to measure how well a company can pay its debts and more
specifically its interest payments. IBM’s times interest earned is much higher than the industry average
this indicates that IBM is paying too much of its money to debt. However in 2013 times interested
earned was 50.37% and in 2014 it was 34.59%. This number is going down and that is a good thing.
Earnings per share is a very important number to know when investing although alone it cant
give you the answer on whether or not to invest in a company. It can be used in other ratios that can
help you decide if a company is worth investing in. EPS measures a company’s profit. In 2014 IBM’s EPS
is $11.97 and that is worse than 2013 with an EPS of $15.06. However this is just a slight decrease
considering it is still above average. It declined $3.09 per share in 2014. This IBM is earning less.
In conclusion of profitability, IBM overall was more profitable in 2013 than in 2014. There were
ups and downs but based on the financial statements the company was less profitable in 2014. However
it wasn’t a huge loss in profit they are still pretty close to the industry averages in the different ratios.
Risk
Risk measures how well a company is able to pay its debts, and also how much of a company is
funded by debts and obligations. IBM has done very well in the past in order to be where it’s at today.
Lets look at the different ratios to prove how risky their company is today.
Starting with the current ratio, this is used to show how well a company can pay off their current
liabilities with their current assets. IBM has a current ratio of 1.25 in 2014 this is lower than the previous
year (1.28) and the industry standard, which is 1.86. This means IBM needs to do better at collecting
their receivables, so they can pay the current debts.
Also, The debt ratio, which shows how much debt a company, is using to finance their assets
with. Unlike the previous current ratio it is total assets and liabilities not just current. In 2014 IBM
financed 89.8% of their assets with debt. This is roughly 30% above the industry standard and 8% about
the previous year. IBM should decrease this number to decrease their financial risk in the company.
We can’t forget IBM’s acid-test ratio, it is 1.02 for 2014 and 1.06 for 2013, which is below the
industry standard of 1.57. The Acid-test ratio looks almost the same as the current ratio, however it
leaves out inventory and other illiquid assets. Now comparing this to the current ratio at 1.25, it is little
lower. If it were a lot less than the current ratio this would tell us that IBM relies more on inventory for
their current assets.
Finally Debt to equity, this shows us the amount of debt that is being used to finance assets
relative its value in stocks. It is more risky to have a high debt to equity ratio. In 2014 IMB has 8.78 and
2013 its at 4.5. This means for every one dollar of equity IBM has $8.78 of debt.
In conclusion the risk in IBM has increase since 2013, so that is not good. Based on the ratio’s
they are below that industry average in just about every category and have gotten worse in 2014.
However I don’t believe they are in trouble, these totals are likely to vary throughout each year. They
just need to do better at paying debt.
Efficiency
Efficiency is measured by how a company turns over its assets. Also by how effective a company
is a collecting receivables and paying debt. I will be going over the ratios to help owners and investors
calculate their company’s efficiency.
Lets start with the asset turnover this is a great way to show a companies efficiency because it
shows how much revenue a company can generate with its assets. IBM’s total asset turnover is 0.21 so
for every dollar of assets IBM has they are currently receiving a profit of $0.21. This amount is low
compared to the industry standard and has decrease .02 from 2013.
Next we have day’s sales uncollected this shows how many days sales stay in your accounts
receivables. For IBM Days sales uncollected is 94.6 in 2014 and 98.8 in 2013. The difference between the
to only four days but 2014 is better. 94.6 is still 32.6 days above the industry average (62 days). This
would directly affect some of the risk ratios we just went over like the current ratio. Also this definitely
tells us IBM needs to do better on collecting their receivables.
Now lets use inventory turnover to measure IBM’s efficiency. Inventory turnover for IBM in
2014 is 4.22 times per year and in 2013 it was 4.99. IBM was less efficient in 2014 than in 2013. However
both are well below the industry average of 17.56. This means IBM needs to do better in sales or they
simply have too much inventory.
Another good ratio is day’s sales of inventory this ratio shows the number of days it takes to
turn inventory into cash. IBM has a 86.5 days sales inventory in 2014 and 2013 was 73.1. Both these
number are too high because the industry average is 20.79 days to turn over inventory. IBM needs to
work on sales.
Finally, receivables turnover this ratio shows the amount of times a company collects on
receivables and turns it into cash. A higher number is preferable with this ratio. IBM’s is slightly low, at
3.59 for 2014 and 3.66 for 2013. They need to do better in collections to increase this number.
Lastly, Cash flow to assets ratio is used to predict the amount of cash that will be available for
business operations. The greater the ratio is, means the company is more efficient. For 2014 and 2013
IBM has a cash flow to assets ratio of .14. This amount is kind of on the lower side but the fact that it is
not decreasing is good. However it should be higher. If it decreases it makes it harder for the company
to generate cash.
In conclusion I realized IBM could do better on efficiency. They are taking too long to turn over
assets and also collect their receivables. That right there tells us efficiency needs work. This would
decrease their risk as well if they could be more efficient.
Stockholder Relations
Throughout stockholder relations I will be going over some ratios that will help investors to see
if IBM is worth investing in. In this section, like the others we cant tell if a company is a good investment
with just one of these ratios. However using all the ratios will give you a better understanding of
whether or not to invest in IBM.
Revenue per share had an increase of $0.16 and stands at $90.75 for 2014 and previously
$90.59. Increasing revenue per share value is great it shows that each share is worth more, and
therefore will bring more revenue. The number $90.75 shows, for every outstanding share IBM is
gaining $90.75 in sales.
Price to free cash flow is the cash a company is able to generate after all its plan expenditures
are made. Basically the amount left over to grow the business or pay outstanding debts. A low number
like IBMs 2.45 in 2014 is often times preferable to investors because it says the stock is undervalued.
The number 2.45 is good even though it is below the industry average because it may encourage
investors to but the stock because it’s cheaply priced.
Price/earnings ratio tells investors how much they are going to pay for $1.00 of the company’s
profits. For example in 2014 IBM’s P/E ratio is 13.40 so investors are going to pay $13.40 for $1.00 of its
earnings. This number increased from12.45 in 2013, so that is good. However it is still below the
industry standard, which is 19.30. This is the value the stock market gives you for a dollar of earnings.
Book Value per share shows stockholders how much their shares would be worth if the
company sold all assets and paid all debts. IBM has a $5.36 per share value in 2014 and $3.85 per share
in 2013. Obviously the higher number is better because it’s the amount stockholders would if a company
went out of business of was liquidated. 2014 was better than 2013.
Cash flow per share measures a company’s financial stability much like earnings per share.
However unlike earnings per share cash flow isn’t as easily manipulated on financial statements
therefore it is a more accurate number of the value of a company. The cash flow per share hasn’t
changed from 2013-2014 it is 1.7.
Dividends per share shows the number of dividends paid throughout the year. This number is
then divided by the number of outstanding shares to find a per share amount. IBM has a 4.31 dividend
per share amount in 2014 and 3.85 in 2013. This increase in 2014 is good for stockholders because they
receive more money for owning stock.
Dividend yield shows the amount of dividends a company pays relative to its stock price.
Dividend yield is used by shareholders to calculate return from owning stock. IBM’s dividend yield is
2.7% for 2014, which is good based on the industry average 2.2% and also the previous year 2013 2.1%.
This means investors will likely get an above average on their investment when buying IBM stock.
Dividend Payout indicates the amount of money a company pays to its shareholders in
dividends. IBM’s Dividend payout is lower than the industry average 42.1% for 2014 which is 36% and
2013 which is 25.6%. However 2014’s 36% is still pretty close to average and is definitely a step up from
the current years 25.6%. Investors like to see high dividend payouts because it means more money for
them.
In conclusion, IBM looks good to investors they have a pretty close to average dividend payout
for 2014. Also its dividend yield was above average meaning stockholders should see a pretty good
return on their investment of IBM stock.
Conclusion
In analyzing these categories: Profitability, Risk, Efficiency, Stockholder Relations, and the
different ratios used, I feel that IBM is a solid company. They took a slight downturn in 2014 from the
previous year. However they were still very profitable and look great to investors. The categories that
needed some work were risk and efficiency. If IBM worked on their efficiency to get their numbers
closer to average, this would greatly benefit and lower their risk factors of the company. I anticipate IBM
remaining successful for years to come but only time can tell.