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Shelby Slusher
Professor Shauna Hatfield
April 26, 2015
Accounting 1120
Financial Statement Analysis
We are going to be looking at International Machines of Business (IMB) financial
statements to determine several thing, efficiency, profitability, ability to pay debt and stock
investments. We will compare all the ratios we have calculated to the previous year and the
industry average. By comparing the year before and industry averages to the current year we can
see if they have grown or not as a company, it will help us determine if they are doing ‘better’ or
‘worse’.
Let’s talk IBM’s profitability, which is their ability to utilize recourses to generate a
profit. The ratios we will be looking at to determine their profitability are Profit Margin, Return
on Assets, and Return on Equity. Profit Margin measures the company’s ability to control cost, a
higher profit margin is better than a lower one. IBM’s Profit Margin is 12.96% for 2014 and
16.76% for 2013. They are well above the industry average which is 1.0%. This could mean that
IBM has better control over how and where they spend money. Return on Equity measures how
much revenue a company makes with what shareholders have invested, a higher percent means a
higher growth rate in the company. Their Return on Equity 22.83% for 2014 and 31.95% for
2013, the industry average is 3.64%. IBM had a higher percent in 2013 than in 2014 which could
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mean that more people were investing in 2013 than they were in 2014. They are above industry
average which says that they have a higher percent of people investing in them. Overall IBM is
more profitable than last year and the industry averages.
Now let’s talk about efficiency which is how well a company can turnover inventory and
make a profit. The ratios we will look at to analysis IBM’s efficiency are Days Sales
Uncollected, Total Asset Turnover, Inventory Turnover, Days Sales in Inventory, and
Receivables turnover. Let’s look at Days Sales Uncollected first which measures how long it
takes a company to collect money for a good or service sold on credit. IBM’s Days Sales
Uncollected for 2014 was 33.13 days and 30.05 days for 2013, the industry average is 62 days.
IBM is well below industry average which means they are very efficient in collecting from
customers who have a credit on their account. Total Assets Turnover measures how much
revenue a company can generate with what assets they have on hand. A higher number is better
because it tells you that the company can generate more revenue per asset dollar. The turnover
for 2014 was .303 and .306 for 2013. IBM’s asset turnover was significantly lower than the
industry average which is 1.6. This could mean that it takes longer for IBM to generate revenue
from their assets. Inventory Turnover measures how fast a company can turnover their inventory,
with inventory turnover you don’t want it to high or low, somewhere in between is the best.
IBM’s rate were 4.8 in 2014 and 5.5 in 2013, they are below the industry average which is 17.56.
IBM’s inventory turnover rate being so low means they could have a hard time selling their
goods or have priced them to high for consumers to want to buy. Days Sales in Inventory
measures how long it takes for the company to turn their inventory into revenue, usually the
lower the number the better. In 2014 their rate was 82.43 and in 2013 it was 76.58. The increase
in days could mean that they are having troubles selling their inventory for several reasons, they
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aren’t marketing correctly, they have priced their product out of consumers’ price range. The
industry average is 20.79 which is below what IBM’s rates are, which says the average company
does a more efficient job at turning their inventory into revenue. The last ratio that we are going
to look at that measures efficiency is Receivables turnover. It measures the number of times a
company collects in accounts receivables. The industry average is 5.86, IBM rate is significantly
lower in 2014 it was .28 and in 2013 it was .33, and these low numbers could mean that company
has poor sells. Overall it looks like IBM could be more efficient with their money than they are.
Now we are going to take a look at their ability to pay long term debt and current debt/
liabilities. We will look at our long term debt ratios first which are Debt ratio, Debt to Equity,
and Times- Interest Earned. Debt Ratio measures how much assets you have per liability. The
numbers for 2014 were 89.78% and 81.83% for 2013 which are relatively higher than the
industry average which is at 59.3%. The high debt ratios for IBM could mean that they are
raking in the debt and not paying it off. The Debt to Equity measure if the company can generate
enough revenue to satisfy its debt, a lower debt to equity is better because it means they are less
risky. In 2014 their numbers were 1.79 and in 2013 they were at 2.00, which is just slightly
above the industry average at 1.46.This means that IBM is able to generate enough cash to pay
debts off if need be. Times- Interest Earned measures the interest earned on debt and a
company’s ability to repay it. The industry average was 2.9 and in 2014 IBM’s numbers 34.57
and 50.37 in 2013. These high rates for IBM could mean that they have too much debt and are
trying to pay it down when they could be using that cash and investing it in projects or stocks.
Now we will look at their ratios for current liabilities which measure how able a company is to
pay off debt right then. Current Ratio measures the company’s ability to pay current liabilities
with current assets. IBM’s current ratio was 1.25 in 2014 and 1.28 in 2013, which is just slightly
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lower than the industry average at 1.86. Our last ratio we are going to look at for this section is
the Acid-Test ratio which measure ability to pay off current liabilities, this need to be above 1 or
they won’t be to pay off their current liabilities. In 2014 it was 1.02 and in 2013 it was 1.06
which means they can pay off their current liabilities. Overall IBM is able to pay their current
and long term debts when they need too.
Now we are going to look at cash flow which measure cash inflows. Cash Flow to Assets
measures the cash flow from operating activities. The cash flow for 2014 was .13 and .14 in 2013
which is right where it needs to be. Cash flow per share measure the cash flow per share of stock,
in 2014 it was 17.04 and in 2013 it was 16.59. It appears that they have increased their cash flow
per share from the previous year. Price to Free Cash is 2.04 in 2014 and 2.44 in 2013 which
means they were doing better in 2013. Overall they are doing very well with their cash flow and
where it goes and how it is spent.
Our last topics in on stock investments, the ratios are Dividend payout, Dividend yield,
Price- earnings, and Dividends per share. Dividend per share measures what is being paid out per
share of stock. The numbers for 2014 are 4.30 and the numbers for 2013 are 3.85, the increase in
dividends per share means that they are having more people investing in their company. Priceearnings shows the earnings per price of each share of stock. In 2014 it was 13.65 and in 2013 it
was 13.35, with this small increase it means that they are making more per stock and is lower
than the industry average at 19.3. Dividend yield and dividend payout is how much is annually
returned and how much is declared per share. Our numbers for Dividend yield are 21.33# in
2014 and 20.29% in 2013, the industry average is 2.2%. In 2014 for dividend payout it was
35.51% in 2014 and 24.57% in 2013 which is lower than the industry average at 42.1%. Overall
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it looks like they are doing fairly average for their stock investments and from their stock
investors.
All in all it looks like IBM was more efficient, profitable, and had less debt. With all of
this information that we went over it look like IBM will continue to grow and flourish as a
company. They do better than most of the industry averages and have improved from their
previous year.
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2014
2013
industry average
41. Revenue per share
93.6357
93.3273
42. Gross marginal ratio
89.96%
88.81%
80.1%
43. Days sales uncollected
33.135
30.052
62
44. Total asset turnover
.3034
.3063
1.6
45. Book value per share
53.1443
48.9317
46. Inventory turnover
4.8311
5.5912
17.56
47. Current ratio
1.2480
1.2788
1.86
48. Days sales in inventory
82.4307
76.5873
20.79
49. Debt ratio
89.78%
81.83%
59.3%
50. Acid test ratio
1.0179
1.0597
1.57
51. Profit margin
12.96%
16.76%
1.0%
52. Return on equity
22.83%
31.95%
3.64%
53. Receivables turnover
.2855
.3353
5.89
54. Times interest earned
34.568
50.368
2.9
55. Cash flow to assets
.1384
.1425
56. Return on assets
.1023
.1306
57. Cash flow per share
17.0394
16.5892
58. Dividends per share
4.3037
3.8501
59. Price – earnings
13.646
12.3523
19.3
60. Dividends yield
21.325
20.290
2.2%
61. Price to free cash flow
2.03664
2.4422
30.2
62. Debt to equity
1.7986
2.0021
1.46
63. Dividend payout
35.51%
24.57%
42.1%
64. Basic earnings per share
11.9741
15.0667
2.66
1.6%