Eric Gray

IBM Corporation Financial Analysis

In this paper, I am going to be analyzing IBM Corporation by their risk, profitability, efficiency,
and their stockholder relations. I will be comparing 2014 to the prior year, and then 2014 to their industry
average.

Risk
Short-Term Risk
We will begin by analyzing IBMs short-term risk. To do this, we will be looking at two different
ratios, which include the current and acid-test ratios. The current ratio measures a companys ability to
pay its current liabilities from only its current assets. A current liability is a debt or obligation that must be
paid within one year, and a current asset is any kind of owned property that will be turned into cash within
the next year. In the table below, their current ratio shows that between 2013 and 2014 there was a
minimal difference. Between the two years, they could pay off their current debts with their current assets
about the same. However, in 2014, their current ratio was below the industry average, thus meaning they
could not pay off their current debts as well as the competing industries could. Now, the acid-test ratio
shows IBMs ability to pay off their current liabilities with their quick assets, if all their current liabilities
were due right now. Going back to the table below, their acid-test ratio indicates that in 2013 they could
pay off their current debts with their quick assets slightly better than they could in 2014. Also, IBMs
acid-test is lower than the industrys average, which means that they cannot pay their current liabilities
with their quick assets as well as most of the industry.

Current Ratio:
Acid-Test Ratio:

2013
1.28
1.06

2014
1.25
1.02

Industry Average
1.86
1.57

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Long-Term Risk
Next, we will be analyzing IBMs long-term risk. The difference between long-term risk and
short-term risk is that long-term risk is going to be any liability that is around for more than a year,
whereas short-term risk is a year or less. There are three ratios we will use as goes the following: debt
ratio, debt to equity ratio, and the times-interest-earned ratio. The debt ratio measures how much of their
assets was financed with debt, for example taking out a loan to pay for an asset. As for IBM, in 2014,
their debt ratio was a stunning 89.78%, which is extremely high. In 2013, it was still rather high at an
81.83%, which either way is not good. This is indicating that almost 90% of their assets have been
financed through debt. Moving on to the debt to equity ratio, which shows the percentage of total
liabilities in relation to the total equity, in 2014 and 2013 IBM had an extremely high debt to equity at an
8.78 and a 4.51. In 2014, they increasingly started financing more of their assets with debt than they did
in 2013. Nonetheless, in either year, their debt to equity is still ridiculously high compared to the industry
average of a 1.46. Lastly, is the times-interest-earned ratio. This ratio measures how well IBM can pay
their interest expense. The higher the ratio is, the better it looks for IBM, because it shows how easily
they can pay their interest expense. In the table below, in 2013, they had a very good times-interest-earned
at 4.2. Now in 2014 it had dropped to a 2.9. So, in 2013, they could pay their interest expenses easier than
they could pay them in 2014. Although, taking 2014 compared to the industry average, IBM is right
where the industry average is at a 2.9. They can pay their interest expense just as well as the next industry.

Debt Ratio:
Debt to Equity Ratio:
Times-Interest-Earned
Ratio:

2013
81.83%
4.51
4.2

2014
89.78%
8.78
2.9

Industry Average
59.3%
1.46
2.9

Overall, IBM can be considered a risky company. The reason behind this is the substantial
difference between the industry average and 2014, in the debt ratio and the current ratio. Mainly looking
at the debt ratio, where almost 90% of their assets are financed through debt, shows they do not have the

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capital to buy assets. As for the current ratio, the company can pay off its current debts with its current
assets, but compared to how well the competing industries can, it puts IBM on the more likely risky side.

Profitability
Continuing, we will be looking at how profitable IBM is. There will be a total of five ratios which
consist of profit margin, rate of return on total assets, gross profit percentage, rate of return on common
stockholders equity, and earnings per share. Profit margin determines how much net income is made on
net sales. Net income happens when revenues exceeds expenses and net sales happens when sales is
greater than returns. The table below shows that in 2013, IBMs profit margin was extremely good. They
were gathering almost 6% for every dollar on net sales. Now in 2014, it was still good, at a respectable
4.69%, although they were not making as much money on each dollar like they were in 2013. But taking
2014 compared to the industry average there is a huge increase for IBM. Most of the other companies in
the industry make about 1% for every dollar on net sales, whereas IBM is making 4.69%. Next, gross
profit percentage shows how profitable each sales dollar does against cost of goods sold. In 2014, IBM
was more profitable on each sales dollar than they were in 2013, although compared to the industry
average, IBM is not nearly making the same amount per sales dollar that the rest of the industry. A
possible reason for that is IBM is paying more for their goods than the rest of the industry. Now, earnings
per share measures IBMs net income for each share of their outstanding stock. In 2013, it was a better
year for IBM compared to 2014. Although IBM is still looking at about five times as much EPS as the
industry average.

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The rate of return on total assets is practically everything it is in the name. This is how a company
can use its assets to earn income. In 2013, IBM was more profitable using their assets than they were in
2014. It was also lower than the industry average, so they are not as profitable using their assets for
income like the other companies in the industry. Lastly, the rate of return on equity simply is net income
available to the common stockholders. In 2014, they had a 2.36% which is lower than 2013 and the
industry average. This means that the common stockholders did not have as much net income compared
to the industry average and the prior year.

Profit Margin:
Rate of Return on Total
Assets:
Gross Profit Percentage:
Rate of Return on
Common Stockholders
Equity:
Earnings Per Share:

2013
5.90%
1.3%

2014
4.69%
1.02%

Industry Average
1.0%
1.6%

71.52%
2.58%

73.44%
2.36%

80.1%
3.94%

15.06

11.97

2.66

Concluding for profitability, IBM was profitable in terms of EPS and profit margin. They were
making a high amount of money on each sales dollar. As far as return on assets, gross profit, and return on
equity, IBM was not as profitable as their competition in the industry. But it is hard to deny such high a
profit margin compared to the industry. Overall, IBM was a little less profitable compared to the industry.

Efficiency
Inventory Efficiency
Moving on to inventory efficiency, where we will measure how efficient IBM can sell its
merchandise by looking at two ratios. The ratios are going to be inventory turnover and day sales in
inventory. Inventory turnover is going to show us how many times IBM can sell an average amount of
inventory during a period. For 2014, IBM has an average inventory turnover at about 21.03 times per
period, which is far above their 2013 turnover at a 19.26. Compared to the industry average, 17.56, IBM
has a very good inventory turnover. The reason it is very good has to do with the next ratio. Day sales in

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inventory measures how long a company holds its inventory on average. To get this, you must have your
inventory turnover ratio, and with that we can see how long IBM typically holds inventory before it is
used or sold. IBM had 17.36 days in 2014, 18.95 days in 2013, and the industry average was 20.79 days.
This shows that IBM can handle sales for about 17.36 days, which means they can sell their inventory
faster than they could in 2013 and faster than the industry average.

Receivables and Collections Efficiency

Next will be receivables and collections efficiency. This will show how efficiently IBM can
collect its receivables. Once again, we will be using two different ratios to determine the efficiency IBM
has on collecting its receivables. The two ratios will be accounts receivable turnover ratio, which will
measure the amount that they can collect an average number of receivables in a year, and days sales in
receivables, which will show how long it takes to collect the average number of receivables. So, in 2013,
IBMs receivable turnover was about a 1.2 and in 2014 it was a 1.01. From 2013 to 2014, IBM got a tad
slower at collecting its receivables. Comparing 2014 to the industry average, 5.89, IBM is significantly
slower at collecting its receivables than the rest of the industry. As for days sales in receivables, in 2013
and 2014, IBM had 56 and 59 days. This tells us that in 2014, IBM took 59 average days sales to collect
its accounts receivables. It took an average of 3 days longer to collect in 2014 than it did in 2013, which
makes the days sales in receivables worse. The industry average of this was 62 days, which means IBM
is faster at collecting receivables than the industry average, even in a slower year.

Asset Efficiency Overall

Asset efficiency overall is only going to have one ratio. That one ratio is going to be total asset
turnover. This will show how efficiently IBM can use its average total assets to create sales. In 2013 and
2014, IBM had a .95 and a 1.05 asset turnover. In 2013, they were creating sales at a much lower rate than
they were in 2014. Regardless of how they did in 2014, they are still substantially below the industry
average of a 1.6. In 2014, they started to use their assets more efficiently.

Cash Management

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Cash management is going to have three different ratios. These ratios are cash flow to assets, cash
flow per share, and price to free cash flow. This measures how much free cash the company has from its
operational activities. For IBM, cash flow to assets, in 2014, was a mere .11 and in 2013 it was not much
better at a .12. The cash flow per share was a .2 in 2014 and a .23 in 2013. Lastly, the price to free cash
flow was 1.6 in 2014 and 1.9 in 2013. This indicates that in 2013 they had more cash to use from its
operating activities than it did in 2014.

Inventory Turnover:
Days Sales in Inventory:
Accounts Receivable
Turnover:
Days Sales in Receivables:
Total Asset Turnover:
Cash Flow to Assets:
Cash Flow per Share:
Price to Free Cash Flow:

2013
21.03
18.95
1.2

2014
19.26
17.36
1.01

Industry Average
17.56
20.79
5.89

56
.95
.12
.23
1.9

59
1.05
.11
.2
1.6

62
1.6

Stockholder and Investor Relations

The last portion of this paper will be assessing stock for IBM. There are six ratios we will be
looking at and they are: dividends yield, dividends per share, price/earnings dividend payout, revenue per
share, and book value per share. First will be dividends yield. Dividends yield is essentially the proportion
of the stocks market worth that gets returned yearly as dividends. In the case here, in 2014, IBMs
stockholders can expect to receive 2.6% of their investments annually, but in cash dividends. Compared to
the 2013 year (1.9%) and the industry average (2.2%), IBM appealed to a lot of investors because their
dividend yield not only increased from last year, but also because it was higher than the industry average.
On the contrary, dividend payout, which is the dividends declared for common stock over the earnings per
share, was lower in both 2013 and 2014 compared to the industry average. With back to back years being
lower than the industry average, IBM will have a tough time staying competitive to attract investors. As
for the price/earnings for IBM, which will show how much value the stock market puts on one dollar of
IBMs earnings, it is also lower in 2013 and 2014 than the industry average. IBMs stock is selling at

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about 16.7 times their annual earnings, in 2014. Whereas the industry is selling their stock at about 19.3
times their annual earnings. Moving on to dividends per share, the number of dividends that shareholders
receive per share, the table below shows that IBM improved in dividends per share from 1.2 to 1.4, in
2013 to 2014. So, shareholders were getting an increase of .2 dividends for each share. Revenue per share
is going to measure how much revenue is over each common share. IBM is not making as much revenue
as they were in 2013, with the decrease between the two years, according to the table. Book value per
share is similar to RPS, but the difference is calculations. Book value will be calculated by subtracting
assets minus liabilities. However, book value is going to increase from 2013 to 2014, which can indicate
that IBM has a higher amount of assets than they did the year before.

Dividends per Share:

Price/Earnings:
Dividend Yield:
Dividend Payout:
Revenue per Share:
Book Value per Share:

2013
1.2
13.2
1.9%
25%
44.56
16.54

2014
1.4
16.7
2.6%
36%
41.89
17.89

Industry Average
19.3
2.2%
42.1%

Altogether, between the six ratios, IBM is going to struggle to attract investors. Except for
dividends yield, they are below the industry average. Investors invest because they want a return, and it
does not make sense to invest in IBM when there are other competitors who can satisfy the return.

Conclusion
In conclusion, comparing IBM to at least the industry average, it is a risky, less profitable
company. Not to mention that they are not nearly as efficient as their competition nor do they have a
spectacular return for investors. Between the 22 ratios that were analyzed, only four were better than the
industry average. IBM should want to reevaluate themselves if they want to continue to be competitive in
the industry.