IBM Financial

Statement Analysis 2014

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James Bryant
Shauna Hatfield
Accounting 1120
6 December 2015

Introduction
The following paper is an analysis of the company IBM and their financial
accounting statements for the year 2014, and will be compared to the previous year
and the industry average. The information is based off IBMs annual statement for
2014 and 2013. The four major topics will be analyzed.

Profitability
Risk
Efficiency
Stockholder/Investor Relations

Profitability
If a company wants to be a success, its ability to make profit or surplus is
very crucial. Without profit a company will end up going bankrupt. IBM reported a
net income of $12 billion in 2014, a small decrease from 2013 which had a net
income of $16.48 billion. Net income/loss (How much a company has earned or lost)
is not the only way to measure whether IBM is profitable or not, but rather by
specific ratios. The first ratio to look at is profit margin ratio. This ratio measures the

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amount of earnings on each dollar generated by sales. In simple, after all expenses
are paid by IBM the profit margin ratio shows the percentage of sales left over. IBM
had a profit margin of 46.7% in 2014 and 59.6% in 2013 with an industry average of
1.0%. There is percentage drop from the previous year which decreased their
financial health. Though they are still well above average, they have excellent
financial health.
Rate of return on total assets, often called return on assets ratio or ROA is
another ratio used to calculate profitability. This ratio measures how successful
companies are in using its resources to earn money. In 2014, IBM had a ratio of
10.3% and 13.8% in 2013. The industry average is 1.6%. This ratio is well above
average, showing that IBM is still very successful in generating money from
resources even though there was a slight decrease from the previous year.
Another ratio to discuss is the gross profit percentage. This is a calculation
that shows the amount of sales comprised of costs related services provided for a
company to generate sales. In 2014 and 2013 respectively, IBM had a percentage of
73.4% and 71.5%. With a small increase from 2013, IBM is rising closer to the
industry average of 80.1%. IBM being lower than the industry average diminishes
their chances of generating a net profit.
The last two ratios for profitability are earnings per share (EPS) and return on
equity (ROE). EPS shows how profitable a company is on a shareholder basis by
measuring the amount of money each share of stock would receive if all the profits
went to the outstanding shares. In 2014, IBM had an EPS of $11.97 and $15.06 in
2013. With an industry average of $2.66 IBM is well above the average and very
profitable. ROE shows profit generated from investments by shareholders that are in
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the company. A return of 1 will show that for every dollar of common stockholders
equity generates 1 dollar of net income. IBM reported a ROE of 23.1% and 31.6% in
2014 and 2013 putting IBM yet again above the industry average of 3.94%. With
four of the five ratios greatly above the industry average and only one slightly
below the average for both 2014 and 2013, IBM has been very profitable over the
last couple of years.

Risk
When a company is in debt there is very much risk involved. If company 1
buys resources on credit (purchasing without actually giving anything like cash or
other resources) from company 2, then company 1 owes money to company 2. The
risk involved with credit is if you cannot make the payment when its time to give
the money you owe, then you start to pay interest which in some cases can make a
company go bankrupt and lose all there resources. To see the risk involved with IBM
again we must look at ratios.
The first ratio is the current ratio, this ratio measures the ability for a
company to pay debts owed within one year from resources expected to be
converted to cash within one year or with cash itself. IBM reported a current ratio of
1.25 and 1.28 in 2014 and 2013. With the industry average at 1.86, and falling from
the previous year IBM has an increased risk of not being able to pay its one year
debts with cash or resources expected to be cash in one year. Closely related is the
acid-test ratio. This measures how well a company can quickly convert its resources
into cash in order to pay off its debts within one year if they came due immediately.
For 2014 and 2013, IBM recorded an acid-test ratio of 1.02 and 1.06. The industry
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average is 1.57. IBM again is below average for both years, and has a small slight
decrease from the previous year. This increases IBMs risk with debt.
Another ratio is the debt ratio. This ratio shows how many resources the
company must sell to pay off its debt. IBM reported a debt ratio of 89.8% and 81.8%
in 2014 and 2013. The industry average is 59.3%, putting IBM above average. This
makes it more difficult for IBM to borrow money because lenders often have debt
ratio limits that wont extend further credit to companies that are over-leveraged.
Similar is the debt to equity ratio. This ratio shows the companys funding that
comes from investors. IBM reported a debt to equity ratio of 8.78 and 4.5 for 2014
and 2013. IBM has an increased debt to equity ratio from its prior year. IBM also falls
above the industry average of 1.46. Having a high debt to equity ratio reduces the
value of ownership in a business.
At last is the times-interest-earned ratio. This measures the amount of
income that is able to pay for interest expense. In 2014 and 2013, IBM reported a
times-interest-earned ratio of 34.59 and 50.37 with an industry average of 2.9. IBM
has a decreased ratio from its prior year but still is very high above the industry
average. Having a high ratio like this shows they can afford to pay its interest
payments when they come due making it less risky than the industry average.
Overall having high risk involved with four out of five ratios, IBM needs to work on
their risk factors to try and gain more investors.
Efficiency
There are a few ratios used to consider efficiency of a company. This
efficiency I am talking about is the ability to sell goods that came from a wholesaler,
distributor, etc that you plan to sell to third parties. Not only is it just that, but also
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the ability to collect money that is owed to your company regarding the companys
resources. The first of five ratios is the Inventory turnover ratio. This ratio measures
how effectively a company manages their inventory by comparing dollar amount of
goods sold with the average inventory with a specific period. IBM reported an
Inventory turnover of 4.22 and 4.99 in 2014 and 2013 respectively. The industry
average of this ratio is 17.56. IBM has a slight decrease from the previous year,
increasing the gap from the industry average. This shows that IBM is not selling
their products efficiently.
The second ratio is the days sales in inventory. This ratio shows how many
days a companys stock of inventory will last. In 2014 and 2013, IBM recorded a
days sales in inventory of 86.5 days and 73.1 days. With the industry average
being only 20.79 days, IBM efficiency goes down. The longer IBMs inventory sits
there, the more cash that cant be used for other things. Our third efficiency ratio is
asset turnover ratio. This ratio measures how efficiently a company uses its average
resources from the current and previous year to earn income from sales generated.
In 2014 and 2013, IBM reported an asset turnover ratio of 0.21 and 0.23. The
industry average for this ratio is 1.6. IBM falls below average and also decreases
from the previous year. This means IBM is not using its resources efficiently.
The fourth ratio is accounts receivable turnover ratio. With this ratio a
company can measure the amount of times they can turn the money that is owed to
them from other companies to actual cash during a specific year. In 2014 and 2013,
IBM reported an accounts receivable turnover ratio of 3.59 and 3.66. The industry
average for this ratio is 5.89. IBMs ratio went down from the previous year and is
still lower than the industry average. This shows that IBM is not collecting the
money owed to them very frequently.
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The fifth and final ratio to measure efficiency is the days sales in receivables.
This ratio shows the number of days it takes for a company to collect cash from its
credit sales. IBM reported a days sales in receivables of 94.6 days in 2014 and 98.8
days in 2013. The industry average for this ratio is 62 days. Though there was a
small decrease from the prior year, IBMs days sales in receivables is still far above
average. With IBM having a high days sales in receivables, they are unable to
convert their sales into cash as quickly as other companies who have a lower days
sales in receivables. With all 5 ratios not in favor of IBM. IBM is not selling their
products efficiently or even collecting the money owed to them very frequently. Also
IBM is not using its resources efficiently. Overall IBM falls in efficiency, which may
cause the eyes of investors to turn away or may lead to bankruptcy.
Stockholder/Investor Relations
There are a few ratios you can look at to determine if it is worth it for
stockholders to invest in IBM shares. The price/earnings ratio is one of them. This
ratio shows the amount placed on $1 of IBMs earnings from the stock market. IBM
reported this ratio in 2014 and 2013 as follows, 13.4 and 12.45. The industry
average is 19.3. Having a low price/earnings ratio, means that investors are
anticipating lower growth from the company in the future. IBMs price/earnings ratio
has increased approximately by 1 from its prior year which may bring some
investors in because it has increased. Yet still IBM is below the industry average
causing some investors not to invest.
Another ratio is the price to free cash flow. This ratio compares the price that
a resource or service can be bought or sold to a companys ability to generate cash.
In 2014 and 2013, IBM reported their price to free cash flow to be 2.45 and 4.04
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respectively. The industry average is 30.2. Investors often look for companies that
have low or decreasing price to free cash flow because its stock is cheaper. IBMs
price to free cash flow has decreased from the prior year and is far below average.
This will cause many investors to look toward IBM and may even invest. The third
ratio is the dividend yield ratio. This ratio is a measure of investor return that has
come from payments made to shareholders. IBM reported a dividend yield of 2.68%
in 2014 and 2.05% in 2013. The industry average is 2.2%. From its prior year IBM
has increased its dividend yield above the industry average. Investors generally are
willing to pay more for stocks if the dividend yield is low. Some investors may sell
stock in IBM but also may not because the increase in its dividend yield ratio wasnt
very big.
The last ratio is the dividend payout ratio. This ratio shows the portion of
profits that the company keeps to pay for its operations and the portion of profits
that is given to the companys shareholders. IBM reported a dividend payout of 36%
in 2014 and 25.6% in 2013. The industry average is 42.1%. The consistency of this
ratio is usually more important than a high or low ratio. If it is a steady ratio or
steady increasing ratio for the last ten or so years, investors can assume that it will
continue to give out that percentage of profit to the shareholders or continue to
have increase in profit to shareholders. Many investors may turn their eye to IBM
due to its price to free cash flow ratios and its dividend payout ratios. Though IBM
may lose some investors due to having a poor price/earnings ratio and may or may
not due to its dividend yield. Overall IBM may get more investors to invest.
Conclusion

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After analyzing the four major topics, which are profitability, risk, efficiency,
and stockholder/investor relations; there are some things to be said. Overall, IBM
has been very profitable over the last couple of years and may continue that route
in the future. They need to work on their risk factors to lower their risk. Along with
trying to increase their efficiency, so they dont lose investors or go bankrupt.
Investor relations look good for IBM and they may see more investments in the near
future.

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