Memorandum

Date: 11/25/2014
To: President
From: Ubon Noble
Subject: Financial Statement Analysis of IBM-2001

This is the financial analysis of IBM in comparison to the industry average, utilizing IBM the
financial statement from the year 2000 and 2001. This analysis will cover profitability, liquidity,
solvency, and efficiency.
Liquidity
Liquidity is the ability to pay current liabilities. Such as operating expenses and short term loans.
It can be evaluated by comparing ratios of cash on hand, cash coming in and money owed. If a
business is able to generate cash flow faster then, acquired new debt it is considered liquid.
Current ratio and acid-test ratio were used to determine the liquidity of IBM.
IBMs current ratio in 2001 was 1.2:1. This means that the company generate $1.2 dollar for
every dollar in debts. Therefore IBM has a .1 lower debts ratio than the industry average. Thus,
the company was marginally able to pay their debts.
Solvency
Solvency is the ability to retire their long term debt obligations. The debt and acid-test ratio were
used to evaluate the long-term debts.

The acid-test is a measure of a companys immediate short-term liquidity. This ratio further
refines the current ratio by measuring the amount of the most liquid current assets.
For the year 2000 IBM had a debt ratio 77 percent, for year 2001 their debt ratio was 73 percent.
The industry average was 62 percent. Based on IBM debt ratio exceeding the industry average by
over .15 percent in 2000 and .11percent in 2001. IBM risk would be considered above average.
In order to lower their risk, IBM must improve their revenue and reduce their long term debt to
at least the industry average.
Profitability
Profitability is establish after all expenses are deducted from earned income. To determine the
profitability of this company, Profit margin and return on asset ratio were used.
Profit margin is a measure of each dollar of sales that results in net income. A higher profit
margin indicates a more profitable company that has better control over its costs compared to its
competitors.
In the year 2000 IBM had total revenue of $88,396 million and total cost of $56,342 million and
resulted with a gross profit percentage of a percent 36.26 less than industry average of percent
36.84. In 2001 the profit margin increased to percent 37.0. This increase is attributed to a higher
number of global services contracts. The companys strong performance in services helped gross
profit margin to increases.
The return on asset is measures the success a company has in using its assets to earn a profit. It
evaluate how efficient management is at using its assets to generate earning. IBMs return on
asset was 8.7 percent in 2001 and 9.2 percent in 2000, the industry average was 4.94 percent. In

both years IBM had a greater return on asset than the industry average. Even though IBM had a
great return on asset, in 2001 their return on asset was trending lower, down from 9.2 to 8.7
percent.
Efficiency
The efficiency is the ability of a company to produce products in the most efficient manner and
the number of time that the merchandise inventory in a giving time period.
The inventory turnover measures the number of times, on average the companys Inventory is
sold during the period. A lower inventory turnover suggests that the company is having trouble.
IBMs inventory turnover for 2000 was 12.42 times compare to the industry average of 9.1
times. In 2001, the inventory turnover was 11.92 times. There was a notable decrease in 2001,
however both year outperform the industry average.
Days sales in inventory is the number of days that it take for inventory to sales. In 2000 IBM
turnover inventory in 29.3 days, in 2001 the turnover was 30.6 days. The industry average was
40 days. IBM has a higher efficiency ratio in both year due to their ability to produce and
turnover more efficiently than the industry average.
In conclusion, even though IBM has a significant higher debt ratio than the industry average,
they are outperforming the average in others areas. As noted IBM has consistently maintain a
higher profit margin than the average. IBMs inventory and days sales have also outperform the
average. The area that IBM should focus on is reducing their debt ratio to coming line with the
industry average. Overall the outlook seems positive for IBM.