Jeremy Fox

Accounting 1120
Financial Statement Analysis

IBM

Investing is a hard decision; there is a great deal of risk when investing your hard earned
money. It can be viewed as gambling, like playing the slot machines in a casino. But unlike
gambling, investing isnt as big of a risk when you look at the financial statements and can tell
when a company is a good investment, and which is not. In this report we will calculate some
ratios and use them to measure the financial position of IBM.

Risk
There is risk in every aspect of life, and in the business world that risk can be very high
or very low. Yes, some companies will have bad years; but what we are looking for in the risk
category is how well a company can perform if the road gets a little rough. The number one ratio
you should calculate first when looking at a company is called, the acid test ratio. This ratio is a
measurement of on how fast a company can pay off its debts with cash or quick convertible cash,
for example: selling a truck to pay off a loan, or taking money out of savings and selling
equipment to pay off the mortgage on a building. As a side note this ratio excludes any kind of
inventory, meaning if the company is relying on sales to generate cash the company would have
a low acid test ratio. The year of 2014 showed us that IBM had an acid test ratio of 1.02, which
was lower than the prior year. This score of 1.02 means that for every dollar of debt the company

can pay one dollar and two cents, this would be a solid score, but when we compare that to the
industry average, which is 1.57, we find that IBM is relying more on sales to generate income.
Therefore, we can conclude that IBM is at a slight risk than last year, and a bigger risk compared
to the industry. Does this mean you dont invest in IBM? Lets analyze some more ratios before
we make a decision. The debt equity ratio is a measurement of how much the companys (IBMs)
assets were paid for by money invested by stockholders. The days sales uncollected is a ratio
that tells us how much cash that IBM collects is actually in an accounts receivable, which is
when the company sends a bill to the customer and hasnt received cash yet. The price earnings
ratio tells investors how the market price of the stock is compared to the companys earnings.
Times interest earned is a businesss ability to pay interest expense. Below is a chart to compare
IBM data from 2014 to 2013, to the industry average.
Ratio
2014
2014
Industry Average
Current Ratio
1.25
1.28
1.86
Debt Ratio
89.7%
81.8%
59.3%
Acid test Ratio
1.02
1.06
1.57
Price Earnings Ratio
0.16
0.17
19.3
Debt to Equity Ratio
8.78
4.50
1.46
Times Interest Earned
41.29
50.36
2.9
As we can see from the chart, the times interest earned if very is a very large amount, but
the decrease from the prior year shows us that IBM is having a bigger expense that is coming
from an increase in debt. I can assume that because that is what the debt ratio concludes. IBM
has a very large amount of debt and that is a red flag when it comes to investing. The acid test,
and price earnings ratios are very low compared to the industry average, from these ratios we can
conclude that IBM is a bigger risk investment because of the huge amount of debt, and the ability
to pay off that debt is lower than average also.
Profitability

After looking at the risk ratios and getting a fill for the company, the next step in
evaluating an investment is by looking at probability. Or in other words, how easy it is for a
company to make money. In these ratios you will see the term net income used a great deal of
times, that term means how much money a company makes after all expense, taxes, depreciation,
etc. has been taken out, so in other words it is the take home amount. Weighting profitability
ratio is one of the more important ratios in this section. Why? This is where you analyze where
the profits came from by looking at the return on equity, which is how IBM made money off of
shareholders investments. Another big ratio is the cash return on assets. This is a measurement on
how successful a company is on using their assets to earn a profit. The ratios called profit
margin, and revenue per share are very similar. The profit margin shows how much IBM earned
on every one dollar of sales, where revenue per share is the amount of common shares
outstanding that revenue is coming from.
Ratio Name

2014

2013

Industry Average

93.64%

93.33%

3.94%

Profit Margin

34%

43%

1.0%

Return on Equity

1.00

0.72

Cash flow on Assets

0.07

0.08

Cash return on Assets

0.16

0.18

Revenue per share

Overall we see that IBM was more profitable than the industry. Revenue per share is extremely
high. The profit margin is high, but a decrease from last year shows us that IBM isnt making as
much profits off of sales. Cash flow and return on assets is a little low, but still solid. IBM looks
good in the profitability section; IBM is making a lot of money.
Efficiency

We now know that IBM can make a profit, but how much of that profit is a profit? In this
section we will explore some ratios that tell us how efficient IBM is. I find it easier to look at the
ratio for this section first and then I will elaborate.
Ratio
Gross Margin Ratio
Total Asset turnover
Inventory turnover
Days Sales in

2014
50%
79%
4.22
16.08

2013
49%
78%
4.79
12.13

Industry Average
80.1%

Inventory
Receivables turnover
Return on Assets
Day sales Uncollected

24.92
0.16
276

30.45
0.18
232

5.89
1.6

20.79

Frist we see that the gross margin ratio which is very low, comparted to the industry
average, what does that mean though? This ratio measures the profitability of each net sale
dollar above the cost of goods sold and is computed as gross profit divided by net sales (891).
The next ratio is total asset turnover, which analyzes IBMs ability to generate sales form its
assets. The Inventory turnover is the amount of times the company sold its entire inventory in a
year. Which goes with days sales in inventory that tells how many days it took IBM to sell their
whole inventory. The ratio might look little, but when a company the size of IBM that can sell a
huge amount of inventory four times in a year is pretty damn good. IBM had a decrease in the
return on assets ratio, the means IBM made less money off divided by their assets. The days sales
uncollected is easy, it tell the investors how many days it took to collect on a sale. Over all IBM
isnt very efficient in my option.

Stock Holder/Investor Relations

Now that we have taken a glance at all the other sections, this is where we can see what
IBM does for you. Why? This section explores the market value of the stock and the dividends
that they can pay out to the shareholders, which if you do invest this would concern you.
One of the most important ratios to an investor is the dividend payout, which states the
annual dividends payout to common shareholders, in other words, the total amount of earnings
set aside for dividends for the year. The divided yield is a measurement of that money set aside
that is compared to the market price or the current price per share of the stock. Then the dividend
per share breaks down the value of dividends to each what each individual share of stock gets.
The Book value per share is a ratio that measures how much money IBM would have remaining
for common shareholders after all assets have been liquidated, and all debts have been payed.
Then the cash flow ratios are a measurement of the amount of cash available form operating
activities after paying for planned investments and after paying dividends to shareholders (828).

Ratio
Dividend Payout
Divided Yield
Dividends Per Share
Book Value per Share
Price to Free Cash

2014
87%
21.33%
4.25
12.12
9.42

2013
85%
20.3%
3.71
21.75
11.31

Industry Average
42.1%
2.2%

flow
Cash flow Per Share
17.02
16.59
30.2
IBM treats there shareholder very good, the dividend payout is very high, as well as the
divided yield. This means that IBM puts a lot of money towards the shareholders, which is good
for investing because you can receive dividends. The book value per share had a big decrease,
which is not good, but that is to be expected because of the great deal of debts IBM has. And the
cash flow per share ratio is lower than average.

Now that we have analyzed IBM, would you invest your money into them? After all the
decision is not up to me, does IBMs positives out way there negatives?

Works Citied
Miller-Nobles, Tracie L., Brenda Mattison, Ella Mae Matsumura, and Charles T. Horngren.
Horngren's Accounting: The Financial Chapters. N.p.: Pearson, n.d. Print.