Norma Garcia

Professor Hatfield

ACCT 1120

29 November 2017

IBM Financial Statement Analysis for 2016

I will analyze the risk, efficiency, profitability, and investor relations of IBM. I will compare the

current year with the prior year, evaluating each of these areas to determine their performance and assess

the changes. I will then compare the current year to the industry average to understand how the company

measures up to the competition. These two comparisons will be used to give an overall picture of IBM

for the year 2016.

In the risk category, there is both short-term risk and long-term risk. The three ratios that will be

used to analyze short-term risk are the following: Current ratio, Acid-test ratio, and Cash ratio. The 2016

Current ratio for IBM is 1.21, it was 1.24 last year, and the industry average is 1.83. This ratio shows that

for every $1 of debt that needs to be paid within the next year, the company has $1.21 worth of resources

currently available to pay it off. This number has slightly decreased from last year and when compared to

the industry average, IBM is only slightly more risky. The Acid-test ratio is $1.04 for this year, it was $1.07

last year, and the industry average is $1.58. This ratio shows that IBM has $1.04 in cash to pay for every

$1 of debt, in the event the debts needed to be paid off right away. This number has slightly decreased

from last year making it riskier and because this number is significantly less than the industry average, it

indicates that IBM is significantly more risky than the competition. The Cash ratio is 0.22 for this year and

remains unchanged from the 0.22 last year. The industry average is 0.87. This ration shows that IBM has

$0.22 in cash to pay for every $1 of debt that needs to be paid within the next year. This number shows

that IBM is being consistent, but their number is significantly less than the industry average, which means
they are more risky than the competition. Overall, IBM is significantly more risky than the competition in

the short-term risk category.

The three ratios that will be used to analyze long-term risk are the following: Debt ratio, Debt-to-

equity ratio, and Times-interest-earned ratio. The Debt ratio for the current year is 84%, it was 87% last

year, and the industry average is 59%. This ratio shows that for every $1 of an asset or resource IBM has,

it would take $0.84 to pay off their debts. This number has slightly improved from last year, making the

company slightly less risky. However, the industry average is only 59%, therefore, IBM is significantly

more risky than the competition. The Debt-to-equity ratio for the current year is 5.39, it was 6.6 last year,

and the industry average is 1.44. This ratio indicates that for every $1 that IBM stockholders own, $5.39

of that would be needed to pay off IBMs debt. This number has slightly improved from last year but is

still significantly higher than the industry average. Therefore, IBM is significantly more risky than the

competition. The Times-interest-earned ratio for the current year is 20.56, it was 34.70 last year, and the

industry average is 1.38. This ratio shows that IBM can pay its interest expense 20.56 times. This number

has decreased from last year but is still significantly higher than the industry average. This indicates that

IBM is significantly less risky than the competition. Overall, IBM is significantly more risky than their

competition in the long-term risk category. IBM has slightly decreased both its short-term and long-term

risk from last year, but they are still significantly riskier than their competition.

The following ratios will be used to analyze the companys efficiency at managing their assets.

The six ratios are Inventory turnover ratio, Days sales in inventory ratio, Accounts receivable turnover

ratio, Days sales in receivables ratio, Asset turnover ratio, and Cash flow to assets ratio. The Inventory

turnover ratio for the current year is 4.23, it was 3.79 last year, and the industry average is 22.31. This

ratio indicates that IBM sells its inventory 4.23 times in a year. This number has slightly improved from

last year, but when compared to the industry average, IBM is still significantly less efficient at selling its

inventory. The Days sales in inventory ratio for the current year is 86.29, it was 96.31 last year, and the
industry average is 16.36. This ratio shows that IBM holds its inventory an average of 86.29 days. This

number has slightly improved from last year. However, IBM is still significantly less efficient than the

competition at managing its inventory. The Accounts receivable turnover ratio for the current year is 2.77,

it was 2.71 last year, and the industry average is 7.93. This ratio shows that in a year, IBM collects or

receives payment on their average receivable accounts 2.77 times. This number remain relatively

unchanged from last year and is significantly lower than the industry average. This indicates that IBM is

significantly less efficient at managing its receivable accounts. The Days sales in receivables ratio for the

current year is 131.77, it was 134.69 last year, and the industry average is 46.00. This ratio shows that it

takes IBM an average of 131.77 days to collect on its receivable accounts. This number has slightly

improved from last year but remains significantly higher than the industry average. This indicates that

IBM is significantly less efficient at collecting on its receivables accounts. The asset turnover ratio for the

current year is 0.70, it was 0.72 last year, and the industry average is 0.81. This ratio shows that for every

$1 of asset IBM has, it has generated $0.70 in sales revenue. This number has remained relatively

unchanged from last year and is only slightly lower than the industry average. When compared to the

competition, IBM is only slightly less efficient at using its assets to generate sales revenue. The Cash flow

to assets ratio for the current year is 15%, it remains unchanged from last year, and the industry average

is 20.09%. This ratio shows that for every $1 of assets that IBM owns, they generate $0.15 in cash for

operations. Although this number has remained the same as last year, in comparison with the

competition, IBM is slightly less efficient at using their assets to generate cash for operations. Overall,

IBM has slightly improved in their efficiency at managing their assets but remain significantly less efficient

than their competition.

The following ratios will be used to analyze IBMs profitability. There are five ratios: Gross profit

percentage ratio, Profit margin ratio, Return on assets ratio, Return on equity ratio, and Earnings per share

ratio. The Groff profit percentage ratio for the current year is 48%, it was 50% last year, and the industry
average is 78.40%. This ratio shows that for every $1 IBM earns in sales, it has $0.48 left over to cover

any remaining expenses. This number has a relatively slight decrease from last year. When compared to

the industry average, IBM remains significantly less profitable. The profit margin ratio for the current year

is 15%, it was 16% last year, and the industry average is 40%. This ratio shows that IBM generates $0.15

in net income, or profit, for every $1 in sales revenue. This number is slightly less than last year and

continues to be significantly less than the industry average. This indicates that IBM is significantly less

profitable at generating net income through sales. The Return on assets ratio for the current year is 10%,

it was 12% last year, and the industry average is 72%. This ratio shows that for every $1 of assets, IBM

generates $0.10 in profit. This number has slightly decreased from last year. When compared to the

industry average, IBM remains significantly less profitable in using its assets to generate a profit. The

Return on equity ratio for the current year is 73%, it was 101% last year, and the industry average is 1.82%.

This ratio shows that for every $1 in stockholders equity, IBM generates $0.73 in profit. This number has

decreased from last year. However, when compared to the competition, IBM is significantly more

profitable in generating income using stockholders equity. The Earnings per share ratio for the current

year is 12.44, it was 13.66 last year, and the industry average is 2.05. This ratio shows that for every share

of stock, IBM generates $12.44 in net income. This number had slightly decreased from last year but

remains significantly higher than the industry average. This indicates that IBM is significantly more

profitable in generating net income for every share of stock. Overall, IBM has improved in some areas

and has remained profitable in one area but continues to be significantly less profitable than the

competition.

The following ratios will be used to analyze IBMs investor relations. The five ratios are: Earnings

per share ratio, Price-Earnings ratio, Dividend yield, Dividend payout, and Cash flow per share. The

Earnings per share ratio is also an investor relations measurement. It was previously mentioned. The

Price-Earnings ratio for the current year is 13.34, it was 10.07 last year, and the industry average is 23.04.
This ratio shows that for every $1 in earnings, investors are willing to pay $13.34. This number has

increased from last year. However, it remains significantly lower than the industry average. This indicates

that IBM gives a significantly lower return on investment when compared to the competition. The

Dividend yield for the current year is 3.35%, it was 3.68% last year, and the industry average is 2.70%. This

ratio shows that investors can expect to receive $0.335 in dividends for every $1 they have invested in

IBM stock. This number has slightly decreased from last year but remains slightly greater than the industry

average. When compared with the competition, IBM gives investors a slightly greater dividend per share

of stock. The dividend payout for the current year is 44%, it was 37% last year, and the industry average

is 46.34%. This ratio shows that 44% of IBMs earnings were paid to stockholders. This number has

increased from last year but remains slightly lower than the industry average. As an investment, IBM is

comparable to other companies in the industry, when analyzing how much of their earnings are given to

the stockholders as dividends. The Cash flow per share for the current year is 17.93, it was 17.61 last year,

and the industry average is 3.08. This ratio shows that for every $1 in stockholders equity, IBM generates

$17.93 in cash. This number has slightly improved from last year and continues to be significantly greater

than the industry average. When compared to the competition, IBM is generating significantly more cash

using stockholders equity. Although, IBM has had slight improvements, it still provides a significantly less

overall return on investment.

Overall, IBM is needs improvement in each of the areas analyzed; risk, efficiency, profitability, and

investor relations. IBM has slightly decreased both its short-term and long-term risk when compared to

last year, but they are still significantly riskier than the industry average. IBM has slightly improved their

efficiency at managing their assets, but they remain significantly less efficient when compared to the

industry average. IBM has either improved or maintained its profitability, but they continue to be

significantly less profitable than other companies in the industry. When evaluating IBM as an investment,
they show slight improvements from last year, but they still provide a significantly less overall return on

investment. Again, IBM needs improvement when compared to its competition.