BARAL

DP Baral
Shauna Hatfield
Account: 1120
April 28, 2017
Ratio Analysis

To analysis ratios, mathematic formulas are very useful. It is a business practiced to study and
summarize the financial position of the company in different areas investment like short-term
risk, long term risk, profitability, efficiency and investment attraction/stockholder relations. This
type of ratio analysis help with the managements of the company to evaluate and make future
decisions, they get help to be careful in all the areas, not just fall in the risk. Such type of ratio
analysis support the study of the company financial position and in many other areas. This type
of ratio analysis helps the management to realize economic scale and efficient use of resources
within and outside of the company. Here, we have ratios of the IBM company 2014 & 2013
comparative analysis and an industry average comparison for all ratios of IBM.
RISK
1. Short-term Risk
Ratios Name 2014 2013 Results Industry Results
Average
Ratio
Current Ratio 1.25 1.28 2014<2013, low is in 1.86 IBM is in risk
risk comparing to Industry
average & 2013.
Acid-test 1.07 1.10 2014<2013, low is in 1.57 IBM is in risk
Ratio risk comparing to Industry
average & 2013.

In 2014, the IBM Company had $1.25 of resources currently available to pay for every $1 of
debt or other obligations coming due within the next year. But comparing to 2013 within the
company and industry average IBM is low in the current ratio which has more risk for future. In
the other hand, under Quick Ratio IBM had 1.07 of available resources to pay all obligations
coming within the next year. IBM in 2014 is in the risk side comparing to the industrys average
and within the company in 2013. Because both the Current and Acid-test ratios were going down
which means, IBM is, definitely, in risk of the short-term risk.
2. Long-term Risk
Here we mainly focused on long term risk or solvency. There are three (3) ratios under solvency
and they help the company to analyze the companys ability to pay all long-term liabilities in the
coming future.
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Ratios Name 2014 2013 Results Industrial Results

Debt Ratio 89.8% 81.8% 2014>2013, low is 59.3% IBM has higher ratio which
better, higher is risk is worse than industry
average.
Debt to 8.8 4.5 2014>2013, low is 1.46 IBM has higher than
Equity Ratio better industry average. Low
result is better
Time Interest 34.6 50.4 2014<2013, higher is 2.9 IBM has higher than
Earning better, low is risk industry average. Which is
Ratio good

In 2014, the IBM was more on the risky side for solvency analysis as debt ratio, where the
company was paying $0.90 from debt finance in every $1 from equity finance. Comparing to the
industry average IBM was way too much in risk at the long-term future. Debt to Equity section
of financial analysis IBM has more in equity finance than the industrys average which was in
the risk factor in the long run. Time Interest Earning Ratio of IBM was better than the industrys
average, which means IBM was better able to pay the interest expenses in the time of the
solvency risk. But, by the overall study of all three ratios in the IMB it was in risk for long-term
liability.

II. Profitability
Under the profitability analysis we have 5 different ratio measurement. They are Profit margin,
Gross Profit Percent, Return on Assets, Return on Equity and Earnings per Share. Most of them
are analysis under percentage basis.

Ratios Name 2014 2013 Results Industrial Results

Profit margin 13.0% 16.8% 2014<2013, low, which is 1.0% IBM is better than
low profitability Industry average.
Gross Profit 50.0% 49.5% 2014>2013, higher is 80.1% Industry average is
percentage better better than IBM.
Return on 13.43 17.02 2014<2013, low return on 1.6% IBM is better than
Assets % % assets 2014, not better. industry average.
Return on 5.4% 7.3% 2014<2013, low return on 3.94% IBM is better than
Equity equity, not good result industry average
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Earnings per 11.97 15.06 2014<2013, low is not 2.66 IBM is better than
share good result. industry average

On the profit margin side IBM had a net sale which was better than the industrial average. Which
shows that every $1 sale in the IBM can make profit of 0.13 or 13% whereas the industry
average has 0.01 or 1% of the profit margin. Industry average had a higher result than IBM in
Gross Profit percentage. Return on asset IBM had a net income $0.13 in every $1 of average
assets in the company where as industry average had only $0.16 in every $1 of average assets.
Return on equity IBM had more returns than the industry average. IBM had 5.4% of return from
average common equity whereas the industry average had 3.94% of return from every Average
Common Equity, so IBM had better return from the average of common equity. EPS had a
higher, and better result whereas IBM looked lower in 2014 than 2013, but higher than industry
average, which is better. Overall IBM was better in industry average because IBM had a better
industry average, more than 4 ratios, so profitability of IBM is good.

III. Efficiency
Here efficiency means ability to meet standard return from the company products. We have 4
main headings under efficiency, which are Inventory Management, Receivable/collection, Assets
Management and Cash Flow Management. We are analyzing IBM 2014 with 2013 and industry
average efficiency.
A. Inventory Management
Ratios Name 2014 2013 Results Industrials Results

Inventory 4.22 4.78 2014<2013, low is 17.56 Industry average is

Turnover not better result better than IBM
Days sales in 86.5 76.4 2014>2013, low is 20.79 Industry average is
Inventory better better than IBM

Inventory Turnover is higher is better. In 2014, IBM had a low Inventory Turnover than 2013 and
industry average. IBM had a poor result on Inventory Turnover in 2014. Comparing to 2013 and
industry average IBM in 2014 had poor result on Days Sales in Inventory too. In 2014 IBM had
a poor result in both Inventory Turnover and Days Sales in Inventory. So, IBM in 2014 had low
efficiency in Inventory Management.

B. Receivables/Collections
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Ratios Name 2014 2013 Results Industrial Results

Receivables 2.91 3.44 2014<2013, low is 5.89 Industry average is

Turnover not better result better than IBM
Days Sales 125.43 107.04 2014>2013, high is 62 Industry average is
in not better result better than IBM
Receivables
Receivables/collections is because of efficiency of credit sale and collection efficiency. It was
depending upon how quick the company sales its products and collects the cash. Higher
receivable and low Days Sales in receivable was better result. In 2013 IBM turnover it
receivable 3.44 time in a year but 2014 had a low result which was 2.91 times only. Whereas
industry average receivables turnover is higher than IBM, so IBM had not good result in
Collection Turnover. In 2014 IBM had 125 days worth of sales in it average receivable and in
2013 it had low days like 107 days worth of credit sales average receivable. But industry
average had only 62 days worth of average receivable. Overall, result in Receivable Turnover
and Day Sales in Receivable IBM was poor efficient result in 2014.
C. Assets Managements
Ratios Name 2014 2013 Results Industrial Results

Asset 0.29 0.32 2014<2013, low is 1.6 Industry average is

turnover not better result better than IBM
In 2014 IBM was poor in Asset turnover than in 2013. Comparing to industry average with IBM,
IBM had poor result in Assets Management. Overall IBM was not efficiency/profitability in
assets management.
D. Cash Flow Management
Ratios Name 2014 2013 Results Industrial Results

Free Cash 9602 6102 2014>2013, higher is

Flow better
Cash Flow to 0.14 0.14 2014=2013, higher is
Assets better result

Cash Flow 17.02 16.59 2014>2013, higher is 30.2 Industry average is

per Share better result better than IBM

Cash flow management efficiency is about how the cash is utilized for collection, operating
activities, cash amount paid for long-term loan and cash paid for dividend. Its main goal is to
balance overall amount. Higher balance remain was better result. IBM was poor than industry
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average in cash per share. In cash flow management IBM was not efficient compare to industry
average.
IV. Investment Attraction/ Stockholder Relations/Owner
Under stockholder relations we have 4 ratios. They are Earning per share, price-earnings ratio,
dividend yield and dividend payout.
Ratios Name 2014 2013 Results Industria Results
l
Earnings per Share 11.97 15.06 2014<2013, low is 2.66 IBM is better than
poor result industry average.
Price/Earnings Ratio 13.48 12.56 2014>2013, higher 19.3 Industry average is
is better result better than IBM
Dividend Yield 2.6% 2.4% 2014>2013, higher 2.2% IBM is better than
is better industry average

Dividend Payout 36% 26% 2014>2013, higher 42.1% Industry average is

is better result better than IBM

The most important thing of financial ratios evolution is reflected on Earning-per share. EPS has
collected net income minus preferred dividends divided by weighted average number of shares
outstanding. The bigger the $ per share is better result. Comparing the result of 2013 and 2014 of
IBM company, there is poor result in 2014 where as comparing to industry average IBM had
better result both 2013 and 2014. Price/earnings ratio gives us mix study. In 2014 IBM looked
better than 2013 but it looked like IBM had poor result with industry average. But $13.48 is
better with market places on $1 of company earning. IBM result is better on dividend yield in
2014 comparing to the result of 2013 and industry average. In dividend payout IBM had better
result than 2013 whereas it was way low than industry average. Overall result of stockholder
relations was comparatively the same. IBM was almost equal to industry average. IBM had a
better result in Earnings per share and dividend yield but had poor result in price/earnings ratio
and dividend payout.
Comparing of 2014, 2013, and industry average ratios IBM is better positioned in financial
starter. All the ratios are up and down but also not in worse situation. This type of ratio analysis
give the correct financial position of the company where it helps to compare with other similar
companies financial position with its own company. Management get support to study the
companys economic stander from such comparatives analysis of the financial ratio. Overall
management of the company are responsible for better or low/weak result of the companys
financial strength. All the above results of the ratio analysis, IBM maintained an effective work
in the financial position.