Accounting 1120~Financial Accounting

Analysis Paper

Rachael Christensen
11/28/2017
I am writing to compare and contrast IBMs profitability, long term and short term risk,

efficiency, collections, asset management, cash management and stockholder/investor

relations. I will be using last years and this years ratios as well as the industrys averages to be

able to come evaluate these areas.

Short Term Risk

First I will be evaluating IBMs risk in terms of short term ability to pay their debt and

obligations. To be able to evaluate their risk I used the following three ratios, current ratio, acid

test ratio and cash ratio.

Using the current ratio shows for every dollar of debts or obligations coming due within the

next year. IBM has $1.21 worth of resources available to pay per dollar of obligation, in

comparison to the previous year of $1.24. This is only a slight decrease from the previous year,

but still much lower than the industry average of $1.83.

Applying the acid test ratio, shows that IBM has enough liquid assets to meet any immediate

obligations. Currently IBM has $1.04 for every dollar of debt, were as the previous year they

had $1.07. Again IBM shows a slight decrease in liquid assets but not a significant change. The

industry average is $1.58 which is a bit higher, showing that IBM is a greater risk with their

ability to pay short term debt.

The cash ratio will show what their ability is to pay debts or obligation from cash and cash

equivalents. They only have $0.22 available per dollar, last year they had $0.23 available. The

industry average is $0.87 showing that IBM has a much lower ability to pay their debts with the
cash available. This shows that they would be a higher risk if they had to pay their debts with

cash.

As far as short term risk is considered overall IBM is riskier than the industry average, meaning

they arent as able to pay off their short term debts with their assets and cash making them a

riskier company.

Long Term Risk

Next we will look at IBMs ability to pay off long term debt. I will use the following three ratios:

debt ratio, debt to equity ratio, and times-interest-earned ratio.

Using the debt ratio, we are to see the amount of IBMs assets that are financed with debt, this

year it is at 84%, the previous year was at 87% which shows a slight decrease in financing. This

is still much higher than the industry average of 59%. Showing that IBM is in more long term

debt than the industry average.

Next we will will look at IBMs amount of debt compared to their assets they would be

considered risky at such a high ratio of 5.39 this year, although is is lower than last year of 6.66.

So it does show improvement but based solely on the ratio of debt to equity compared to the

industry average of 1.44 they would be considered much riskier.

Another area to consider when discussing risk is the ability to pay a companys interest

expense. In order to find this, we used the times-interest-earned ratio and find that IBM is

much higher than the industry average of 1.38. IBMs ability to pay interest expense is 20.58

this year, this is quite a bit lower than last year of 34.7. This shows that the company has

enough income to pay the interest expense come due.

Long term debt shows that although IBM is above the industry average for their debt and asset

compared to equity, they are still bringing in plenty of profit to pay off those long term debts.

Efficiency

Next we will look at the efficiency of IBM. In order to do this, we will use the following

formulas: Inventory turnover, days sales in inventory, asset turnover, accounts receivable

turnover, and cash flow to assets ratio.

First off using the inventory turnover and days sales in inventory we will see that IBMs turnover

rate is 4.23 this year and 3.79 the previous year, this is very low in comparison with the industry

average of 22.31. We can see this coordinates with the average number of days the inventory is

in the company that they are much higher than the average as well. They show this year the

average number of days the inventory was in stock was 86.29 days just slightly higher than last

year of 82. The industry average shows a days sales in inventory of 16.36. This shows that

they are keeping their inventory much longer than the industry average proving they are not as

efficient.

Next we will look at how efficient IBM is in collecting on their accounts as well as how long it

takes for them to receive their payments. Using the accounts receivable turnover ratio and the

days sales in receivables we will be able to find this. IBM shows a lower than average rate with

collecting on accounts, this year they had a rate of 2.77 only slightly higher than last year of

2.71. The industry average is 7.93 showing that IBM is not collecting as often on their accounts

as the industry average. The days it takes for them to collect on an account this year was

131.77 only a few days less than last year of 134.7. The industry average is 46 days. This shows

it takes a long time to collect on their accounts making them inefficient in their receivables.
Another way to test a companys efficiency is to use the asset turnover ratio. This will test the

ability to sell or use the company asset. The rate for IBM this year is 0.70 this is a slight

decrease from last years rate of 0.71. The industry average is at 0.81, this shows that the

competitor is more efficient at generating sales. We can also see from the cash flow to asset

ratio the efficiency of generating cash from its current activities. IBMs current year percentage

is 14.88% which only a very slight decrease from last year of 14.93% compared to the industry

average of 20.09% they arent a lot less efficient than the rest of the industry.

For overall efficiency it seems that IBM is less efficient than most of the industry, they have a

much longer turnover of inventory and it takes them much longer to collect on their accounts.

Profitability

We will see how profitable IBM is in comparison to their previous year, as well as their

competitors. We can do this with the gross profit percentage ratio, profit margin ratio, return

on assets, return on equity, and earnings per share ratio.

The gross profit shows how much profit is made after paying for the cost of the good. This year

IBM showed a 48% which is a slight decrease from last years 50%. This is quite a bit lower than

the industry average of 78.40%. This coincides with the profit margin ratio which shows how

much revenue was brought in. IBM had a 15% this year and a 16% last year which is quite a bit

lower than the industry average of 40%. We can also look at the numbers from the return on

assets ratio which shows how well it manages its resources to turn a profit. IBMs number for

this year is 11% only a little less than last year or 12%. These numbers are significantly lower

than the industry average of 72%.

When discussing profitability, we also need to look at the return on equity which shows how

much profit a company earned after taxes and whats available to the stock holders as far as

equity in the company. This year IBMs percentage was 72.35% which was lower than last years

at 99.78%. This is still significantly higher than the industry average of 1.82%. We can also see

with the earnings per share ratio how profitable the company has been for each of its common

stock shares, this year IBM was at 12.44 just slightly lower than last year of 13.66. They are

quite a bit higher than the industry average of 2.05.

As far as profitability it seems that in some areas like the amount available for stock holders as

well as the earnings per share they were above industry average. They could strengthen other

areas like improving their gross profit as well their return on assets.

Investor Relations

Investor relations will look at how well the investors are doing in the company and if they have

invested wisely. We will use the earnings per share, price to earnings, dividend yield, dividend

payout, and cash flow per share ratios to help determine this.

As stated in the previous section the earnings per share showed that IBM had more earnings

per share of their common stock than the industry average. The price to earnings ratio will

show us how the stock market values IBMs earnings per $1, their numbers this year were 0.02

and last year 0.01 so a very slight increase this is much lower than the industry average of

23.04. The investors can see how much they have earned annually from the dividend payout

yield ratio this year their number is 2.7% which is a bit higher than last year of 2.54, which is in

line with the industry average of 2.7%. We can also use the dividend payout ratio to see how

much of a dividend was paid per common share. IBMs number this year was 0.04 the same as
last year of 0.04. This is much lower than the industry average of 46.34. The last formula for

the investors is the cash flow per share, this is showing the amount of cash flow to the common

stock. IBM this year is 17.93 which is pretty close to last years number of 17.98. This is above

industry average of 3.08, which shows that there is more cash flow to investors than the

industry average. So like some of the other areas it looks like they have some strengths and

weaknesses as far as the investors are concerned.

Conclusion

IBM has some strong areas but it looks like they are pretty below industry averages in a lot of

the areas. They definitely have a longer turnover rate and longer collection times on their

accounts than most of the industry. They are also pretty risky when it comes to short term

payments but seem to do better with their long term risk. As far as investors are concerned,

IBMs stock prices are low as well as their dividend payouts. An investor may see more of a

return on their money with a different company.