Running head: Financial Statement Analysis Part 2

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Amy Carpenter
Financial Statement Analysis Part 2
Financial Accounting 1120
December 4, 2015

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Financial Statement Analysis Part 2
Comparing IBM to Previous Years and Industry Standards
Financial reports shared with a companys shareholders and potential investors determine
whether or not the company is improving or being left in the dust. Comparing to previous years
and the industry standards we can learn several things about IBM. Firstly, the company is more
profitable when compared from previous years to itself, however IBM was still below industry
average for the year. Also, the risk of the company has increased. While IBM was able to cover
their interest expenses for the year, the company still struggles to pay its obligations without
relying too much on their inventory. As far as how well the company manages their assets,
inventory and collectibles, its performance rates fairly well, but there is some room for
improvement. Lastly, we will analyze investor and stockholder relations, which improved
throughout the year. While fewer dividends were issued, they were given out at a higher price,
and shares were selling for more money. Following is a more in depth analysis of profitability,
risk, efficiency, and stockholder/investor relations for IBM.
Profitability
IBM uses many ratios and equations to compute how well they are doing to generate a
profit. One of such ratios is the gross profit margin. In 2013, IBM had a gross profit of 49.5%
and in 2014 the gross profit margin was recorded at 50%. Looking closer at this means that IBM
was more profitable in 2014 than in 2013 with more gross income being earned than the cost it
takes to manufacture or purchase the goods which were sold. During the year 2014, the industry
standard was set at 80.1%. Looking at that new information tells us that while IBM was more

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profitable in their gross profit in 2014, but they still are struggling in comparison to the industry
standard to generate more gross profit.
Another ratio that was analyzed was IBMs overall profit margin after all expenses and
taxes were paid on the income earned. In 2013 the company recorded a profit margin of 16.76%
and in 2014 the profit margin 12.93%. This means that in 2014 the profitability of the company
declined and we made only about 13 cents per dollar of services or goods sold. While the
standard in the industry was low as 1% we see that the company was still more profitable than in
most other companies in the industry.
When examined how IBM used their assets to generate an income, we see that IBM has
suffered a decline. In 2013 the company had a return on assets of 14% whereas the company in
2014 declined their return to 10%. Although the company was not as profitable in 2014 as in
2013, they were still above the industry standard of 1%.
When IBM posted that their return on equity was in 2013 at 0.72 and in 2014 was at 1.0
tells the reader that for every dollar that the company gains from sales and services, the amount
is returned as equity to the stockholders. This is significantly lower than the standard industry
rate of 3.94 which tells us that IBM has a hard time changing the income coming in to
stockholder equity within the company.
When looking at the overall performance of IBM in relation to industry standards, IBMs
performance in regards to profitability is below average. When comparing IBMs performance in
past years, however, we can see that the company is making great strides in becoming more
profitable than in previous years, but there are still some areas to improve upon.
Risk

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Now that we know how well IBM was able to generate a profit in 2014, we need to look
at how the company is doing to reduce the risk. The first thing to look at is how many assets
were purchased by borrowing from a bank or another organization. By analyzing the debt ratio
we can see that in 2013, IBM purchased 81.83% of assets, which consist of land, equipment, or
buildings, by borrowing money. In 2014 IBM purchased 87.78% of assets by borrowing.
Compared to the standard of 59.3%, we can see that IBM is purchasing more by borrowing more
money thus concluding that IBM is becoming more of a risky company.
Next, we will look at the current ratio which helps us determine how well IBM will be
able to pay their loans that are due within the year. In 2013 IBM recorded a 1.28 and in 2014 it
was calculated at 1.25. Looking at the numbers from year to year we can see that IBM is less
able to pay those loans back with their assets. The standard to compare IBM to the rest of the
industry is 1.86 and even then we can still see that IBM is more risky than the industry in
general.
What if IBM didnt have any inventory left? How well will the company be able to pay
for its loans? In 2013 it was recorded at 1.07 and in 2014 it was calculated at 1.02. Again, IBM is
more risky than the previous years at paying back loans and other payments that must be made
before the year ends. IBM compared to the rest of the industry, which is stated at 1.86, is again,
lacking in its ability to pay those loans back.
While still looking at the risk level, we look into how much IBM relied on shareholders
equity to pay for the loans and other various payments that become due at the end of the year. In
2013 we calculated using the debt to equity ratio that 4.50 and in 2014 it was 8.78. This means
that for every dollar owed, we used $8.78 to purchase assets. Compared to the normal rate of

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1.46, we can see that IBM is relying heavily on the shareholders equity by issuing stock to pay
for new assets.
How well is IBM able to pay their interest expense? We can see that in 2013, IBM
reported using the times-interest earned amount at a 50.37, while in 2014 it was calculated at
34.59. These numbers indicate how well the company can pay their obligations and loans before
the year end, and as we can see that ability has declined over the last year. In comparison
however, IBM is doing excellent compared the industry standard of 2.9
Although IBM is able to pay its interest expenses, but IBM is still significantly risky in
paying those obligations without relying on its inventory. While all companies must purchase
equipment, land or buildings by borrowing, in the last few years, IBM is mostly financing those
new assets with credit.
Efficiency
Next, we analyze how efficiently IBM was operating in 2014. There are several things to
consider when testing for efficiency. The efficiency of managing a companys assets, inventory
and collection of money that is owed.
By using the asset turnover ratio, we can see how much money we make in revenues per
dollar of assets owned by the company. In 2013 asset turnover was reported at .80 and in 2014 it
was calculated at 0.76. Keeping in mind that the standard is at 1.6, we can safely determine that
IBM is below average in efficiently generating revenue.
Another point of efficiently lies within IBMs inventory. By using the days sales in
inventory ratio, we can see how many days an item stays in inventory. In 2013 it was calculated
to be 19.97 days and in 2014 it was stated to be 17.37 days, therefore IBM became more efficient

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in managing their inventory. Another test used to check for efficiency in inventory is the
inventory turnover ratio, which calculates how many times the inventory was sold or used during
the year. In 2013 it was recorded at 21.61 times and in 2014, 21.02. Looking at the latest ratio,
we can see that while the management of the inventory was more efficient, there were fewer
sales in 2014 than in 2013.
In addition to selling inventory, we can also look at how well the company was at issuing
credit collecting money from customer. Accounts receivable turnover evaluates how efficiently
IBM was at issuing and collecting credit. In 2013 we see that IBM had a ratio of 3.15 and in
2014 it was calculated at 2.91. Knowing that we had a lower number in 2014 suggests that IBM
was not as successful at collecting from customers and other owing parties. Days sales in
suggests that there are 4.33 days worth of uncollected sales in 2013 and in 2014 there was 4.43
days. Knowing that the standard was 20.79, we can safely say that they are efficiently collecting
money, however they have slightly become less efficient from their previous years performance.
While IBM was efficient in managing their inventory, they struggled with managing
assets and uncollected monies. We can also safely say that IBM is below average when compared
the other companies in the industry.
Investor/Stockholder Relations
If you were looking into investing with IBM, or already hold stock with the company,
how well has the company been able to pay dividends from earnings? We can see that by
computing the dividend payout percentage. In 2013 IBM was able to use 24.57% of earnings for
dividends, and in 2014 it increased to 35.35%. The industry average for dividend payouts is
42.1%, so while IBMs ability to pay its stockholders dividends, it is still below the industry

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average. By using the dividend yield equation, we can see that stockholders are receiving 1.98%
of each dollar earned in 2013 and in 2014 it was recorded at 2.65%. The average for dividend
yield for 2014 was set at 2.2% which means that IBM was able to pay more dividends per share
of stock. In addition, the selling price per share has increased from $15.42 in 2013 to $15.68 in
2014.
Using the price-earnings ratio, we compare the price the shares are being sold at to the
actual price of the shares. The results in 2013 were 12.45, and in 2014 it was measured at 13.4.
While the average across the industry was set at 19.3 we can see that it below average but has
increased from the previous year. Basically, this means that an investor would need to invest
$13.40 per one dollar of earnings back in 2014.
Lastly, we examine how much cash was provided per share of stock. In 2013 we
calculated that $0.0175 of cash came in from daily activities per share of stock, and in 2014 there
was $0.0189. While the average in 2014 was $30.20 we can see that there must be something
wrong in how IBM was accounting for the cash coming into the company from completing daily
processes and that while there was a slight increase over the year, it is significantly lower than
normal.
To reiterate, the shareholders received fewer dividends, however they totaled for a greater
amount than the previous year. There was also an increase in the price per shares as well. There
is a glaring problem though; cash coming in from daily operations, when compared to the price
of each share is practically non-existent. There seems is a huge problem in tracking where the
cash coming in and going out during daily operations. IBM needs to fix this problem

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immediately and be able to show correctly how much cash coming in or going out per share of
stock there is.
Conclusion
Throughout the year, we learned that IBM has a few issues with paying back lenders
without leaning heavily on their inventory thusly, leading us to the conclusion that IBMs risk
has definitely increased. In addition, there is the case of the almost no cash coming in from daily
operations going to the shareholders. However, there seems to be a lot of good going on as well.
Profitability within the company increased although IBM is still below average, and the
management of assets and inventory has been changed for the better. There is still a lot of work
that IBM can do to make efficiency in collecting money owed by customers and other debtors
though. Overall, IBM has made some great strides forward in some areas, and in other taken a
few steps back. IBM has seen a pretty positive year in the industry, and hopefully, it will
continue to improve over the next few years.