Running Head: IBM ACCOUNTING ANALYSIS PROJECT

IBM Accounting Analysis Project

Juliana Ivanova
Salt Lake Community College

IBM ACCOUNTING ANALYSIS PROJECT

International Business Machines Corporation (IBM) is a billion-dollar computer

hardware company founded in 1911 with headquarters in New York. As the business has
expanded, they have kept the extensive amount of information in the annual report records free
for the world to view and see how much goes in and out of the company, who is involved and an
idea of what its like to be an accountant. For this project, I compared the results (to see if they
did better or worse than previous years) from the years 2013 and 2014 to the average combined
results of other industries, in ideas such as profitability, stockholder relations, and subcategories
in efficiency and risk.
Profitability:
Profitability is the ability for a business to obtain a benefit when the amount of revenue
(earnings from delivering services/goods to customers) exceeds the amount of expenses. In
accounting, there are a few ratios that calculate how well a company is performing in different
areas. The following ratios under this category will let us know how well IBM did throughout
2013 and 2014.
Earnings Per Share:
During 2014, IBMs earnings per share (EPS) was $11.96 whereas the previous year it
was $15.06. EPS is the reporting of net income (calculated from revenues minus expenses) a
company has at the end of an accounting period, divided by the average number of common
stock outstanding. This means the issued stock is in the hands of the stockholder, who owns
stock in the company. Although there was a drop during the comparison of the two years, IBM
was well above the industry average of $2.66 and could probably drop down a couple of dollars
without much consequence. For example, Apple Inc. EPS dropped $.60, but currently holds a
$105.08 which is considerably well above IBM, and dropping .57% isnt going to hurt them. If
the trend continues each month for years to come, then there will be problems (Apple).

IBM ACCOUNTING ANALYSIS PROJECT

Return on Equity:
Equity is described as what is left over after the company has paid off its liabilities, or
debt thats owed to creditors, another name for someone who has loaned the company money.
Return on equity is calculated by net income minus preferred dividends all over the average
common stockholders equity. Preferred dividends is a sum of money received and paid for by
the company to the shareholders, which is similar to that of common stock mentioned above in
EPS, but has better advantages for stockholders if the company decides to liquidate (to get rid of)
and go out of business. Often times, most companies like IBM dont have preferred dividends
therefore you move onto the next step of finding the average of Common Stockholders Equity
by using the findings in 2014 and 2013 (divided by two) to find the average for 2014. In order to
find the average for 2013, you use the same idea instead with the year 2012. IBMs return on
equity during 2013 was 69%, improving over the course of the year to 79%, completely
surpassing the industry average of 3.94%. What this means is, for every $1 the stockholder
invests in, IBM gets $.79 profit returned back to them.
Revenue Per Share:
Revenue Per Share (RPS) has a similar calculation method to that of EPS. You take the
amount of revenue over the average number of shares outstanding for the given year. (Revenue
can include accounts like rent revenue, sales revenue or even service revenue.) The end results
let the company know well they did at producing sales. During 2013, IBM produced revenue per
share of 93.33 and 93.64 during 2014. Usually the greater the ratio the better, indicating the
company is more active.
Profit Margin Ratio:
The profit margin ratio shows us how much net income is earned on every $1 of net sales
(Miller-Noble, pg 894). Net sales is the amount of sales the company has earned after deducting

IBM ACCOUNTING ANALYSIS PROJECT

accounts like returns, allowances and discounts. These accounts are defined the exact way you
would expect them and there isnt too much else to be said. Net income divided by net sales gave
IBM a 17% profit margin in 2013 and 13% margin in 2014. Compared to the industry
average of 1%, IBM is generating a high profit margin in order to earn a greater profit.
Return on Assets:
Return on assets (ROA) measures how profitable a company is with their assets by net
income divided by the average total assets. Assets are either tangible or intangible items the
company owns. For example, things like buildings, equipment, cash, office supplies, or accounts
receivable (receiving cash from customers on services you have performed). To find the average
total assets, you use the same idea as the return on equity method, but instead you add up all of
the assets and average them, instead of using just one account. IBM measured ROA of 13% in
2013 and 10% in 2014. In order to know how well the company did, its best to compare these
percentages to the industry average of 1.6% to get a better idea of where they stand. In this case,
IBM produces more profit for every $1, than the industry average. Even though there may have
been a slight decline, IBM is still currently producing well above average.
Profitability Conclusion:
IBM was well above the industry average for all of the profitability ratios with given
industry averages. Although the company was successful in this category it doesnt mean the
company is successful as a whole. There are other groups to consider before making a final
judgement on how well IBMs performance is.
Stockholder/Investor Relations:
Stockholders purchase stock in a company in hopes of earning revenue once they decide
to sell the stock. There are a few ways selling your stock could go, it could result in a gain or a
loss, or you could receive dividends from the company.

IBM ACCOUNTING ANALYSIS PROJECT

Dividend Payout:
This ratio has to do with annual dividend declared per common share outstanding divided
by EPS. This measures the amount of earnings paid annually to the common shareholders as cash
dividends. IBMs dividend payout ratios were 25.6% in 2013 and 35.9% in 2014 are both less
than the industry average of 42.1%. There could be a reason behind this result, IBM may still be
a fairly new company and needs to retain its earnings for expansion or growth or they are
completely struggling to manage their company. For 2014, the annual cash dividends were
35.9% of the earnings. The investor would need a greater outcome for the following years in
order for IBM to stay competitive (Miller-Noble, pg 898).
Book Value Per Share:
Book value is the original amount of an item minus accumulated depreciation, or the
amount the item lost value over the usage of a period of time. Therefore if you decide to buy a
car for $20,000 and sell it after 5 years, it may have depreciated $5,000 and you could only get
$15,000 off of it. To calculate the book value per share you take stockholders equity minus
preferred stock and put it all over total common shares outstanding. Preferred stock is another
name for a stock with more advantages than common stock such as having liquidity; if the
company ever decides to close up and sell all they have you can convert certain accounts into
cash. IBM produced $21.75 in 2013 and almost half the amount in 2014 at $12.12 book value per
share. This amount is the dollar amount remaining for shareholders after all assets are liquidated
and all debts are paid (Book).
Dividends Per Share:
Dividends per share can be calculated by the sum of all the dividends paid out during the
year dividend by the average number of common shares outstanding. If you havent noticed by
now, all of the per share denominators are reported the same way, all you need to worry about

IBM ACCOUNTING ANALYSIS PROJECT

is what goes on top of the equation. During 2013, IBM reported a dividend per share of $3.85,
and $4.3 in 2014. Dividends are a kind of profit for the shareholder, having an increasing
dividend per share is a sign of growth in the company.
Dividend Yield:
Dividend Yield is a ratio that deals with the dividends per share ratio from above divided
by market price per share. Market price is the value the share is currently being sold for on the
market. The industry average of 2.2% falls right into place with IBMs dividend yield for 2013 at
2.1% and 2014 for 2.7%. Investors who spent an average amount of $991 during 2014, can
expect to receive 2.7% of the investment in the form of cash dividends.
Price/ Earnings Ratio:
Price/ Earnings can be abbreviated as P/E, measures the value of stock price to the
amount of its earnings. To find your results, you need to find the market price per share of
common stock over your EPS. IBM fell below the industry average of 19.3 with 13.4 in 2014
and 12.5 in 2013. IBM is currently selling 13.4 times one years earnings and would be preferred
to continually increase in order to be in line with the rest of the industry.
Stockholder/Investor Relations: Conclusion
IBM seemed to teeter back and forth with the success of investment in stock. Since some
of the ratios had positive impacts and the rest had negative, I would consider the company to stay
in a steady place and not earn too much revenue.
Efficiency:
In this group, there are subcategories in inventory, collections, asset management and
generating cash ratios which are all used to determine how well the company works and if the
amount they produce is enough to keep them a stable profitable company.
Inventory:

IBM ACCOUNTING ANALYSIS PROJECT

In this category, I will go over two ratios that measure the ability of IBM to sell
merchandise inventory. Merchandise inventory is best described as merchandise the company
sells to the customers.
Inventory Turnover:
Inventory turnover measures the amount of times a company sells its average
merchandise inventory during a year. We start with the cost of goods sold (the cost of
merchandise inventory the business has sold to its customers) over the average merchandise
inventory for the year. To find the average inventory, you would combine both 2013 and 2014
(divided by two) to find the 2014 average and combine 2012 to 2013 to find the average for
2013. Having a high turnover rate means the company is capable of selling merchandise
inventory with ease. In this case, the industry average came out to be 17.56 and the 2014
turnover was 4.05 times a year and 2013 turnover was 4.79. These results show IBM struggling
to sell merchandise inventory to its customers and is a place the company needs to improve.
Days Sales in Inventory:
This ratio is based off of inventory turnover which was previously talked about and
makes calculations a lot easier. Days sales in inventory measures the average number of days
merchandise inventory is held in storage. This ratio is a key measurement for inventory using
365 days divided by inventory turnover. IBM held their inventory for 76 days during 2013 and
90 days during 2014. The industry average was extremely low at 21 days. The reason you
wouldnt want to keep your inventory in storage units is because the amount of money you earn
is being put to use for insurance costs, taxes, fees, etc. the storage company may need.
Inventory: Conclusion
Overall, IBM needs to improve the way they handle their inventory. Each employee (no
matter how much authority) needs to be more efficient and work around the ratios for pros and

IBM ACCOUNTING ANALYSIS PROJECT

cons. Days in inventory is the first ratio I would personally look into if I were to improve IBM
because of how high the numbers were. Even though we are dealing with a billion dollar
company, I couldnt imagine what IBM could be saving if they were to reduce the amount of
days inventory was stored in containers and all of the savings went to benefit their employees.
Collections:
Collections is the process of collecting or recovering amounts owed to the company by
its customers for goods or services. There are three different ratios to show how well the
company performed on receiving the amounts owed:
Accounts Receivable Turnover Ratio:
Accounts receivable turnover ratio has to do with net sales divided by the average net
accounts receivable. To average the accounts receivable or A/R, you take the beginning balance
for the year added to the ending balance of the year and divide it by two. IBM had a A/R
turnover of 9.4 in 2013 and 10.2 in 2014, almost double the industry average of 5.89. On
average, IBM collects receivables 10.2 times in a year.
Days Sales in Receivables:
Days sales in Receivables has to do with the average amount of days it takes to collect
receivables from customers. In order to understand this ratio, we must be familiar with the A/R
turnover ratio from above. To calculate this ratio you take 365 days and divide it by the A/R
turnover ratio to receive the average amount of days. During 2013, IBM had an average of 39
days and an average of 36 days in 2014 compared to 62 days with the industry average. With this
ratio, you want your companys results to be as low as possible, otherwise your company could
suffer (Miller-Noble, pg 503).
Asset Turnover:
Asset turnover ratio measures the amount of net sales divided by the average total amount

IBM ACCOUNTING ANALYSIS PROJECT

of assets. To compute the average total of assets, you take the beginning asset balance, add it to
the ending asset balance and divide the results by two. The results should give you an idea of
how well the company is using its assets to generate sales. For every dollar of assets invested,
IBM is producing $.76 of sales for 2014 and $.80 for 2013. The industry average is producing
$1.6 sales for every dollar of assets invested. In this case, a high ratio is desired and to improve
your companys turnover ratio you would need to increase the amount of sales, or limit the
average total of assets.
Collections: Conclusion
For the most part, IBM seems to be doing a good job recovering the amount of money the
customers owe them. I was amazed by the average amount of days it took customers to pay back
the company what they owed, coming in at almost half of what most other companies owed.
(With this entire project, I have noticed little things like this and I am shocked when the results
are shown next to the industry averages.)
Asset Management:
This category shows us how well the company manages their assets; including
organizing, disposing and maintaining the assets at the most cost-effective method.
Price to Free Cash Flow:
Price to free cash flow also known as P/FCF is the amount of cash available from
operating activities after paying back shareholders their portion. There are a few things to explain
here before going into the ratio. Firstly, operating activities has to do with a financial statement
in accounting called Statement of Cash Flows. Within this statement, there are three main
groups, operating activities, investing activities and financing activities. Second, cash flow is
described as cash payments and receipts of a business. P/FCF is calculated by taking the current
stock price multiplied by the shares outstanding divided all over the total amount of cash

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received from operating activities minus cash payments planned for investments in long-term
assets minus cash dividends. IBMs ratio was 12.62 for 2014 and 14.72 for 2013, compared to
the average of 30.2. Therefore, the company trades 12.62 times free cash flow.
Asset Management: Conclusion
The P/FCF for IBM during the two years had a slight decrease in the amount of times the
company traded per year. Although it may seem like IBMs stocks were well below the average,
there were a few top stocks listed on the website Seeking Alpha who had successful stocks even
though they had a low P/FCF (Top).
Generating Cash:
Generating cash deals with cash flow which is largely independent of the cash flows
generated from other assets. Without this group it would be extremely difficult to associate cash
flows with individual assets. There are two cash flow ratios to show how well the company
generates in comparison to its size.
Cash Flow to Assets:
Cash flow from assets lets us know how much cash flow is generated from the companys
assets. The higher the ratio, the more cash the company has available for restoration; whether
they decide to put it towards upgrades, or replacement areas is completely up to them. The cash
from operating activities divided by average total assets results in .138 in 2014 and .142 in 2013.
As long as you have cash moving around, your company is able to pay its bills.
Cash Flow Per Share:
Cash flow per share is calculated by taking operating activities cash flow subtracted from
preferred dividends all over common shares outstanding. These results allocate the companys
profitability and the ability to generate cash. IBM generated a cash flow of $17.02 per share in
2014 and $16.59 in 2013.

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Generating Cash: Conclusion

IBM is generating cash to keep the company continuing and growing. Both of the ratios
seemed to stay the same if not similar to what they were previous years.
Efficiency: Conclusion
Overall, IBM maintains the industry averages and keeps up with other competitors.
Efficiency is able to reduce the waste of resources as long as the company is willing to cooperate
and remove ideas that dont work.
Risk:
Risk is the uncertainty of how well a companys performance will be. Therefore, we split
the risk into two categories to test out. The first is short-term liquidity, the second is long-term
solvency. Each of these categories are further involved with ratios to prove just how risky the
performance of the company truly is.
Short-Term Liquidity:
Short-term liquidity has to do with how quickly the company can pay off their short-term
debt. This term also helps let us know how quickly a company might be able to sell their assets
in order to raise cash (Financial). The most common ratios are discussed down below.
Acid-Test Ratio:
The acid-test ratio shows us how well the company can pay off current liabilities.
Current is anything owed back to its creditors within the year of purchase. To compute this
ratio you take, cash including cash equivalents, short-term investments and net current
receivables divided by total current liabilities. Cash equivalents are investments you are able to
convert into cash during a period of three months. For example, investments in the U.S
government securities or a money-market, an interest based account that pays interest
depending on the market, would both qualify. Short-term investments are investments that have

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the easiest rate to be turned liquid or into cash and intend to sell in a year of less. Net current
receivables includes accounts like Accounts receivable, notes receivable and net of allowances.
IBMs acid-test ratio was a few points below the industry average of 1.57 receiving 1.02 in 2013
and .94 in 2014, this means IBM has $.94 of assets to for each $1.00 of current liabilities.
Current Ratio:
This ratio is considered one of the most used and I believe its one of the easiest to
remember. You take your total current assets for the year divided by the total current liabilities
for the year. Current assets include accounts like cash, accounts receivable, or office suppliesthese are all accounts that can be turned liquid into cash and sold before the 12 month mark is
up. Current liabilities include accounts like account payable, salaries payable, or unearned
revenue. To get rid of a current liability the process is a bit different, you need to either pay with
cash or have goods and services pay off the accounts all before the 12 month mark. A high ratio
indicates the company has enough current assets for the company to maintain normal operations.
In this case, the industry average of 1.86 was slightly above IBM during both 2014 (1.25) and
2013 (1.28). IBM isnt using their assets as effectively as most other companies are and would
need to look into reducing the long-term accounts for better spending.
Short-Term Liquidity: Conclusion
IBM needs to focus their efforts on making sure they have enough current assets in order
for the company to maintain normal operations. With both of the short-term ratios, IBM was a
few points below the average, but I dont believe this is something that could cause serious
damage. In the acid-test ratio example, IBM lost a few cents of profit because it all went to pay
off current liabilities. For reasons like this, the company needs to be smarter and reorganize the
way they are wired.
Long-Term Solvency:

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Solvency is when current assets exceed the amount of current liabilities and keep the
company profitable in order to meet the long-term financial obligations. The following three
ratios will let us know how successful the performance of the company is.
Debt Ratio:
The debt ratio measures the relationship between total liabilities over total assets. All you
do is add up the totals for both categories, without having to do any complicated work. If the
ratio equals 100%, then the assets are financed with a debt, the smaller the percentage gets, only
that small percentage is financed with a debt. In IBMs case, during 2013 they had 82% of assets
financed with a debt and in 2014 that number went up to 90%. This is extremely high compared
to the industry average of 59%. Since IBM is at such a high percentage, it poses a greater risk to
the company.
Debt to Equity Ratio:
This ratio has to do with the relationship between total liabilities divided by total equity.
This ratio measures financial leverage. If the ratio is greater than one, the company is financing
more assets than debts, if the ratio is less than one, the company is financing more assets with
equity than with debt (Miller-Noble, pg 747). The industry average of 1.46 shows us that most
companies finance their assets with debts. IBM falls into the same category with 4.75 in 2013
and 8.78 in 2014. IBM is seven times greater than the industry average and falls under an
extremely high risk.
Time-Interest-Earned Ratio:
Time-interest-earned ratio lets the company know where they stand on paying off interest
expense. The formula for this ratio is net income, income tax expense and interest expense all
added up and divided by interest expense. IBM had 24.8 for 2014 and 41 for 2013. The industry
average came to 2.9, therefore IBM did a spectacular job paying off their liabilities. The greater

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the ratio the better the companies perform with the status of their liabilities, and the smaller the
ratio, the worse off the companies are.
Long-Term Solvency: Conclusion
2/3rds of the ratios performed above showed IBMs need for improvement. With that being
said, I believe taking a closer look at their liabilities and limiting the amount of loans they have
would suggest a much more profitable company.
Risk: Conclusion
Both the short-term liquidity and long-term solvency ratios needed. Since the majority of
the ratios were below the industry average, I would qualify IBM as a company that poses risk
because they are losing money.
Concluding Paragraph:
I was surprise with how many favorable and unfavorable ratios the company had. Seeing
as IBM is a billion dollar company, I assumed almost all of the ratios favored both the company
and industry average (which, dont get me wrong, they really do), but there were also many
downfalls. In my mind, competitive companies like IBM were perfect and didnt have flaws
before realizing what truly goes into analyzing the information. Getting through this paper took
hours on end to research all of the information and make sure I had an accurate representation. I
now have a better understanding of how much work and effort is put into a successful
corporation. IBM had a great efficiency and profitability rate. Their next step would be to work
on their investments and risk factor to be well off in upcoming years.

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Works Cited

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Financial Analysis: Solvency Vs. Liquidity Ratios http://www.investopedia.com/articles
/investing/100313/financial-analysis-solvency-vs-liquidity-ratios.asp n.d. Web. 25 April
2016.
Miller-Nobles, Tracie, Brenda Mattison and Ella Matsumura. Accounting the Financial
Chapters. Microsoft Corporation in the United States. 2016, 2014, 2012. Print.
Top 30 Stocks With Low P/FCF Ratios, With Mutual Fund Buying http://seekingalpha.com
/article/272908-top-30-stocks-with-low-p-fcf-ratios-with-mutual-fund-buying 2 June
2011. Web. 24 April 2016.