ANALYSIS REPORT

Date: 28 Nov. 2016

To: Shauna Hatfield
From: Rembrand Paul Pardo
Subject: Financial Analysis of International Business Machines (IBM)

I. INTRODUCTION
This paper is designed to analyze the financial information and conclude the performance on the
multinational technology company International Business Machine (IBM) in 2016, which
manufactures and markets computer hardware, middleware and software, and offers hosting and
consulting services in areas ranging from mainframe computers to nanotechnology.
The document examines IBMs performance in the categories of risk, efficiency, profitability,
and stockholder/investor relation. All information has been pulled from IBMs 2016 and 2015
Year Annual Reports, accessible through their website (https://www.ibm.com/investor/). The
paper will address each of the categories separately and study the financial information
accordingly by using the ratio-analysis and comparing the current year (2016) to the prior year
(2015) and to the industry average.

II. CATEGORIES
A. SHORT AND LONG-TERM RISK

1) SHORT-TERM RISK

Current Ratio
The current ratio measures IBMs short-term debt-paying ability. IBM had a ratio of 1.21
in 2016, and for 2015, the company had a ratio of 1.24. The industry average ratio was
1.83.
The 2016 ratio tells us that for every dollar of debts or obligations coming due the next
year they have $ 1.21 worth of resources available to pay for its responsibilities. Their
current assets to maintain normal business operations has declined slightly compared to
the prior year, and it is significantly low compared to the industry average. This might
represent that IBMs liquidity is not strong, that is, the company is not using its assets
wisely.
Acid-test Ratio
The acid-test or quick ratio shows the ability of the company to use its near cash to retire
its current liabilities immediately. IBMs 2016 ratio was 1.04, 2015s was 1.07 and the
industry average was 1.58.
This tells us that for the year of 2016 the company had $1.04 of liquid assets available to
cover each $1.00 of current liabilities. This value is slightly lower than the prior year but
a lot lower than the industry value. The higher the quick ratio, the better the companys
ability to pay its current liabilities. Therefore, even though 2016s ratio is lower by 0.54
units than the industry average, it is still an acceptable value.

Cash Ratio
IBMs cash ratio for 2016 was 0.22, for the year of 2015 was 0.23, and for the industry
average was 0.87.
Between the years of 2016 and 2015 the ratio decreased but the difference was
insignificant, but 2016 IBMs ratio was fairly lower than the industry average ratio which
means the company cant easily fund its debt and is less liquid than the industry.

2) LONG-TERM RISK

Debt Ratio
The debt ratio indicates the percentage of the companys assets that are provided via debt.
IBMs ratio was 84.35 %, 86.95 % for the prior year, and 59.00 % for the industry
average.
IBM 2016s ratio is less than 1, which means the company is financing more assets with
its equity than with debt. The 84.35 % indicates that for every dollar of total assets IBM
would have to pay 0.8435 cents to debts. Although, 2016s ratio was a lot greater than the
industrial value, it was slightly lower than 2015s ratio. This represents that the company
is in a fairly low-risk position and that has improved from the prior year.

Debt-to-Equity Ratio
The debt-to-equity ratio calculates the financial leverage, the amount of debt that a
company uses to buy more assets. IBMs ratio was 5.39 for 2016, 6.66 for 2015, and the
industry average was 1.44.
2016s ratio was considerably lower than 2015s, but it is a lot greater than the industry
average. A high debt- to- equity ratio indicates that a company may not be able to
 generate enough cash to satisfy its debt obligations. Therefore, these values show that
IBM has improved in 2016 but it is still too high for the industry average.

Times Interest Earned Ratio

Times interest earned ratio is the ability of a company to honor its debt payments. For
2016, IBMs ratio was 20.56 times and for 2015 it was 34.70 times. The industry average
was 1.38 times. 2016s ratio was lower than the prior year, but it was considerably high
for the industry average ratio. A higher times interest earned ratio is favorable because it
means the company presents less of a risk to investors and creditors in terms of solvency.
Although, when times interest earned ratio is far above the industry average the company
might be heading to misappropriation of earnings. This means that the business could be
paying down debt obligations too quickly and not utilizing excess income
for reinvestment in the business via expansion or new projects.

Conclusion
Overall IBM is in a healthy position, although some work needs to be done to improve its
liquidity. As we have observed IBMs long-term risk needs less improvement than their
short-term risk. The company uses equity, but IBM might be using more debt for
financing than other companies in their industry. This could be an attempt to take
advantage of the debt tax shield.

B. ASSETS MANAGEMENT EFFICIENCY

Cash Flow to Assets Ratio

The cash flow to assets ratio relates IBMs ability to generate cash compared to its assets
size. IBMs cash flow ratio for 2016 was 14.88 %, only 0.05 % less than the prior year,
which was 14.93 %. The industry average ratio was 20.09 %, a value that is considerably
higher than the years 2016 and 2015. This suggests that compared to the industry, IBM is
not as efficient and is not generating as much cash.

Inventory Turnover Ratio

The inventory turnover ratio measures how quickly IBM can convert inventory to cash, in
order to pay off debt. For 2016, IBM had a ratio of 4.23 times. For 2015, the ratio was
3.79 times. The industry average was 22.31 times.
This tells us the number of times, on average, that IBMS inventory was sold during the
year. Their inventory turnover increased slightly in 2016, meaning that they are
improving their ability to pay debts based on inventory compared to the prior year.
However, their inventory turnover ratio is a lot slower than the industry average, which
indicates that they are not as adept as their competitors at selling their inventory quickly.

Days Sales in Inventory Ratio

The days sales in inventory ratio represents IBMs average number of days that the
company holds the inventory. IBMs 2016 ratio was 86.29 days, 2015 ratio was 96.31
days and the industry average ratio was 16.36 days.
The ratio decreased slightly from 2015 to 2016, but both years are extremely high for its
industry, which indicates that IBM has either strong sales and/or large discounts.

Accounts Receivable Turnover Ratio

Accounts receivable turnover ratio measures how many times, on average, accounts
receivable was collected during a year, that is, how efficiently IBM uses its assets. For
2016, IBM has a ratio of 2.77 times. For 2015, the ratio was 2.71 times. The industry
average was 7.93 times. Between the years of 2016 and 2015 there was barely a
difference of ratios. However, both ratios were too low for the average industry ratio.
This indicates that IBM cant efficiently collect funds from its credits issued in
comparison to its industry.

Days Sales in Receivables Ratio

The days sales in receivable ratio calculates the average number of days it takes to
collect an account receivable. 2016 IBMs ratio was 131.77 days, 2015s ratio was
134.69 days and the industry average ratio was 16.36 days.
Like in previews ratios, the difference between 2016 and 2015 is minimal, but both ratios
are extremely high compared to its industry. This could mean that IBM gives its
customers a longer time to pay than its industry average.

Assets Turnover Ratio

Assets turnover ratio shows how efficiently IBM is utilizing its assets in generating
revenue.
 IBMs 2016 ratio of 0.70 had a minimal difference to the prior year which was 0.72. Both
ratios were slightly lower than the industry average, 0.81, which indicates that IBM is
generating less net sales for each dollar of total assets invested.

Conclusion
Overall, we can observe by the ratios studied that IBM is not performing efficiently. The
company needs to improve generating cash and selling their inventory quickly.
Furthermore, IBM must improve the collection of funds from its credits issued, as well as
generating more net sales for each dollar of total assets invested.

C. PROFITABILITY

Gross Profit Percentage Ratio

Gross profit percentage ratio indicates how much profit a company makes after paying
off its cost of goods sold. IBMs ratio for the year of 2016 was 47.92 % only about 2 %
lower than the year 2015, which was 49.77 %. The industry average ratio was
significantly higher than 2016 and 2015s ratios, by almost the double, 78.40 %. The
gross profit margin ratio is an indicator of a companys financial health and earning
power. This indicates that IBM is under-pricing, and/or it needs to lower the cost of
merchandise inventory.

Profit Margin Ratio

The profit margin ratio is a percentage measure of each dollar of IBMs sales that results
in a gain or a loss, net income.
For 2016, IBM had a profit margin of 14.81 % and for 2015, it was 16.14 %. The
industry average was 0.40 %. The higher the profit margin the more sales dollars end up
as profit. We can see with all this that IBMs profit margin ratio from 2015 to 2016 is
slightly lower which represents less profit. Even though the ratio decreased a little,
2016s value was still a lot greater than the industry average which means more IBMs
sales dollars result in profits than its industry.

Return on Assets Ratio

IBMs return on assets ratio for the year of 2016 was 10.97 %, for 2015 was 11.99 %, and
the industry average ratio was 0.72 %. The difference between 2016 and 2015 was
 minimum, with a small decrease from 2015 to 2016. However, both ratios were
considerably high compared to the industry average. This represents the overall
profitability of IBM. IBMs 2016 ratio shows that the company had a high return on
assets, so they are still profitable in this regard.

Earnings per Share Ratio

The earnings per share ratio measures IBMs net income earned on each share of
common stock. For 2016, IBM earned net income of $ 12.44 on each share of common
stock. For 2015, they earned $ 13.66 per share. The industry average was $ 2.05 per
share. The ratio decreased slightly from the year studied and the year of 2015 which
means a diminution in profitability. Although, 2016 and 2015s ratios were very high,
almost by the tripled, compared to the industry average. This shows that IBM is highly
profitable and has more profits to distribute to its shareholders.

Conclusion
In general IBM is a profitable company with a fairly return on assets and ability to
generate money. However, IBM could lower the cost of merchandise inventory to
improve and become more profitable.

D. STOCKHOLDER/ INVESTOR RELATION

Price-Earnings Ratio
The price-earnings ratios measures the market price of each share of common stock to the
earnings per share. For 2016, the ratio was 13.34 times, just a little higher than the year
2015, which was 10.07 times. This represents that in 2016, each share of IBMs stock
sold for 13.34 times the amount that they earned on each share. The industry average
ratio was 23.04 times, which is a lot higher than the two years ratio. If the industry
average ratio comes from the same industry and with similar characteristics as IBMs we
can say it would be wise to invest in IBM.

Dividend Yield
Dividend yield represents the percentage of a stocks market value that is returned
annually as dividends to shareholders. For 2016 the dividend yield was 3.35 %, for 2015
was 3.68 % and the industry average was 2.70 %. The difference between 2016 and 2015
 was very insignificant, there was a decrease of only 0.33 %. Between the industry
average ratio and 2016s theres an increase of 0.65 % which is not a very big difference,
but it still represents that an investor who buys IBMs stocks can expect to receive more
percentage from the investment annually than he would from the industry.

Dividend Payout
Dividend payout measures the number of dividends, in percentage, paid to stockholders
as cash dividends annually. IBMs 2015 dividends payout was 37.12 %, which increased
in 2016 with a value of 7.57 %. This 2016s percentage, 44.69 %, approximates to the
industrial average ratio of 46.34 %, which means that IBM is retaining more of its profits
than its industry.

Cash Flow per Share

Cash flow per share represents the portion of IBMs cash flow allocated to each share of
common stock. IBMs 2016 ratio was $ 17.93 and for the year of 2015 was $ 17.61. The
industry average ratio was $ 3.08. Between 2016 and 2015 there is an insignificant
increase, but the difference between 2016s ratio and the industry average is extremely
high which is indicates that IBM is strong and sustainable in this regard.

Conclusion
Overall IBM is able to meet all their obligations which represents a good return to the
investors. This is a good feature of the company for future investors and possible
stockholders. However, IBM could improve on this category by getting a lower price for
the merchandise. We also observe that even though IBM is slightly below the industry
average level in some ratios it still pays a fair number of dividends and it retains more
funds for the company which represents a good relation between stockholders/investors
and the company.

III. CONCLUSION

For the most part, we have observed that IBM is a company with a fair liquidity, that needs to
improve its efficiency, that is profitable, and meets its obligations with their investors and
stockholders.
Although IBM is not performing inadequately related to its industry, IBM could improve some
aspects regarding to the categories we have studied in this paper. The company needs to improve the
collection of funds from its credits issued and generate more net sales from assets invested. The
company could also lower the cost of its merchandise to become more profitable and be more
attractive to future investors and stockholders.