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Financial Ratios Analysis of IBM 2005-2006 - Case Study Example

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1. Liquidity ratio analysis a. Current ratio 2005 2006 % of change Current Assets $45,661 $44,660 Current liabilities 35,152 40,091 Current ratio 1.299 1.114 -14.2417 b. Acid test ratio 2005 2006 % of change Current assets $45,661 $44,660 Inventory 2,841 2,810 Prepaid expenses 2,941 2,539 Ratio 1.134 0.981 -13.4920 There significant decrease in current ratio of 14.242 in 2006 due to the decrease in cash and significant increase in liability…
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Financial Ratios Analysis of IBM 2005-2006
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Download file to see previous pages There was also an inverse increase in current liability of $4,939 ($40,091 - $35,152 million) which adversely affected the company’s liquidity ratio. This decline also reflected in acid test ratio or the ability to settle obligation immediately as it also declined by 13.492. 2. Leverage ratios analysis a. Debt to-total-assets ratio (Total liabilities/total assets) 2005 2006 % of change Total debt $22,682 $22,641 Total assets 105,748 103,234 Ratio .687 .724 5.386 b. Debt-to-equity ratio 2005 2006 % of change Total debt $22,682 $22,641 Total equity 28,506 33,098 Ratio 2.195 2.621 19.40 c. Long-term debt-to-equity ratio 2005 2006 % of change Long-term debt 15,425 $13,780 Total equity 28,506 33,098 Ratio .466 .483 3.648 d. ...
Changes in liability decreased minimally but still, the increase in total assets helped drive debt to asset ratio up by 5.386 %. Since debt was almost constant in 2006, debt to equity ratio significantly went up when IBM registered a profit in the previous year, where portions of the net gain were retained as equity. 3. Activity ratio analysis a. Inventory turnover 2005 2006 % of change Net Sales 91,134 91,424 Inventory 2841 2840 Ratio 32.07 32.53 .01 b. Fixed assets turnover 2005 2006 % of change Net Sales 91,340 91,424 Net fixed assets 60,087 58,574 Ratio 1.517 1.561 2.900 c. Total assets turnover 2005 2006 % of change Net Sales $91,340 $91,424 Total Assets 105,748 103,234 Ratio .862 .886 2.784 d. Average collection period Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days (IBM, 2006 pg. 79). With regard to activity ratios, IBM did a good job of maintaining its level of inventory to 2841-2840 million despite the increase in sales in 2006 ($91,424 million). It only meant that IBM has a very good internal control and monitoring of its inventory. In sum, the activity ratio of IBM increased by 2.784 % which can be mainly attributed to its ability to maintain its inventory despite the increase in sales. With regard to collection period, IBM adopts “Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days” (IBM, 2006 pg. 79). 4. Profitability ratio analysis a. Gross profit margin 2005 2006 % of change Gross profit margin 36,532 38,295 Net Sales 91,134 91,424 Ratio .401 .419 4.488 b. Operating profit margin Operating profit margin 0.134 0.146 0.012 8.95522388% c. Net profit margin ratio 2005 2006 % of change Net profit after tax 79,940 94,920 Net Sales 91,340 ...Download file to see next pagesRead More
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