Financial Statements of IBM: An Evaluation - Report Example

IBM – Company Analysis IBM – Company Analysis Introduction IBM is one of the leading IT companies in the world as well as system integrators. In addition to this, it is famous for the other related services that it is offering to the millions of people around the world. These services include business process outsourcing, Oracle consulting services and related software services. In addition to this, IBM is involved in providing business consultancy including application innovation, business analytics, smarter commerce, and business strategy. IBM was founded in 1911; since its inception it is well known for the quality of its product and services. Its head office is situated in New York and it is operating with more than 430,000 employees around the world. Financial Analysis Liquidity Ratios Current ratio There is a small change in the current ratio since last year, and it has increased by only 0.15 times as compared to 2012. This increases due to the reason that current assets have increased since last year, specially there is an increase in the commercial financing receivable from $7.750 million to $8,541 in 2013, and similar increase was noticed in client loan receivable by $459million. Total current assets increase $1,917 since last year. On the other hand, current liabilities declined due to the decrease in short term debt because the current portion of the long-term debt is only $3,854 million as compared to $5,593 million in 2012. Benefit and compensations also declined by almost 18% due to the changes in estimate. This net increase in current asset and decline in the current liabilities resulted in improved current ratio. Quick Ratio It is one of the important ratios computed as quick assets over current liabilities. For the computation of the quick assets only inventory has been deducted from the current assets. There is a 23 million Dollars increase in the inventories as compared to last year. Quick ratio in 2013 is 1.22 times which 1.08 times last year was. This increase is due to the declined in the current liabilities as well as net increase in the quick assets. Efficiency Ratios Inventory turnover Inventory turnover in 2013 is 22.18 times as compared to 23.70 times in 2012. This drop is due to the reason that, the cost of sales for the year has declined by 5.46%. This low cost of sales was the result of decline in revenue by 4.55% during 2013. As mentioned in the annual report, that decrease in the revenue is due to the adverse movement in the currency as well as decline in revenue streams such as Global Technology Services and Systems and Technology. Fixed assets turnover Fixed assets turnover has declined from 7.47 times in 2012 to 7.22 times in 2013. Reasons for the decline in the revenue were mention above, and the fixed assets have been declined due to depreciation of $149 million charged to them and the rest of the increase in the fixed assets is because of the disposal and additions to them. Both revenue and fixed assets have declined, but the rate of decline in the fixed asset is higher than revenue so the turnover has declined ultimately. Total assets turnover Total assets turnover has dropped due to the reason that, there is an increase in the total assets by a net of $7,010 million in 2013, especially increase in the goodwill is $1,937 million and prepaid pension assets increased by $4,606. There was a negative growth in the revenue and this heavy increase in total assets resulted in net decline of total assets turnover from 088 to 0.79 times. Account receivable turnover There is a little change in the receivable turnover and it has gone down by 0.27 times since 2012. The reason for this change is the heavy decline of $4,756 million in revenue during the year. On the other hand, there is a net decline of $ 202 millions in receivable. Rate of decline in revenue is much higher than the decline in receivable which resulted in dropping receivable turnover. Financial leverage Debt to total assets Total debt to total assets is 31% in the current year and almost 28% in 2012. This increase is due to the fact that the company has increased the long-term debt by $ 8,768 million during the year, but there is also a repayment of the short-term debt by $2,319 million. There is a net increase of 5.8% in the total assets, but the total debt has increased rapidly and ultimately increasing the relative share of debt in financing the total assets. Long term Debt to equity Debt to equity ratio has increased due to the increase in the long-term debt as mention above. On the other hand equity has also increased from $ 18,985 million to $22,929 million due to the decline in the accumulated loss. There is an extraordinary increase in the debt since 2012 increasing the portion of the debt to finance the operations of the company. This is the reason that debt to equity ratio has increased by 0.16 times. Debt to equity There is no major change as far as total debt to equity ratio is concerned. The factor behind this consistency is that long-term debt has increased, but the company has also repaid the some of the portion of short-term debt. The effect of changes in both debt and equity cancel each other, so there is a remote change of 0.02 in this ratio as compared to last year. Coverage ratio The company has reasonably high coverage ratio in both years. Interest expense is $402 million and $459 millions in 2013 and 2012 respectively. On the other hand, there is a much greater profit of $19,926 million in 2012 and $22,360 million in 2013, from operations, ultimately resulting in 49.57 and 48.71 times coverage ratio in 2013 and 2012. Profitability Gross profit ratio There is a minor increase of half percentage in the gross profit ratio. This increase was due to the cost savings in the “Sales” segment of the revenue, whose cost of sales was 34% in 2012 whereas; in 2013 it is only 30.5%. Operating profit Margin There is a slight decrease in the operating profit margin from 21.4% in 2012 to 20% in 2013. The reason for this change is that marketing expenses have risen by almost 1% during 2013. Whereas decline in the revenue and operating profit is at similar rate as compared to last year. Net Profit Ratio Similar is the situation as far as net ratio is concerned. There is a net decline of 0.64% since last years. Factors that affected the gross profit and operating profit are same. In addition to this, there is a little effect of interests and taxes paid in both years. Return on assets Return on assets has declined by 0.87 in 2013. The company is operating with even a higher level of total assets than last year and there is a little increase in the net profit due to the lesser tax expense on low profit as compared to last year. Increase in the total assets is higher so there is a net decline in return. Return on equity There is 15.57% drop in the return on equity as compared to last year. Net profit for the year has increased by $121 million and total increase in the equity in $3,944 million. This extraordinary increase in equity results in sharp decline of more than 15% in return on equity in 2013. Price earnings ratio PE ratio is 12.45 in 2013 as compared to 13.1 in 2012. This decline is due to the change in stock price since last year from 191.5$ to 187.5$. EPS has also increased by 0.53$ in 2013 but, the net effect was the decline in the PE ratio since there is a bigger change in the stock price. (2013 IBM Annual Report, 2014) Trend Analysis Consolidated Statement of Earnings Sales revenue declined by 4.55% in 2013 and 2% in 2012. There is a certain drop in some of the revenue streams, but adverse movement in the currency heavily affected the sales revenue since 2011. There is also a decrease in the cost of sales, which is in line with the decrease in the revenue, because a significant portion of cost of sales is variable. Cost of sales is 51.37% of the revenue in 2013 and 53.11% in 2011. IBM is consistently incurring marketing expenses through promotional camping in order to enhance its revenue, but there is a little drop of 0.22% in the selling expense in 2013, which is reasonable. Selling and admin expenses are equal to 23.56% of the revenue in 2013 and 22.07% in 2011. Net income dropped by 0.73% in 2013 due to the lesser sales revenue as compared to last year’s. In contrast to this, it was 5% higher in 2012 than 2011. Balance Sheet Short term financing receivables decreased by 15% in 2013 which 26.47% higher in 2012. Reason behind this inconsistency is the continuous changes in the client loan receivable. Short-term receivables are 15.68% of the total assets in the current year. In 2011, they contributed 14.52% of total assets. Short term other account receivables declined in 2012 by 11.87% and increase by 1.01% in 2012 due to the decline in the outstanding balances. Long-term loan receivables increased by 18.89% in 2012 due to the increase in the client loans receivables net investment in sales type and direct financing lease. Value of the prepaid pension expenses depends on the estimate given by the expert. At the end of each year so this heavy changes of 487.41% is due to the increase in the estimate as well as addition of the current year employer’s contribution. Compensations and benefits decreased by 18% in the current year and 7% in the previous year. Changes in the balance of this account are the result of changes in estimates at the year end. Compensations and benefits are only 3% of the total equity and liabilities in 2013. Similar is the position in the last two years. There are major changes in 2 years as far as the balance of other liabilities is concerned. There is 15.44% drop in 2012 and 30.59% increase in 2013. The reason behind third change in the increase in the balance of income tax reserve and differed tax and the decrease in 2012 was resulted from the decline in the income tax resave. As a result of these change total assets have raised by 5.88% in 2013 in comparison to 2.39% in 2012. Total liabilities have increased by 3.06% in the current year and 4.19% in 2012. Reference (2014). 2013 IBM Annual Report. New York: International Business Machines Corporation. Appendices Financial Ratio Analysis   2013 2012 LIQUIDITY     Current Ratio 1.28 1.13 Quick Ratio 1.22 1.08       ASSET MANAGEMENT     Inventory Turnover 22.18 23.70 Fixed Assets Turnover 7.22 7.47 Total Assets Turnover 0.79 0.88 Accounts Receivable Turnover 9.53 9.80 Average Collection Period 38.29 37.26       FINANCIAL LEVERAGE     Debt to Total Assets 0.82 0.84 Debt to Equity 4.50 5.28 Long-term Debt to Equity 1.43 1.27 Coverage Ratio 49.57 48.71       PROFITABILITY     Gross Profit Margin 48.63% 48.13% Operating Profit Margin 19.98% 21.40% Net Profit Margin 16.52% 15.89% Return on Assets 13.06% 13.93% Return on Equity 71.89% 87.46% Earnings per Share 15.06 14.53 Price-earnings ratio 12.45 13.18 Vertical Analysis Consolidated Balance Sheet 2013 2012 2011 $ million $ million Assets Current Assets Cash and cash equivalents 10,716 8.49% 10,412 8.73% 10.24% 11922 Marketable securities 350 0.28% 717 0.60% 0.00% 0 Notes and accounts receivable - trade 10,465 8.29% 10,667 8.95% 9.60% 11179 Short-term financing receivables 19,787 15.68% 18,038 15.13% 14.52% 16901 Other accounts receivable 1,584 1.25% 1,873 1.57% 1.27% 1481 Inventories 2,310 1.83% 2,287 1.92% 2.23% 2595 Deferred taxes 1,651 1.31% 1,415 1.19% 1.38% 1601 Prepaid expenses and other current assets 4,488 3.56% 4,024 3.38% 4.51% 5249 Total current assets 51,351 40.68% 49,433 41.47% 43.74% 50928 Property, plant and equipment 40,475 32.07% 40,501 33.97% 34.46% 40124 Less: Accumulated depreciation 26,654 21.12% 26,505 22.23% 22.54% 26241 Property, plant and equipment - net 13,821 10.95% 13,996 11.74% 11.92% 13883 Long-term financing receivables 12,755 10.11% 12,812 10.75% 9.26% 10776 Prepaid pension assets 5,551 4.40% 945 0.79% 2.44% 2843 Deferred taxes 3,051 2.42% 3,973 3.33% 3.01% 3503 Goodwill 31,184 24.71% 29,247 24.53% 22.51% 26213 Intangible assets 0 net 3,871 3.07% 3,787 3.18% 2.91% 3392 Investments and sundry assets 4,639 3.68% 5,021 4.21% 4.20% 4895 Total long term assets 74,872 59.32% 69,781 58.53% 56.26% 65,505 Total assets 126,223 100.00% 119,214 100.00% 100.00% 116433 Current liabilities Taxes 4,633 3.67% 4,948 4.15% 3313 Short-term debt 6,862 5.44% 9,181 7.70% 7.27% 8463 Accounts payable 7,461 5.91% 7,952 6.67% 7.31% 8517 Compensation and benefits 3,893 3.08% 4,745 3.98% 4.38% 5099 Deferred income 12,557 9.95% 11,952 10.03% 10.48% 12197 Other accrued expenses and liabilities 4,748 3.76% 4,847 4.07% 3.89% 4535 Total current liabilities 40,154 31.81% 43,625 36.59% 36.18% 42123 Long term debt 32,856 26.03% 24,088 20.21% 19.63% 22857 Retirement and no pension postretirement benefit obligations 16,242 12.87% 20,418 17.13% 15.78% 18374 Deferred income 4,108 3.25% 4,491 3.77% 3.30% 3847 Other liabilities 9,934 7.87% 7,607 6.38% 7.73% 8996 Total liabilities 103,294 81.83% 100,229 84.07% 82.62% 96,197 Contingencies and commitments Equity IBM stockholders equity Common stock 51,594 40.88% 50,110 42.03% 41.34% 48130 Retained earnings 130,042 103.03% 117,641 98.68% 90.06% 104857.4 Treasury stock at cost (137,242) -108.73% (123,131) -103.29% -95.30% -110963 Accumulated other comprehensive income/(loss) (21,602) -17.11% (25,759) -21.61% -18.80% -21885 Total IBM stockholders equity 22,792 18.06% 18,861 15.82% 17.30% 20139 Noncontrolling interests 137 0.11% 124 0.10% 0.08% 97 Total equity 22,929 18.17% 18,985 15.93% 17.38% 20,236 Total liabilities and equity 126,223 100.00% 119,214 100.00% 100.00% 116,433 Consolidated Income Statement 2013 2012 2011 $ million $ million $ million Net sales 99,751 100.00% 104,507 100.00% 100.00% 106916 Cost of goods sold 51,246 51.37% 54,209 51.87% 53.11% 56778 Gross profit 48,505 48.63% 50,298 48.13% 46.89% 50138 Selling, general and administrative expenses 23,502 23.56% 23,553 22.54% 22.07% 23595 Royalty income, net 6,226 6.24% 6,302 6.03% 5.85% 6258 Amortization of intangible assets (822) -0.82% (1,074) -1.03% -1.04% -1108 Impairment of goodwill (327) -0.33% (843) -0.81% -0.02% -20 Income (loss) from operations 19,926 19.98% 22,360 21.40% 20.03% 21,413 Other expense, net: 0.00% 0.00% 0.00% Interest expense 402 0.40% 459 0.44% 0.38% 411 Income (loss) before income taxes 19,524 19.57% 21,902 20.96% 19.64% 21,003 Provision for income taxes 3,041 3.05% 5,298 5.07% 4.81% 5148 Net income (loss) 16,483 16.52% 16,604 15.89% 14.83% 15,855 Horizontal Analysis Consolidated Balance Sheet 12/31/2013 12/31/2012 12/31/2011 $ million % $ million % Assets Current Assets Cash and cash equivalents 10,716 2.92% 10,412 -12.67% 11922 Marketable securities 350 -51.19% 717 0.00% 0 Notes and accounts receivable - trade 10,465 -1.89% 10,667 -4.58% 11179 Short-term financing receivables 19,787 9.70% 18,038 6.73% 16901 Other accounts receivable 1,584 -15.43% 1,873 26.47% 1481 Inventories 2,310 1.01% 2,287 -11.87% 2595 Deferred taxes 1,651 16.68% 1,415 -11.62% 1601 Prepaid expenses and other current assets 4,488 11.53% 4,024 -23.34% 5249 Total current assets 51,351 3.88% 49,433 -2.94% 50928 Property, plant and equipment 40,475 -0.06% 40,501 0.94% 40124 Less: Accumulated depreciation 26,654 0.56% 26,505 1.01% 26241 Property, plant and equipment - net 13,821 -1.25% 13,996 0.81% 13883 Long-term financing receivables 12,755 -0.44% 12,812 18.89% 10776 Prepaid pension assets 5,551 487.41% 945 -66.76% 2843 Deferred taxes 3,051 -23.21% 3,973 13.42% 3503 Goodwill 31,184 6.62% 29,247 11.57% 26213 Intangible assets 0 net 3,871 2.22% 3,787 11.65% 3392 Investments and sundry assets 4,639 -7.61% 5,021 2.57% 4895 Total long term assets 74,872 7.30% 69,781 6.53% 65,505 Total assets 126,223 5.88% 119,214 2.39% 116433 Current liabilities Taxes 4,633 -6.37% 4,948 49.35% 3313 Short-term debt 6,862 -25.26% 9,181 8.48% 8463 Accounts payable 7,461 -6.17% 7,952 -6.63% 8517 Compensation and benefits 3,893 -17.96% 4,745 -6.94% 5099 Deferred income 12,557 5.06% 11,952 -2.01% 12197 Other accrued expenses and liabilities 4,748 -2.04% 4,847 6.88% 4535 Total current liabilities 40,154 -7.96% 43,625 3.57% 42123 Long term debt 32,856 36.40% 24,088 5.39% 22857 Retirement and nonpension postretirement benefit obligations 16,242 -20.45% 20,418 11.12% 18374 Deferred income 4,108 -8.53% 4,491 16.74% 3847 Other liabilities 9,934 30.59% 7,607 -15.44% 8996 Total liabilities 103,294 3.06% 100,229 4.19% 96,197 Contigencies and commitments Equity IBM stockholders equity Common stock 51,594 2.96% 50,110 4.11% 48130 Retained earnings 130,042 10.54% 117,641 12.19% 104857.4 Treasury stock at cost (137,242) 11.46% (123,131) 10.97% -110963 Accumulated other comprehensive income/(loss) (21,602) -16.14% (25,759) 17.70% -21885 Total IBM stockholders equity 22,792 20.84% 18,861 -6.35% 20139 Noncontrolling interests 137 10.48% 124 27.31% 97 Total equity 22,929 20.77% 18,985 -6.18% 20,236 Total liabilities and equity 126,223 5.88% 119,214 2.39% 116,433 Consolidated Income Statement   2013   2012   2011   $ million % $ million %   Net sales 99,751 -4.55% 104,507 -2% 106916 Cost of goods sold 51,246 -5.47% 54,209 -5% 56778 Gross profit 48,505 -3.56% 50,298 0% 50138 Selling, general and administrative expenses 23,502 -0.22% 23,553 0% 23595 Royalty income, net 6,226 -1.21% 6,302 1% 6258 Amortization of intangible assets -822 -23.46% -1,074 -3% -1108 Impairment of goodwill -327 -61.21% -843 4115% -20 Income (loss) from operations 19,926 -10.89% 22,360 4% 21,413 Other expense, net:           Interest expense 402 -12.42% 459 12% 411 Income (loss) before income taxes 19,524 -10.86% 21,902 4% 21,003 Provision for income taxes 3,041 -42.60% 5,298 3% 5148 Net income (loss) 16,483 -0.73% 16,604 5% 15,855 Appendix 2 HP Financial Statements Income Statement Period Ending 31-Oct-13 31-Oct-12 31-Oct-11 Total Revenue 112298 120357 127245 Cost of Revenue 86380 92385 97418 Gross Profit 25918 27972 29827 Operating Expenses Research Development 3135 3399 3254 Selling General and Administrative 13267 13500 13577 Non Recurring 1012 20346 1712 Others 1373 1784 1607 Total Operating Expenses 18787 39029 20150 Operating Income or Loss 7131 -11057 9677 Income from Continuing Operations Total Other Income/Expenses Net - - - Earnings Before Interest And Taxes 6510 -11933 8982 Interest Expense - - - Income Before Tax 6510 -11933 8982 Income Tax Expense 1397 717 1908 Minority Interest - - - Net Income From Continuing Ops 5113 -12650 7074 Non-recurring Events Discontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - - - Other Items - - - Net Income 5113 -12650 7074 Preferred Stock And Other Adjustments - - - Net Income Applicable To Common Shares 5113 -12650 7074 Balance Sheet Period Ending 42 41 41 Assets Current Assets Cash And Cash Equivalents 12163 11301 8043 Short Term Investments - - - Net Receivables 19020 19659 21386 Inventory 6046 6317 7490 Other Current Assets 13135 13360 14102 Total Current Assets 50364 50637 51021 Long Term Investments 9556 10593 10755 Property Plant and Equipment 11463 11954 12292 Goodwill 31124 31069 44551 Intangible Assets 3169 4515 10898 Accumulated Amortization - - - Other Assets - - - Deferred Long Term Asset Charges - - - Total Assets 105676 108768 129517 Liabilities Current Liabilities Accounts Payable 32164 31754 34256 Short/Current Long Term Debt 5979 6647 8083 Other Current Liabilities 7378 8265 8103 Total Current Liabilities 45521 46666 50442 Long Term Debt 16608 21789 22551 Other Liabilities 15891 17480 17520 Deferred Long Term Liability Charges - - - Minority Interest 387 397 379 Negative Goodwill - - - Total Liabilities 78407 86332 90892 Stockholders Equity Misc Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 19 20 20 Retained Earnings 25563 21521 35266 Treasury Stock - - - Capital Surplus 5465 6454 6837 Other Stockholder Equity -3778 -5559 -3498 Total Stockholder Equity 27269 22436 38625 Net Tangible Assets -7024 -13148 -16824 Read More