Ratio Analysis - Math Problem Example

Ratio analysis further simplifies the information and allows for a longitudinal and cross sectional analysis of an organization’s performance. I, in this paper, perform ratio analysis of IBM financial statements for the accounting period ending in the years 2010, 2011, and 2012, and discuss the computed ratios. Accounting ratios Ratio analysis compares different income statement and balance sheet items to determine liquidity, advantage, activity, profitability, and growth potentials. The following is a summary of applied formulae for computing different ratios. . The following table summarizes major ratios for the company over the three accounting periods based on the above formulae.

Table 1: Computed ratios for IBM for the years ended 2010, 2011, and 2012 Ratio 2010 2011 2012 Current ratio 1.18623342 1.2090307 1.13313467 Quick ratio 0.52857354 1.02281414 0.98846991 Debt to total assets ratio 0.79574622 0.82620048 0.84075562 Debt to equity ratio 3.91733923 4.77688946 5.31436903 Long term debt to equity ratio 0.94793023 1.13501837 1.27720042 Times interest earned 52.5951087 50.0997567 46.7167756 Inventory turnover 21.982449 22.5220151 22.2077018 Fixed assets turnover 1.52856006 1.

52461644 1.49766409 Total assets turnover 0.88028417 0.85774652 0.87664097 Gross profit margin 46.07% 46.89% 48.13% Operating profit margin 18.17% 18.97% 19.56% Net profit margin 14.85% 14.83% 15.89 Return on assets 17.06% 17.69% 17.99% Return on share holder’s equity 83.98% 102.25% 113.70% (Data source: IBM annual reports for the years 2010 and 2011) Discussion The company enjoys high liquidity ratios and this indicates its ability to meet its short-term objectives. Its current ratios are good and indicate stability as they fluctuate above one over the three years.

Even though the acid-test ratio was low in the year 2010, it improved in 2011 and the slight decrease in 2012 does not induce much threat. IBM however has significantly high ‘leverage’ ratios and this indicates its vulnerability to risks of credit capital. Even though the debt to total equity ratio is bellow 1, its increasing trend over the three years indicate that it will soon reach and even surpass one, a factors that will further expose the organization to sustainability risks. Long-term debt to equity ratio was fair in the year 2010 but also has an