Financial Analysis of IBM

International Business Machines (IBM) is a multinational corporation that operates in the information technology field. The firm manufactures and sells both soft and hardware for computers and also hosts computing services. This paper presents the analysis of IBM's 2017 financial performance in comparison to the average industry ratios. Based on the assessment, the paper will identify and propose recommendations for implementation to improve financial health.

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Gross margin is a measure of profitability that discloses how firms manage margins from purchase and sale of products since it shows the portion of the money that remains after accounting for the cost of goods sold (Rich, Jones, Mowen and Hansen, 2009). In 2017, IBM had a considerably high gross margin of 45.78% an indication of high profitability and a sufficient standard of performance of the business. IBM had a higher margin compared to the industry average of 41.12% which suggest the firm's performance was better than that of peers in the industry. The net profit margin reveals a company's overall efficiency in running the business, therefore, evaluates a firm's overall profitability after accounting for all expenses (Gibson, 2012). IBM recorded a net profit margin of 7.27% which was lower when compared to the industry average of 12.82%. Subsequently, IBM was less profitable compared to its peers in the computer hardware industry. The return on equity evaluates a firm's ability to earn profits from investments by shareholders hence it indicates the gain that stockholders receive on their shareholding (Peterson and Fabozzi, 2012). IBM recorded a return on equity ratio of 32.7% which was higher compared to the industry average of 20.55%. Consequently, the business gave a better return to its shareholders compared to other peers in the industry hence better performance.

The current ratio is a reflection of a company's financial strength which indicates the ability of a firm to satisfy short-term obligations with current assets. A high value of this ratio suggests the firm is more liquid and has a better ability to fulfill its immediate commitments (Peterson and Fabozzi, 2012). In 2017, IBM had a current ratio of 1.33:1 which would mean that the business has 1.33 in short-term assets to pay every $1 in current liabilities. However, the ratio was lower when compared to the industry average of 1.43:1 suggesting that IBM was not as liquid as its peers in the industry. The debt to equity ratio is a long-term solvency ratio that shows the relative uses of debt and equity as sources of capital which a business uses to finance its assets (Peterson and Fabozzi, 2012). High values of the ratio imply that the company utilizes more of debt to fund its assets or growth. In 2017, IBM's debt to equity ratio was significantly high at 2.26 times which means that for every dollar of the company that shareholders own, then the business owes $2.26 to the creditors. When compared to the industry average of 1.30, IBM was highly indebted almost twice as much as its peers in the industry. Brigham (2011) argues that as debt levels increase so do the fixed costs which may prove a financial burden to a firm, therefore, IBM may consider maintaining a balance in debt to equity ratio. High gearing can lead to financial difficulties especially if a firm is not able to generate adequate cash flows to meet debt obligations. Therefore, the firm might face problems since its interest coverage of 19.54 times is lower than the industry average of 25.75 times (MSN Money, 2018).

Profitability is vital since it determines the firm's long-run survival. Hence, IBM may undertake several strategies to enhance its profit levels. Over the past four years, the firm's total revenues have been decreasing. Subsequently, the company's management should strive to grow sales by selling more to the existing customers and also identifying new ones. Additionally, IBM may check if its products have been priced correctly relative to peers, hence consider price increase without reducing sales. The management of the firm may also consider checking its crucial cost areas thereby identifying potential areas having wastage that IBM can eliminate.

IBM may consider the early settlement of some of its short-term debts thereby reducing the current liabilities. A decrease in current liabilities will improve the current ratio hence enhancing the firm's liquidity. Also, IBM may sell off its unproductive assets and also speed up the conversion of receivables thus increasing cash levels. The firm should also implement effective inventory management since stock holds the working capital (Dunne and Lusch, 2011). Holding high inventory levels beyond the required ties up cash flow which would be available to meet debt covenants or pay down the debt. Also, IBM may enhance the debt to equity ratio through increasing sales by increasing prices or implementing cost-cutting measures thereby generating additional cash which can be used to reduce debt levels.

Conclusion

In conclusion, the financial analysis reveals that the IBM is not financially healthy when compared to its peers in the industry. Although IBM was able to generate high gross margin, the firm was not able to control its indirect expenses hence the low net profit. Consequently, the firm's overall profitability was low compared to its peers in the industry. IBM should increase sales volume and manage costs efficiently to hence the bottom line. Despite the low profitability, IBM was able to give a higher return to its shareholders than other firms. The firm has low liquidity levels in addition to being highly leveraged. Subsequently, the firm was not as stable as its peers and should improve sales and effectively manage inventory to generate extra cash and free cash flows hence obtain sufficient funds to pay installments or pay off debt.

References

Brigham, E. F. (2011). Financial management theory and practice. New Delhi: Atlantic Publishers and Distributors.

Dunne, P., & Lusch, R. (2007). Retailing (6th ed.). Mason: Thompson South-Western.

Gibson, C. H. (2012). Financial reporting and analysis (13th ed.). Mason: South-Western Cengage Learning.

MSN Money. (2018). Research and analysis for International Business Machines Corp. Retrieved from https://www.msn.com/en-us/money/stockdetails/analysis/fi-126.1.IBM.NYS

Peterson, P. P., & Fabozzi, F. J. (2012). Analysis of financial statements (2nd ed.). Hoboken: John Wiley and Sons.

Rich, J., Jones, J., Mowen, M., & Hansen, D. (2009). Cornerstones of financial accounting. Mason: South-Western Cengage Learning.