Financial Analysis for IBM

Financial Analysis for IBM
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Financial Analysis for IBM
International Business and Machines (IBM) company history dates back to 1890 when many immigrants relocated to the United Sates. In the beginning, IBM was only operating in New York City. After operating for some years, it expanded its offices and to various parts of New York State, Michigan, Toronto, Washington DC, and Canada. Founded on June 16 1911, in Endicott, New York, IBM has remained a leading company in innovation. The company only dedicates approximately 20% of its services to the manufacture of its hardware while 80% of its services are mainly consulting in the computer and technology industry (Aswad & Meredith, 2007). In the period that the company has been in operation, some of its practices have been controversial while others have helped it in meeting customer and shareholders’ demands.
The number of patents held by IBM is an evidence of the company’s commitment to innovation. For instance, from 1993 to 2007, the company was awarded more than 38,000 U.S patents, and managed to invest around $5 billion a year in research, engineering, and development since 1996. Currently, IBM’s current active portfolio has more than 26,000 patents in the US and more than 40,000 patents globally as a result of its investments (Aswad & Meredith, 2007). Furthermore, IBM has been quite effective in promoting organizational management by launching effective campaigns to create new assets, optimizing the existing assets, and analyzing data.
In1914 Thomas Watson joined the company and became the company’s president within one year. It was through his leadership that the company embarked on expanding its products and services (IBM Website, 2013). During that period, the company mainly focused on the production of large-scale custom built tabulating solutions for businesses.
Evaluate the company’s vulnerability to current financial threats such as a recession, higher interest rates, and global competition
Current Financial Threats for IBM from Recession
Recession is a period of a negative economic growth, which may be caused by many factors. For a recession to be a financial growth for IBM, it must have occurred in the region or countries where the company has its operations. For this reason, it is not possible to determine which countries have a threat of recession or which ones do not. Fundamentally, recession is characterized by a low GDP and high unemployment rates (IBM Website, 2013). IBM may be affected by a recession that occurs mainly in the US or in Europe. This does not mean that a recession in other parts of the world where the company has operations will not affect, but the magnitude may be higher if it affected some of the leading economies in the world. Organizations with high bank loans are largely affected because they are likely to have a challenge in repaying their loans due to slow economic growth.
IBM reported a total debt of $33,269, and $31,320 in the financial period of 2012 and 2011 respectively. With this huge amount of debts, it is clear that IBM may be affected by a recession if it occurs in any of its markets (IBM Website, 2013). The main challenge when a recession occurs will be how to repay the debts. The banks or other financial institutions where the company had borrowed money may be considerate to extend the repayment period. If this does not happen, it means that IBM will have to continue servicing its loans from its income, a situation that is likely to affect its profit margins. The payment of the debt owed to suppliers and other stakeholders in the company will become a challenge to pay in case of a recession.
A low GDP may affect the prices of IBM products leading to a decrease in the income generated from sales since most customers will not be having enough money to spend. Since IBM also deals with exporting its products to various destinations in the world, appreciation in exchange rates as often experienced during a recession period, may have a negative effect on the company. This will be the case because the increased exchange rate will make exports and hence reducing the demand for exports. Consequently, this will lead to a slowed business for IBM.
Threats from a higher interest rate environment
Financial threat due an increase in the interest rates is also likely to affect IBM. This is mainly because the company will be required to pay more for its outstanding loans and debts. With higher rates, IBM is likely to reduce its borrowing due to the high cost of servicing the loans. The company may also decide to deal with the increased interest rates by transferring the cost to the customers. Subsequently, the prices for its products and services will be increased and hence affecting the customers’ demand.
Threats from increased global competition in the market industry
There is a stiff competition in the manufacturing industry and especially in the manufacture of computers. Other companies are also involved in the manufacturing of computers. These companies include DELL and COMPAQ among others. As the global competition increases, the number of customers will reduce since some will be poached by the competitors. The impact of this will be a reduction in the total income, which might eventually affect the running of the company as it embarks on an expansion program.
Based on the financial trends of the company, predict how these trends will impact financial performance in future periods. Explain your rationale for this prediction.
Financial trends at IBM will be best explained using some financial ratios.
Current Ratio
This ratio is used to tell the company’s ability to settle the current debt without resorting to outside financing (Loughran, 2012). After assessing the balance sheets, the current ratio for IBM is current assets/ current liabilities. In the year 2010, the current ratio was 48,116/40,562=1.18, in 2011, the current ratio was 50,928/ 42,126=1.2 while in 2012, the current ratio was 49,433/43,625=1.13 (IBM Website, 2013).
From the results of the current ratios, it is possible to tell that IBM has had a steady performance since in all the three years; the current assets have been more than the current liabilities and hence resulting in figures that are more than 1. This is a strong indicator that IBM has been in a position to pay for debts without seeking for financial assistance from outside (Fridson & Ivarez, 2011).
Profit Margin on Sales Ratio
This financial ratio is arrived at after dividing the net income by net sales. Through this ratio, investors and other stakeholders get information on how the company is handling its expenses by measuring the net income (revenue minus expenses) generated by each dollar of sales (Loughran, 2012). For IBM, the financial ratio was 14,833/40,763=0.36 in 2010, 15,855/44,063=0.35 in 2011, and 16,604/43,014=0.38 in 2012. This shows that the management at IBM is able to control their expenses in order to maximize on the company’s profitability.
Return on Equity (ROE)
This ratio is used to measure how the profit earned for each dollar invested in a company’s stock. The calculation is done by dividing the net income by the average owners’ equity or the total shareholders' equity (Loughran, 2012). ROE is one of the most important financial ratios to stockholders and potential investors as it compares earnings to owners’ investments. The higher the ratio, the more efficiently the company’s management is making use of its equity base. When a net income grows in relation to increases in equity, it reflects a well-run business. In this case, ROE for IBM in 2010 was 14,833/23,046= 0.64, in 2011 was 15,855/20,138=0.78, and in 2012 was 16,604/18,860=0.88. The ROE for IBM is relatively high when converted to percentages, which is a good indicator that investors' money is being spent wisely by the IBM’s management. However, this rat...