In the financial report of 2013, IBM describes the strategies they have taken to transform the company. By reshaping the company, IBM believes that it is reshaping the whole industry and by sharing their strategy, the company believes it will increase the confidence they get from the stakeholders in the near term and beyond. The first strategy IBM used for its transformation was to make markets by using data to transform professions and industries. With the market for data and analysis growing rapidly, the company has built the worlds deepest and broadest capabilities in analytics and Big Data, and this includes expertise and technology. The company has invested billions in this venture, by doing a total of 30 acquisitions. Consequently, two-thirds of the companys research work is dedicated to analytics, cognitive computing, and data.
The second strategy was to remodel the IT infrastructure for the age of the cloud. Cloud is very important in IT, but its economic significance is highly misunderstood. IBM is the industry leader in enterprise cloud. The company has enhanced this position by investing billions in the acquisition, notably SoftLayer which was acquired in 2013. The company can provide cloud delivery models that are a platform as a service, infrastructure as a service, business process as a service and software as a service. The clouds in IBM are supported by experts and built on 1,500 cloud patents. 85% of Fortune 500 companies use the cloud capabilities from IBM. The third strategy employed by IBM is enabling systems of engagement enterprises. IBM is the overall leader in building modern enterprise systems of earning and engagement.
In the long run, IBM achieved a year over year growth of19% in security, 69% in mobile, and 45% in social business. By many measures, 2013 was a successful year for the company, with a diluted operating income per share of $16.28 which was a new record. The company in 2013 grew the operating net income by 2% to $18 billion.
Common Size Income Statement
2013 2012 2011
Revenue (services) 100% 100% 100%
Cost (services) 65.20% 65.90% 67.10%
Gross profit (services) 34.80% 34.10% 32.90%
Revenue (sales) 100% 100% 100%
Cost (sales) 31.30% 32.40% 34%
Gross profit (sales) 68.70% 67.60% 66%
Revenue (financing) 100% 100% 100
Cost (financing) 54.20% 53.30% 50%
Gross profit (financing) 45.80% 46.70% 50%
Total revenue 100% 100% 100%
Total cost 51.40% 51.90% 53.10%
Gross profit (total) 48.60% 48.10% 46.90%
Selling, general and administrative 23.60% 22.50% 22%
Research, development, engineering 6.20% 6% 5.90%
Intellectual property and custom development income -0.80% -1% -1%
Other (income) and expense -0.30% -0.80% -0.02%
Interest expense 0.40% 0.44% 0.40%
Total expenses and other (income) 29.10% 27% 27.30%
Income before taxes 19.50% 21.00% 19.60%
Provision for income taxes 3% 5.10% 4.80%
Net income 16.50% 15.90% 14.80%
Liquidity Ratios Current Ratio 1.30 0.01
Acid Test Ratio 1.20 1.10
Profitability Ratios Net Margin 16% 16.00%
Gross Profit Margin 47% 48%
Solvency Ratio Debt to Equity Ratio 2.0 2.0
Analysis of the Common Size Income Statement
The gross profit and net profit margins are used mostly in the analysis of common size income statements. In the case of IBM the profit margins have been declining each year. This means that the company needs to examine the expenses in order to spot the significant changes that are causing the drops in the profit margins.
Liquidity ratios are used to measure the ability of the company to pay its bills as they become due. This means that the company must at any time have enough cash to meet current payments. The acid test ratios test whether the company can meet its short-term obligations in adverse conditions. Ratio of between 0.5 and 1 is considered satisfactory considered the company continues collecting from receivables. According to the ratios of IBM, the company is able to meet its shorter obligations. Current ratios are used to tell the relationship of current assets with current liabilities. According to the above table, the current ratio for the year 3013 is 1:1 and that of 2012 is below. This means that IBM did not have enough working capital for year 2013. In 2012, the company was struggling with liquidity because the ration was below 1. However, the lower current ratio means that most of the companys current assets are in inventories.
Debt to equity ratios on the other hand measures the proportion of the companys assets that are supplied by creditors compared to what is supplied by the owners. If the debt ratio is greater than 1, then the capital provided by the creditors is more than what is provided by the owners. For IBM the ratios for 2012 and 2013 are greater than 1, which means that the company relies mostly on creditors to service its operations. Profitability ratios on the other hand measures how a form generates profits on total assets, sales and on stakeholders investments. The gross profit margin measures the amount of dollar sales that is left after operating expenses, while the net income margin the amount of dollar sales left after all expenses. In the case of IBM, in every sales dollar of the company in 2013 there was 47% gross profit margin and 16% net margin, while in 2012 the figures were 16% and 48% respectively.
In a study done by Konchitchki & Patatoukas (2013) they find out that financial statement analysis of any company using the profitability drivers is very important in forecasting the real economic activity of the company. These results are mostly effective and yield timely insights when applied at the aggregate levels. For investors, the companys profitability is very important, as they forecast their stock market portfolios depending on their profitability and decide where to invest. For profitability margins, the managers are expected to raise the sales and net incomes, preferably with the net income growing at a faster rate than the sales. Prices of stocks in part are based on expectations on net incomes and sales. When firms fall short on the net incomes and sales forecasts of financial analysts, the price index of stocks suffers. Therefore, for a company to be able to maximize the shareholder's wealth as shown by the stock price, the managers ensure that the expectations are met by smoothing incomes and sales so that over time risk is lowered, stock prices are maximized, and projections are easier to make (Laux, 2010). In addition to profitability ratios, the investors can check on other ratios before making their decisions on investments. Other ratios include liquidity ratios and solvency ratios among others. For IBM, the company is doing well regarding liquidity and profitability.
Konchitchki, Y., & Patatoukas, P. N. (2013). Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation. The Accounting Review, 89(2), 669-694.
Laux, J. (2010). Topics In Finance Part II-Financial Analysis. American Journal of Business Education, 3(3), 81.
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