Analysis of IBM

Section 1

IBM is a technology firm whose operations include Global Business Services, Cognitive Solutions, Systems and Global financing, Cloud Platforms and Technology services.  The main driver of the firm’s strategic imperative is to develop markets through a transformation of professions and industries with data.  It provides an entire  range of capabilities needed by its clients in the extraction of Big Data value  which enables them to obtain  many data sets , both structured and unstructured across they business operations ( IBM, 2013). The portfolio of IBM’s data and analytics is the deepest in the entire industry and provides cognitive systems as the basis for the future era in computing.  The other strategic imperative of IBM is remaking of the IT infrastructure enterprise for the cloud era whose economic impact is very significant in the current business world.  The firm also aims at enabling the systems of engagement for businesses which will allow them to embrace a systematic approach in dealing with all their stakeholders including employees, partners, customers and the entire community (IBM, 2013).

The company has a strategy of continuing in remixing of high value and addressing areas of its business that are holding back its success. This involves addressing its two major challenges which involves transforming and preparing its hardware business for new opportunities and realities and the growth in world markets.  While strong growth was realized in Africa, Middle East and Latin America, other key markets encountered a slow business spending. Therefore, IBM is increasing its focus on emerging growth opportunities which remains attractive in this period (IBM, 2013). 

 

Section 2: Tables

Income statement

	2013	2012	2011
Revenue (services )	57,655	59,453	60,721
Cost (services )	37,564	39,166	40,740
Gross profit (services )	20091	20287	19981
Revenue (sales )	40,049	43,014	44,063
Cost (sales)	12,572	13,956	14,973
Gross profit (sales )	27477	29058	29090
Revenue (financing )	2,047	2,040	2,132
Cost (financing)	1,110	1,087	1,065
Gross profit (financing)	937	953	1067
Total revenue	99,751	104,507	106,916
Total cost	51,246	54,209	56,778
Gross profit (total)	48,505	50298	50138
Less expenses
Selling , general and administrative	23,451	23,463	23,594
Research ,development, engineering	5,743	5,816	6,258
Intellectual property and custom development income	(822)	(1,074)	(1,108)
Other (income) and expense	(333)	(843)	(20)
Total expenses and other (income )	28,981	28,396	29,135
Income before taxes	19,524	21,902	21,003
Provision for income taxes	3,041	5,298	5,148
Net income	16,483	16,604	15,855

 

 

 

 

 

Ratios

Ratios %	2011	2012	2013
Gross margin	46.89	48.95	49.49
Operating margin	18.97	20.49	20.65
EBT margin	19.64	21.91	20.58
Net margin	14.83	15.89	16.52
Assets Turnover	0.93	0.89	0.81
Average financial leverage	5.78	6.32	5.54
Return on assets	13.79	14.09	13.43
Return on equity	73.43	85.15	79.15
Earnings per share	13.06	14.37	14.94
Current Ratio	1.21	1.13	1.28
Debt/Equity ratio	1.14	1.28	1.44
Financial Leverage	5.78	6.32	5.54

 

Section 3

Looking at the income statement through a vertical analysis makes it possible to capture the significant changes that IBM has been experiencing over the three years period. Running through the income statement above, the company has been undergoing decline in profitability of the 3 year period explored. The gross margin indicates a gradual decline in profitability level of this company which is in line with the decline in the sales over the sale period. This is despite the total cost of the sales seeming to decline yearly for the services and non-services revenue from $ 37,564 to $ 40,740 and $12,572 to $ 14,973 respectively.  The gross margin and the operating margin  shows a somehow different trend to the revenue and cost trend , as indicated in the increase  from 46.89 % to 49.49 % and  18.97 % to 20.65 % .  There were no drastic changes in the trends of sales of both the services and non-services products in the period but the revenue indicates decreasing trend.  The strength in the company is seen in the sale of services where the revenues, operating margins and profit margins are higher as compared to the non-services or software sales over the 3 year period.

 

 Weaknesses have been experienced in the sales of the software products, which when put together under the title strategic imperatives saw a trend of reducing revenues in this period. There is a trend of software sales decline in this period which may have contributed to the overall decline in profits total gross profit from $48,505 to $ 50,138 over the three year period. For an investor, this trend is worrying but given the resilience in gross profit for service revenue, it may be a good buying option for the long-term investment.   An aggregate change in a company’s profitability is useful in the forecasting of growth, based on an analysis of the financial statements (Konchitchki, & Patatoukas, 2014).

 

Section 4

 A stability test shows that IBM has remained fairly stable over the last decade, where margins have been strong even though increase and decline in revenue has been common in this period (Sharma, 2016). This is in line with the common size income statement analysis discussed above where sales revenue has remained stable even though there has been a bit of decline.  Even though the debt-to-equity ratio is high at 1.14, it could be so due to the high financial leverage of between 5.78 and 5.54 percent.  This could be an indication that the higher amount of this debt can be due to financing of the operations of the company.  Slow growth in the software and non-service products remains to be a concern which requires digging into the firm’s strategies and literature to assess its competitive positioning and even future prospects. The changes in technology could be said to have lead to the big business climate which has also led to growth in software market globally and consulting in business processes.

Analysts have recently raised the concerns that declining business legacy in software has not been offset by the company’s faster-growing areas such as provision of data crunching services.  The present optimism for investors is that firm’s increment in services revenue and profitability is an indication the firm is trying to focus on areas where higher growth in business is and such a strategy will work (Sharma, 2016). With such a focus, it could align with the above analysis of common size income statement and where the strength in services sales makes it buy option for long-term investment.   The company has continued with its transformation from historically focusing on hard-ware to an increase emphasis in business services.  There has been a rapid rise in debt mostly so as to repurchase shares which may increase the value of investors remaining shares (Sharma, 2016).

Reference

IBM, (2013).What will we make of this moment? Annual Report. Retrieved from: https://www.ibm.com/annualreport/2013/bin/assets/2013_ibm_annual.pdf

Sharma, A. (2016). Book of value: The fine art of investing wisely. 283-288

Konchitchki, Y., & Patatoukas, P. (2014). Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation.