Income statement and vertical analysis

IBM Financial Analysis

David Wells I

Rasmussen College

Author Note

This paper is being submitted on December 18, 2019, for Tomeika Williams’ ACG3357CBE Accounting for Business Managers

Introduction

International Business Machines Corporation is an American company that was formed in 1911 by Thomas Watson Sr. and Charles Ranlett Flint. The organization has it’s headquartered in Armonk, New York, USA. The company serves more than 170 countries, with over 350,000 employees distributed worldwide. The company offers various products in information technology as well as services related to consultancy, management services, and outsourcing services. Some of the products manufactured and sold or leased by the organization including but not limited to industrial time recorders, industrial scale, punched cards, tabulators, and cheese and meat slicers. The organization has however, experienced stiff competition from other firms such as Hewlett Packard, Oracle, Accenture, and SAP (Panel, 2019).

Income vertical analysis

Income vertical analysis is a financial analysis where each item is shown as a percentage of the revenue of the organization for the specified financial period. The revenue of the organization consists of sales, financing, and services for form the 100% used in the analysis. The vertical analysis shall focus on the last three financial years, from 2016 to 2018.

In 2017, the cost of production was 52.08% resulting in a gross profit of 47.92% of the revenue of the organization. The operating income was 16.40%, while the net profit at the end of the financial year was 14.88%. In 2017, the cost of production was 54.22% resulting in a gross profit of 45.78% of the revenue of the organization. The operating income was 14.1%, while the net profit at the end of the financial year was 7.29%. In 2018, the cost of production was 53.59% resulting in a gross profit of 46.41% of the revenue of the organization. The operating income was 16.61%, while the net profit at the end of the financial year was 10.99% (Panel, 2019).

Income horizontal analysis

Horizontal income analysis is a financial analysis that aims to compare various items in different fiscal years. The horizontal analysis seeks to determine the economic changes in an organization from one financial period to the other. The horizontal analysis is used by management and various stakeholders in an organization to make decisions based on the trends in the organization. The horizontal analysis examines the changes both in percentages and in actual values of the items (International Business Machines Corporation, 2018).

The percentage of the revenue of the organization remains at 100% over the three years-period. The actual figures show that revenue decreased between 2016 and 2017 by 1% from $79.92 billion in 2016 to $79.13 billion in 2017. The revenue between 2017 and 2018 increased by 0.58% from $79.13 billion in 2017 to $79.59 billion in 2018. The cost of revenue has the same pertain in percentage and figures over the financial period covered in the assignment. The cost of revenue increased from $41.62 billion (52.08%) in 2016 to $42.91 billion (54.22%) in 2017 before decreasing to $42.66 billion (53.59%) in 2018.

The gross profit was highest at $38.3 billion (47.92%) in 2016 before decreasing to $36.23 billion (45.78%) in 2017 and increasing to $36.94 billion (46.41%) in 2018. The changes in the gross profit are as a result of the cost of revenue, which fluctuates from one financial year to the other. The operating income was $13.19 billion (16.40%) in 2016 before falling to $11.86 billion (14.91%) in 2017 and increasing to $13.29 billion (16.61%) in 2018. The operating income was highest in 2018 which was as a result of decreased operating expenses. The net profit was highest in 2016 at $11.87 billion (14.88%) before decreasing to $5.75 billion (7.29%) in 2017 and increasing to $8.73 billion (10.99%) in 2018.

Categorization of expenses

Expenses	Variable cost	Fixed cost	Product cost	Period cost
Research development		X	X
Selling general and administrative	X			X
Interest expense	X			X
Income tax	X			X
Cost of revenue	X		X

Ratio analysis

Ratio	IBM	HPE	ACN	ORCL	SAP
Current ratio	1.29	1.00	1.40	3.98	1.57
Debt to equity	2.71	0.57	0.01	1.29	0.40
Gross margin	46.41%	30.12%	30.81%	79.53%	69.90%
Operating margin	15.31%	6.02%	14.59%	33.68%	23.09%
Profit margin	10.96%	6.18%	11.06%	9.11%	16.63%
Asset turnover	0.65	0.56	1.45	0.29	0.48
Receivable turnover	9.74	4.63	5.34	7.67	3.88
Return on equity	51.52%	9.46%	32.68%	7.65%	14.16%
Return on assets	7.07%	3.63%	16.27%	2.60%	7.94%

The ratio analysis above shows the performance of International Business Machines Corporation against four of its competitors in the industry. The current rate shows The ability of the organization to meet its current financial obligations is shown in the current ratio using the existing assets. The current ratio of IBM is 1.29, which is only better than Hewlett Packard at 1.00. The current ratios show that all the industries can meet their current liabilities using the existing assets. IBM has the highest debt to equity ratio at 2.71, which means that more than 90% of the assets of the organization are financed by debt and 10% through equity. The rate shows that the firm is deficient in its debt management and may scare away potential investors (Panel, 2019).

The gross margin of IBM is the third at 46.41% after Oracle and SAP at 79.53% and 69.8%, respectively. The gross margin shows that the organization has the potential to increase its profit by decreasing the cost of production to compete with the big firms in the industry. The same trend is witnessed in the operating margin, where Oracle has 33.68%, followed by SAP at 23.09%, then the third position is IBM at 15.31%. The net profit margin shows a different picture because SAP leads by 16.53%, followed by Accenture at 11.065, then IBM at 10.96%. The net profit of the organization indicates that International Business Machines Corporation has minimized the cost of other expenses, thus increasing the net profit margin realized by the organization at the end of the financial year (Panel, 2019).

The asset turnover of International Business Machines Corporation is the second highest at 0.65 after Accenture with 1.45. The asset turnover is a financial ratio that is used to measure the efficiency of the organization is using its assets to generate revenue. The rates show that all four firms are inefficient in using the assets to generate revenue. Only Accenture has an asset ratio, which is above one unit.

The next ratio is receivables turnover, which is used to measure the effectiveness of an organization in giving credits and collecting the payment within the stated period. International Business Machines Corporation has the highest receivables turnover at 9.74. The ratio shows that International Business Machines Corporation is better at collecting cash from its debtors after the credit sales than its four competitors. The average receivable period is between 30 days and 60 days, which means that International Business Machines Corporation operates within limits. The return on equity of International Business Machines Corporation is the highest at 51.52%, followed by Accenture at 32.68%. The ratio shows that International Business Machines Corporation is more efficient in using its equity to generate profit. The last rate is the return on assets, which ranks International Business Machines Corporation at position three among the five firms. Accenture is the best performer in this category at 16.27%, followed by SAP at 7.94%, then 7.07%.

Accounting standards changes

In 2018, IBM adopted a new FASB, which gave a new way of recognizing revenue by the organization to help in comparing the performance of the organization with other firms across the industry. The change ensures that the organization acknowleges operating lease liabilities and assets in their balance sheet. The recognition of an operating lease or capital asset improves the accuracy of the balance sheet in indicating the financial position of an organization at a glance. The capital lease shows how an organization may acquire an asset through periodic payments, thus owning the holdings at the end of the payment period. Operating lease, on the other hand, shows the cost that the organization incurs in using an asset though it does not get the ownership rights of the property (Trainer, 2018).

References

International Business Machines Corporation. (2018). International Business Machines (IBM) Income Statement. Retrieved from https://finance.yahoo.com/quote/IBM/financials?p=IBM

Panel, E. (2019, July 22). Council Post: Nine Methods for Analyzing and Optimizing Your Cash Flow. Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2019/07/24/10-methods-for-analyzing-and-optimizing-your-cash-flow/#2af9f00c3bf4

Trainer, D. (2018, May 1). Impact of Operating Leases Moving To Balance Sheet. Retrieved from https://www.forbes.com/sites/greatspeculations/2018/05/01/impact-of-operating-leases-moving-to-balance-sheet/#53fdd75e2c55