IBM, founded in 1911, is primarily a manufacturing business. The company is headquartered in United States. IBM is involved in the manufacturing and marketing of computer software and hardware. It also provides a range of services which includes consulting, hosting and infrastructure in the fields varying from nanotechnology to mainframe computers (IBM, 2013).
Currently, IBM has employed 450,000 workers worldwide. The purpose of this report is to identify the financial status of this giant corporation. Moreover, the report will help in establishing the strong and weak areas of the company. Also, the report will be able to analyze the company's recent financials and summarize IBM's current position.
Current Financial Position
The current financial position of IBM can be summarized as below:
|Gross Profit Ratio
|Debt to Equity Ratio
|Assets Turnover Ratio
Source: IBM (2012), IBM (2011)
Current ratio is the most common liquidity ratio. The ratio has ranged from 1.13 to 1.21 over the past three years. This means that IBM has more than sufficient assets to pay off its short term liabilities. The ratio of more than one suggests that IBM is currently in the safe zone as it has more assets than its liabilities. The ratio indicates a safety cushion for IBM. The trend shows increased flexibility because some of the stock at hand and account receivables are not easily converted into cash.
Secondly, IBM’s gross profit margin has remained constant at 46% over the last three years. This means that IBM is earning $46 for every $100 of revenue. The ratio shows the management’s ability to convert sales revenue into cash flows and profits. However, it can be seen that sales revenue has been on the rise during each year. At the same time, the cost of revenue has also increased. Hence, no significant rise in gross profit margins is reported during these three years.
The debt to equity ratio has been on a rise over the past three years. It can be observed that every year, debt to equity ratio has increased about 0.5 points on average. This is a serious concern for the company. As the ratio suggests that company’s debt has increased to 5 times for every one dollar of shareholder equity in 2012. However, the ratio stood at 3.9 times in 2010.
Assets turnover ratio measures the company’s ability to efficiently avail its business assets. The assets turnover ratios have remained stagnant at around 0.9 each year. The ratio of less than one is of concern for the company as this means that the company is underutilizing its assets.
Strengths and Weakness
IBM is one of the largest companies in the business. With over 4000 PhD’s and 12 laboratories worldwide, research and development is one the core strengths of the company. IBM research and development has state of the art technologies. Therefore, with huge profits coming in from its mainstream business operations, IBM must invest heavily in research and development. Research and development has always been a source of strong competitive advantage for IBM (Frier, 2013). The top management of IBM must fix an annual budget fully dedicated for its research and development department.
On the other hand, financial statements indicate that the company is under a huge pile of heavy debts. The value of debt is increasing every year. This is of great worry for the management of IBM. Higher debts can have negative implications on the investors (Reuters, 2013). Higher levels of debt can hinder the future growth of IBM. The total liabilities have increased from $90,217 in 2010 to $100,229 in 2012. This increase in debt levels of 11% can be alarming in the near future.
In the end, it can be concluded that IBM current financial position is safe from investors and management point of view. The company has managed to register constant profits. However, the debt to equity ratio has been on a rise. Moreover, IBM has been underutilizing its overall assets. As a result, the company has a wide range of opportunities to increase its revenue. Lastly, IBM must continue to expand its business and invent new technologies in the era of cloud computing, data analytics and mobile devices. These new fields of businesses have strong potential of earning high profits for a company of IBM scale.
Frier, S. (2013). IBM Needs to Reposition Itself for the Cloud Computing Era. Bloomberg Business Week
IBM. (2013). About IBM
. Retrieved November 28, 2013, from www.ibm.com: http://www.ibm.com/ibm/us/en/?lnk=fai-maib-usen
IBM. (2011). IBM Financial Reports
. Retrieved November 28, 2013, from www.ibm.com: http://www.ibm.com/annualreport/2011/bin/assets/2011_ibm_annual.pdf
IBM. (2012). IBM Financial Reports
. Retrieved November 28, 2013, from ibm.com: http://www.ibm.com/annualreport/2012/bin/assets/2012_ibm_statements.pdf
Reuters. (2013). Reuters
. Retrieved November 28, 2013, from www.reuters.com: http://www.reuters.com/finance/stocks/overview?symbol=IBM.N