Question.3168 - Select a publicly traded U.S. corporation for which you have a common interest. A. Prepare an overview of the company, incorporating the following points: History of the company History of the industry Types of products or services offered Rank in the particular industry that it operates Discussion of the competition New potential products of the company on the horizon and your assessment of its impact on the company and industry B. Discuss the types of financing that your company uses (short term borrowings, lines of credit, commercial paper, debentures, collateralized bonds, issues of common stock) C. As per financial ratios, prepare an analysis of as many of the 13 key ratios as you can obtain information for. Financial statements for publicly traded companies include 3 years of balance sheets and statements of shareholder equity and two years of income statements. The Internet will furnish the third year’s income statement. Prepare the financial ratios for the 3 year period using the balance sheets, income statements and statements of shareholders’ equity. D. For two of the company’s closest competitors, prepare an analysis of as many of the 13 key ratios as you can for the latest year information is available. Then chart the results of the key ratios of the 3 companies for the latest common year that you can obtain information on, and provide a discussion of your interpretation of the results and which company seems to be in the best and worst financial shape. E. Finally, for the three companies in (D) above, prepare an analysis of the P/E (price to earnings) ratio for a three period and contrast those numbers with the financial results of each of the companies.. Determine if there is any correlation of the P/E ratios with the financial performance and strength (or weakness) of each of the companies. Prepare a written report that will be handed in. Include the financial statements and your company and the competitors (don’t need all the footnotes, just any relevant to your report).
Answer Below:
Answer to Part (A). IBM or International Business Machines is a computer manufacturing corporation, founded by Thomas J. Watson. IBM is also known as "Big Blue" and is an internationally well-known company . International Business Machines Corp. is an information technology company. This company carries on its operations with well framed strategic planning such as: Global Technology Services, Global Business Services, Software, Systems & Technology and Global Financing. Information technology refers to taking account of computer hardware and software applications to represent data in a true and fair manner . Departments, such as Management Information Services (MIS), take up the responsibility for the storage, protection, processing, transmission and restoring of the information as and when required. The birth of information technology had taken place with the invention of computer. The abacus, used by Asians, Egyptians, Romans, and the Greek can be termed a source of information technology. The wide range of products and service that are provided to the customers are as follows: RISC/EPIC based Servers, Windows based Servers, Workstations, Thin Clients, Desktops and Notebooks, Storage Systems, Networking Equipment, Network Printers, Cables, Connectors, and Accessories, Video Equipment Products, Uninterruptible Power Supplies (UPS) IBM ranks first in the industrial ranking. Some of the competitors of IBM are Apple Inc., formerly Apple Computer, Dell Inc. (formerly Dell Computer) etc. Apple not much behind in the race of revenue is the second-largest information technology company after Samsung Electronics, and third-largest mobile phone manufacturer after Samsung and Nokia in the world. Dell has increased both in terms of customers and acquisitions since its existence. On 08 Feb 2013 IBM, WellPoint, Inc. and Memorial Sloan-Kettering Cancer Centre brought up the first commercially developed Watson-based cognitive computing breakthroughs. These innovations and ideas help in the transformation of the quality and speed of care provided to patients through individualized, evidence based medicine. Answer to Part (B). The types of financing used by IBM for the following are as follows: 1) Short term Borrowings: It can be financed by timely collection from debtors & Banks. 2) Line of Credit - An accounts receivable revolving line of credit that lets you utilise accounts receivable to secure cash advances, with the ability to manage and reduce interest expense as available funds are used to pay down debt and to borrow against excess collateral as the need for funds arises. 3) Commercial Paper - Since commercial paper is usually issued in minimum amounts of $100,000 or more, it is primarily purchased by money market mutual funds and other corporations looking to maximize their short-term deposits. 4) Debentures: 5) Issues of common stocks: It can be financed by revolution investing. 2 Answer to part (C) The Financial Ratios for the 3 year periods of IBM are as follows: Financial Ratio 2012 2011 2010 Quick ratio 1.10 1.15 1.13 Current Ratio 1.13 1.21 1.18 LT Debt to Equity 1.28 1.14 0.95 Earnings Per Share 14.37 13.06 11.52 Interest Coverage Ratio 48.70 48.62 48.68 Cash & Short Term Investment 9.34 10.71 10.72 Debtors Turnover Ratio 3.50 3.62 3.54 Total Shareholders Equity / assets 15.82 17.30 20.31 Asset Turnover Ratio 0.90 0.92 0.88 Gross Profit margin Ratio 47.30 46.40 45.51 Net Profit Margin Ratio 15.90 14.83 14.85 Return on Asset 13.90 13.74 13.78 Return on Investment 38.70 38.57 38.63 Analysis: The company’s gross profit and net profit has not fallen drastically and the returns are also not a matter of concern which shows that the company has utilised borrowed funds efficiently. The company should review a new sales policy. If the company cannot achieve good sales the shareholders will have to pay the price. The liquidity position of the company is good but the hint of rise in the current ratio should be kept in check and make sure it does not rise dangerously. Answer to part (D) The Financial Ratios of IBM and its two competitors for the year 2012 are as follows: Financial Ratio IBM APPLE DELL Quick ratio 1.10 1.30 1.00 Current Ratio 1.13 1.50 1.20 LT Debt to Equity 1.28 0.00 0.49 3 Total Debt to Equity 1.76 0.00 0.85 Interest Coverage Ratio 48.70 N.A 11.50 P/E ratio 14.70 9.70 10.40 Debtors Turnover Ratio 3.50 8.70 5.80 Inventory Turnover Ratio 20.30 68.00 1.30 Asset Turnover Ratio 0.90 1.00 1.20 Gross Profit margin Ratio 47.30 44.40 23.40 Net Profit Margin Ratio 15.90 25.30 4.20 Return on Asset 13.90 21.30 5.00 Return on Investment 38.70 32.80 14.90 Analysis: The liquidity position of IBM is the best among the three which is one of the reasons that it is first in the industrial ranking. Interest coverage ratio is a rough indicator of the long term solvency of the company in the sense that it shows the ability of the company to meet its debts service costs out of the current earnings. Failure to meet this obligation can bring legal action by the lenders. Price earnings ratio is a capitalisation factor. The higher the price earnings ratio the more the stock market thinks of the company and the cheaper the cost of equity capital of the company. Answer to Part (E) Particulars 2012 2011 2010 P/E Ratio 211.24/14.37 194.60/13.06 143.42/11.52 = 14.70 = 14.90 = 12.45 There is a positive correlation between IBM and Dell whereas there is a negative correlation between IBM and APPLE . The strengths of IBM are the higher interest coverage ratio, P/E ratio and the gross margin ratio as compared to Apple and Dell which have a lower of these ratios. The weakness of IBM is it has a lower Debtors turnover ratio as compared to its competitors. IBM has to come up with new and innovative ideas to increase its Inventory turnover ratio and Net Profit Margin Ratio. 4 References : http://inventors.about.com/od/computersandinternet/a/Ibm-History.htm http://www.marketwatch.com/investing/stock/ibm/profile https://www-304.ibm.com/easyaccess3/ites2h/gclcontent/!!/gcl_xmlid=104309/#oneCat1 http://www-03.ibm.com/press/us/en/pressrelease/40335.wss#release https://www- 304.ibm.com/partnerworld/wps/servlet/ContentHandler/igf_com_fin_comm_receivables http://collegesavings.about.com/od/glossarydefinitions/g/commercialpaper.htm http://www.dailyfinance.com/quote/nyse/international-business-machines-corp/ibm/financial- ratiosMore Articles From Finance
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