Week Two Problems
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FIN/571
April 4, 2012
Week Two Problems
In this paper the subject of discussion will be on the analysis and summary of the IBM’s financial rations calculations. The discussion will be on the liquidity, asset activity, leverage, coverage of fixed charges, profitability, and market value related rations at IBM (Emery, Finnerty, & Stowe, 2007).
In the 1896 the Computing-Tabulating-Recording Company was responsible for the invention of the printing tabulator and later the first electric key punch device. In 1924, the Computing-Tabulating-Recording Company officially changed its name to the International Business Machines Corporation (IBM).
In 1928, IBM introduced a new 80 column rectangular-hole punched card, which became the standard IBM card used by tabulators and computers for many years to come. Later in the 1950’s IBM became the primary contractor in developing computers for the United States Air Force automated defense systems. In July 1980, Microsoft’s Bill gates agreed to create an operating system for IBM’s new computer for the home consumer, which IBM released on August 12 1981. The first IBM PC ran on a 4.77 MHz Intel 8088 microprocessor. IBM had now stepped into the home consumer market, sparking the computer revolution (Bellis, 2011).
Liquidity
International Business Machine Corporation (IBM) liquidity position at the end of 2011 seems very competitive within the market. The liquidity of any company assets represents how quickly and easily they can be sold without losing any value (Emery, Finnerty, and Stowe, 2007).
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Liquidity ratios measure the company’s ability to meet its short-term obligations. The industry average current ratio is 1.3; IBM’s current ratio stayed at 1.2, which represents the company’s ability to cover its current liabilities. IBM’s current ratio is determined by taking $50,928,000,000, which are current assets and dividing them by $42,124,000,000, which represent the company’s current liabilities (Emery, Finnerty, and Stowe, 2007).
According to the Use Money Report, IBM is capable of paying its short term liabilities with its short term assets (2012).
IBM’s current ratio deteriorated from 2009 to 2010, but then slightly improved from 2010 to 2011. With the industry current ratio average at 1.3; IBM’s current ratio at 1.2 demonstrates that IBM management needs to be more efficient to increase profitability and the growth of the company. IBM liquidity ratios can provide information of how efficient the company is to convert its inventory into cash (Emery, Finnerty, and Stowe, 2007, p. 59).
Asset Activity
IBM’s liquidity can be improved by the effective use of its inventory. IBM’s asset activity represents how quickly the company can collect on its receivables. IBM’s receivable turnover is represented by the number of times the accounts receivable balance turns over during the year (Emery, Finnerty, and Stowe, 2007, p. 62).
The IBM’s receivables turnover can be calculated by dividing the annual credit sales by the accounts receivable. The industry average turnover is 4.9 days and IBM’s is 3.6 days. As a result, IBM is beating effectively the industry average on their accounts receivable.
In addition, inventory turnover is another asset activity ratio used by IBM to effectively measure how many times per year the inventory is physically turned over. IBM’s inventory turnover is 21.9 days while the industry average is 18.3. These numbers prove that IBM is holding its current inventory for a longer period and it is also taking longer to collect the accounts on the sold inventory. An additional method used by IBM to calculate the inventory turnover is the day’s sales in inventory ratio, which is the average time, in days, that the inventory stays with a company or organization before it is sold (IBM, 2012).
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IBM’s days’ sales inventory is 16.7 days and industry average days’ sales inventory is 20.0 days. The days’ sale in inventory is calculated by dividing 365 by the inventory turnover (Emery, Finnerty, and Stowe, 2007, p. 63).
In addition, IBM needs to focus on how many day its sales are in receivables; how many days it will take to IBM to collect on an outstanding sale (Emery, Finnerty, and Stowe, 2007, p. 62).
IBM takes 100.9 days while the industry average is 74.4 days; IBM is taking 26.4 additional days to collect on receivables. If IBM reduces the days to collect its receivables it would operate more effectively because will have more available cash to operate with (IBM, 2012).
References
Emery, D., Finnerty, J., and Stowe, J. (2007).
Corporate financial management (3rd Ed.) Prentice Hall.
IBM Corporation (2012).
Maximize Your ROI. Retrieved on April 02, 2012, from
http://www-05.ibm.com/services/dk/cfolibrary/pdf/Cash_optimization_assessment.pdf
