1. 1 | P a g e
Comprehensive Financial Analysis
International Business Machines (IBM)
Author :
SamirSingh,EPGP 030
IIM INDORE

2. 2 | P a g e
Relevant Links Used :
Anual Report
http://www.ibm.com/annualreport/
Balance Sheet,Income Statementand Cash FlowStatement
http://www.nasdaq.com/symbol/ibm/financials?query=income-statement
General Infoand History:
https://en.wikipedia.org/wiki/IBM
http://www.ibm.com/in-en/
Introduction
International Business Machines Corporation (commonly referred to as IBM) is an American
multinational technology and consulting corporation, with corporate headquarters in Armonk,
New York.
IBM has constantly evolved since its inception. Over the past decade, it has steadily shifted
its business mix by exiting commoditizing markets such as PCs, hard disk drives and DRAMs
and focusing on higher-value, more profitable markets such as business intelligence, data
analytics, business continuity, security, cloud computing, virtualization and green
solutions,[19][20][21] resulting in a higher quality revenue stream and higher profit margins.
IBM's operating margin expanded from 16.8% in 2004 to 24.3% in 2013, and net profit
margins expanded from 9.0% in 2004 to 16.5% in 2013.
IBM acquired PwC's consulting business (2002), SPSS (2009) and Kenexa (2012), also
spinning off companies like printer manufacturer Lexmark (1991), and selling off to Lenovo
its personal computer product line (2005), plus its x86-based server businesses (2014). Also
in 2014, IBM announced that it would go "fabless" by offloading IBM Micro Electronics
semiconductor manufacturing to Global Foundries, a leader in advanced technology
manufacturing, citing that semiconductor manufacturing is a capital-intensive business
which is challenging to operate without scale.

3. 3 | P a g e
Q2 : Estimate the ratios considering only the operating assets of the company .
Operating Assets / Total Assets:
Operating Assets is not explicity mentioned in Annual Report and Balance Sheet. Assuming
Operating Assets as Current Assets.
RATIO 2015 2014 2013 2012
Operating Assets /Total Assets
0.384 0.4 0.4 0.41
Investments /Total Assets :
RATIO 2015 2014 2013 2012

4. 4 | P a g e
Investment /Total Assets
0.13 0.14 0.13 0.14
IBM always keepsitsinvestmentsas13% of the Total Assets.This hasbeenconstantfor overthe
years. Its LongTerm Investmentispledgedat 15.2 Billion USD .
KeysectorsinwhichIBM isinvesting isAnalytics,Cloud,Mobile ,SecurityandSocial Sectors
Relevantlinks
http://www.wsj.com/articles/ibm-pumps-4-billion-into-strategic-imperatives-1424959681
Key strategic investments -:
 $1.2 billioninDataCentres.
 $1 billioninWatsonDataAnalyticsTechnology.
 $4 BillionIntoCloudandMobile Initiatives.
Q2 : DU PONT ANALYSIS -Return on Equity and Return on Investment
RATIO 2015 2014 2013 2012

5. 5 | P a g e
Profit Margin (operating)=Net
Income / Net Sales (revenue) 0.16 0.12 0.16 0.16
Total Assets Turnover
(Sales/Asset) 0.73 0.79 0.77 0.86
Leverage (Total Asset/Equity)
7.74 9.88 5.53 6.32
Du Pont Factor , ROE=Net
Income/Shareholders' Equity 0.92 1.01 0.72 0.88
ROE Trend for IBM is -:
Accenture on the otherhand has ROE(ReturnonEquity) of 40 percentin 2015
.
HewlettPackardhasROE of 15%

6. 6 | P a g e
D) CommonSize Statement –Vertical and Horizontal
Common sizeratiosare usedto compare financial statementsof different-size companies,orof the
same companyoverdifferentperiods.Byexpressingthe itemsinproportiontosome size-related
measure,standardizedfinancial statementscanbe created,revealingtrendsandprovidinginsight
intohowthe differentcompaniescompare.
Common Size Ratio =
Item of Interest
-
Reference Item
Belowisthe snapshot of Common Size Statementof Income Statement
Income
Statement
12/31/2
015
12/31/2
014
12/31/2
013
12/31/2
012
12/31/2
015
12/31/
2014
12/31/
2013
12/31/
2012
Period
Ending: Common Size Statement
Total
Revenue
8,17,41,
000
9,27,93,
000
9,83,67,
000
10,28,7
4,000
100.000
0
100.00
00
100.00
00
100.00
00
Cost of
Revenue
4,10,57,
000
4,63,86,
000
4,96,83,
000
5,25,13,
000
50.2282
%
49.988
7%
50.507
8%
51.045
9%
GrossProfit
4,06,84,
000
4,64,07,
000
4,86,84,
000
5,03,61,
000
49.7718
%
50.011
3%
49.492
2%
48.954
1%
Operating
Expenses
Research
and
Developmen
t
52,47,0
00
54,37,0
00
57,43,0
00
58,16,0
00 6.4191%
5.8593
%
5.8383
%
5.6535
%
Sales,
General and
Admin.
1,97,48,
000
2,24,38,
000
2,26,29,
000
2,23,89,
000 24.1592
%
24.180
7%
23.004
7%
21.763
5%
Non-
Recurring
Items
0 0 0 0
0.0000%
0.0000
%
0.0000
%
0.0000
%
Other
Operating
0 0 0 0
0.0000%
0.0000
%
0.0000
%
0.0000
%

7. 7 | P a g e
Items
Operating
Income
1,56,89,
000
1,85,32,
000
2,03,12,
000
2,21,56,
000
19.1936
%
19.971
3%
20.649
2%
21.537
0%
Add'l
income/expe
nse items
7,24,00
0
19,38,0
00
3,33,00
0
8,43,00
0
0.8857%
2.0885
%
0.3385
%
0.8194
%
Earnings
Before
Interestand
Tax
1,64,13,
000
2,04,70,
000
2,06,46,
000
2,29,99,
000
20.0793
%
22.059
9%
20.988
7%
22.356
5%
Interest
Expense
4,68,00
0
4,84,00
0
4,02,00
0
4,59,00
0 0.5725%
0.5216
%
0.4087
%
0.4462
%
Earnings
Before Tax
1,59,45,
000
1,99,86,
000
2,02,44,
000
2,25,40,
000
19.5067
%
21.538
3%
20.580
1%
21.910
3%
Income Tax
25,81,0
00
42,34,0
00
33,63,0
00
55,41,0
00 3.1575%
4.5628
%
3.4188
%
5.3862
%
Minority
Interest 0 0 0 0 0.0000%
0.0000
%
0.0000
%
0.0000
%
Equity
Earnings/Los
s
Unconsolidat
ed
Subsidiary 0 0 0 0 0.0000%
0.0000
%
0.0000
%
0.0000
%
NetIncome-
Cont.
Operations
1,33,64,
000
1,57,51,
000
1,68,81,
000
1,69,99,
000
16.3492
%
16.974
3%
17.161
2%
16.524
1%
X
1,31,90,
000
1,20,22,
000
1,64,83,
000
1,66,04,
000
16.1363
%
12.955
7%
16.756
6%
16.140
1%
NetIncome
Applicable to
Common
Shareholders
1,31,90,
000
1,20,22,
000
1,64,83,
000
1,66,04,
000
16.1363
%
12.955
7%
16.756
6%
16.140
1%
Attachingthe CASH FLOW COMMON SIZE STATEMENT
Period
Ending:
12/31/2
015
12/31/2
014
12/31/2
013
12/31/2
012
12/31/2
015
12/31/2
014
12/31/2
013
12/31/2
012
Cash
Flow
Common Size Statement
Net
Income
1,31,90,
000
1,20,22,
000
1,64,83,
000
1,66,04,
000
100.000
0
100.000
0
100.000
0
100.000
0
Deprecia
tion
38,55,00
0
44,92,00
0
46,78,00
0
46,76,00
0
29.2267
%
37.3648
%
28.3808
%
28.1619
%

8. 8 | P a g e
Net
Income
Adjustm
ents
24,07,00
0
21,21,00
0
-
12,32,00
0 7,56,000
18.2487
%
17.6427
%
-
7.4744% 4.5531%
Accounts
Receivab
le 8,12,000
12,70,00
0
-
14,07,00
0
-
22,30,00
0 6.1562%
10.5640
%
-
8.5361%
-
13.4305
%
Changes
in
Inventori
es 1,33,000 -39,000 -57,000 2,80,000 1.0083%
-
0.3244%
-
0.3458% 1.6863%
Other
Operatin
g
Activities
-
34,48,00
0
-
18,86,00
0
-
7,47,000 7,33,000
-
26.1410
%
-
15.6879
%
-
4.5319% 4.4146%
Liabilities
59,000
-
11,11,00
0
-
2,35,000
-
12,32,00
0 0.4473%
-
9.2414%
-
1.4257%
-
7.4199%
NetCash
Flow-
Operatin
g
1,70,08,
000
1,68,68,
000
1,74,85,
000
1,95,86,
000
128.946
2%
140.309
4%
106.079
0%
117.959
5%
Capital
Expendit
ures
-
35,79,00
0
-
37,40,00
0
-
36,23,00
0
-
40,82,00
0
-
27.1342
%
-
31.1096
%
-
21.9802
%
-
24.5844
%
Investme
nts
-
6,29,000
-
9,23,000
-
7,98,000
-
15,75,00
0
-
4.7688%
-
7.6776%
-
4.8414%
-
9.4857%
Other
Investing
Activities
-
39,52,00
0
16,62,00
0
-
29,04,00
0
-
33,48,00
0
-
29.9621
%
13.8247
%
-
17.6182
%
-
20.1638
%
NetCash
Flows-
Investing
-
81,59,00
0
-
30,01,00
0
-
73,26,00
0
-
90,04,00
0
-
61.8575
%
-
24.9626
%
-
44.4458
%
-
54.2279
%
Sale and
Purchase
of Stock
-
42,87,00
0
-
1,29,70,
000
-
1,27,85,
000
-
1,04,55,
000
-
32.5019
%
-
107.885
5%
-
77.5648
%
-
62.9668
%
Net
Borrowin
gs 19,000
17,83,00
0
69,61,00
0
22,52,00
0 0.1440%
14.8311
%
42.2314
%
13.5630
%
Other
Financing
Activities 0 0 0 0 0.0000% 0.0000% 0.0000% 0.0000%
NetCash
Flows-
Financing
-
91,66,00
0
-
1,54,52,
000
-
98,83,00
0
-
1,19,76,
000
-
69.4920
%
-
128.531
0%
-
59.9587
%
-
72.1272
%
Effectof
Exchange
Rate
-
4,73,000
-
6,55,000 28,000
-
1,16,000
-
3.5861%
-
5.4483% 0.1699%
-
0.6986%
NetCash
Flow
-
7,90,000
-
22,40,00 3,04,000
-
15,11,00
-
5.9894%
-
18.6325 1.8443%
-
9.1002%

9. 9 | P a g e
0 0 %
(valuesin000's)
Analysison the Basis of Cash FlowStatement
IBM cash flowstatementisone of the importantreportsconsideredbyinvestorsdoingfundamental
analysis. Cashflowstatementprovidesdetailsof cashflow movements.
(valuesin000's)
Period Ending: 12/31/2015 12/31/2014 12/31/2013 12/31/2012
Cash Flow
NetIncome 1,31,90,000 1,20,22,000 1,64,83,000 1,66,04,000
NetIncome ison constantdecline forIBM.Howeverthe ratioof decline hasvariedinpastfew years
.
Additional Funds Needed ?
Cash Components
12/31/2015 12/31/2014 12/31/2013 12/31/2012
RetainedEarnings
14,61,24,000 13,77,93,000 13,00,42,000 11,76,41,000
Liabilities 11,04,95,000 11,72,71,000 12,62,23,000 11,92,13,000
NetBorrowings 19,000 17,83,000 69,61,000 22,52,000
(valuesin000's)
The NetBorrowingshassubstantiallydecreased in2015 to 19,000 .IBM hasdone good to maintain
itsliabilitiestoconstantlevel . ItsRetainedEarningsare increasingeveryyearbutthe growth
percentage variesaround6percent.
Market Capitalization:$188 billion
Cash Hoard: $11.76 billion
As of now,IBM doesnot needany additional funds immediatelyinnearfuture .

10. 10 | P a g e
Cash Components
12/31/2015 12/31/2014 12/31/2013 12/31/2012
Capital Expenditures
-35,79,000 -37,40,000 -36,23,000 -40,82,000
Investments -6,29,000 -9,23,000 -7,98,000 -15,75,000
Other Investing
Activities -39,52,000 16,62,000 -29,04,000 -33,48,000
NetCash Flows-
Investing -81,59,000 -30,01,000 -73,26,000 -90,04,000
(valuesin000's)
CAPITAL STRUCTURE
A capital structure is a mix of a company's long-term debt, specific short-term debt, common
equity and preferred equity. The capital structure is how a firm finances its overall operations
and growth by using different sources of funds.
Debt comes in the form of bond issues or long-term notes payable, while equity is classified
as common stock, preferred stock or retained earnings. Short-term debt such as working
capital requirements is also considered to be part of the capital structure.
Glimpse of IBM Capital Structure:
Capital Strucure
12/31/2015 12/31/2014 12/31/2013 12/31/2012
Long Term Debt 33428000 34991000 32856000 24088000
Short Term Debt 6461000 5731000 6862000 9181000
Common Stoks 53262000 52666000 51594000 50110000
Other Stocks -29607000 -27875000 -21602000 -25759000
Treasury Stock -155518000 -150715000 -137242000 -123131000
TOTAL -91974000 -85202000 -67532000 -65511000
(values in 000's)
IBM ‘s long term debt and short term debt has been constant in last 3 years .
IBM is also buying back its shares in increasing amount to increase its Treasury Stock.
IBM can play with this stock to generate money in short notice .

11. 11 | P a g e
2. WORKING CAPITAL ANALYSIS
Working capital can be divided into two categories: gross working capital and net working
capital.
Gross working capital
Gross working capital is a measure of a company's total financial resources. Gross working
capital is calculated by totalling a company's current assets such as cash, short-term
investments, accounts receivable, inventory, and marketable securities. Liabilities are not
taken into account when determining a company's gross working capital, and in this regard,
gross working capital only offers a limited picture of a company's financial standing.
Net working capital
Net working capital provides a much more thorough, comprehensive picture of a company's
financial health. Net working capital is calculated by taking a company's total current assets
and subtracting any current liabilities. Current liabilities include accounts payable, short-term
debt, taxes, and employee salaries.
IBM WorkingCapital 12/31/2015 12/31/2014 12/31/2013 12/31/2012
GrossWorking CAPITAL
=Total CurrentAssets 42504000 47377000 51350000 49433000
Current Liabilities 34269000 39581000 40154000 43625000
NET Working CAPITAL
(CurrentAssets -Current
Liabilites 8235000 7796000 11196000 5808000
(values in 000's)
Working Capital for IBM has increased if we see the CAGR for 5 years .

12. 12 | P a g e
Operating Cycle –Gross and Net
The operating cycle is the average period of time required for a business to make an initial
outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange
for the goods. This is useful for estimating the amount of working capital that a company will
need in order to maintain or grow its business.
2015 2014 2013 2012
Days Salesin Inventory (DSI)=(Inventory
/ Cost of Sales) * 365 Days 13.78851 16.54798 16.97 15.8961
Days sales outstanding (DSO)
=(Account Recievable/Total Credit
Sales)*365 Days 36.3255 154.4652 70.100 90.3987
Days payable outstanding
(DPO)=(Accounts Payable / (cost of
sales /number of days )) Days 149.2466 172.9001 152.33 156.334
Gross operating cycle(DSI+DSO) Days 50.11404 171.0131 87.070 106.294
Net operating cycle (CCC) Days -99.12 -1.88 -65.26 -50
The net operating cycle involves determining how long it takes to create inventory, sell
inventory and collect on invoices to customers.
We observe that CCC is negative for all the years .This is because it gives money quite late to
its vendors .Being a major player in IT , it can command late payment of its dues .
Excel Sheet Analysis
Please find the detailed excel sheet analysis.
IBM Analysis.xlsx
Q3. Estimate the return on stock based on -:
1> Estimate the stock return –arithmetic mean and geometric mean taking past 12
months closing price data ?

13. 13 | P a g e
Excel Function Used are =Average and =GeoMean
ii) One Year Holding Period
Rate of return for 1 year = Column Value G2 = 5.6 %
HPR = [1+.056]-1 = 5.6%
iii) 5 Year Holding Period

14. 14 | P a g e
HPR for 5 Years = (1.08 *.96*.95*.87*.96) -1
= 0.82 -1
= --.18 %
C) Estimate the standard Deviationof Returns usingone year or 52 week data
Calculatedin Risk Returns One Year TAB ,ColumnH

15. 15 | P a g e
Q4 : Valuation ofStock :
i) DividendDiscount Method:
ExpectedRate of Return = ExpectedDividendYield + ExpectedGrowth Rate or Capital Gains
Yield
Snap as on 8th
July:
2015 2014
Common shares outstanding (in millions) 966 991

16. 16 | P a g e
International Business Machines
Period
Ending:
Expected in
2016
12/31/2015 12/31/2014 12/31/2013 12/31/2012
Net Income
Applicable
to Common
Shareholder
s or
Dividend
12,53,05,00,00
0
13,19,00,00,00
0
12,02,20,00,00
0
16,48,30,00,00
0
16,60,40,00,00
0
Common
Stocks 55,92,51,00,00
0
53,26,20,00,00
0
52,66,60,00,00
0
51,59,40,00,00
0
50,11,00,00,00
0
Common
shares
outstanding
(in millions)
96,60,00,000 96,60,00,000 99,10,00,000 99,10,00,000 98,90,00,000
Per Share
Dividend
(D1)
13 14 12 17 17
Market
Price of
Stock (P0) 154 138 160 188 192
Dividend
Yield
0.0839799 0.0992170 0.0756119 0.0886746 0.0876464
Capital
Gains Yield
0.1223659 -0.1422339 -0.1446393 -0.0207779
Expected
Rate of
Return
0.2063458 -0.0430169 -0.0690274 0.0678967

17. 17 | P a g e
Present Value of Operating Cash Flow
FCF = NOPAT - Net new investment in operating capital.
International Business
Machines
Period Ending:
Expected
in 2016
12/31/20
15
12/31/20
14
12/31/2013
12/31/2
012
Sales
7765395
0
8174100
0
9279300
0 98367000
1028740
00
SalesGrowth Rate -0.05
-
0.119103
812
-
0.056665
345 -0.043810875
Profit Margin
(operating) =NetIncome
/ NetSales(revenue)
0.153295
164
0.161363
331
0.129557
186 0.167566359
0.16140
1326
OperatingCapital
1615760
0
1700800
0
1686800
0 17485000
1958600
0
OperatingCapital
Growth Rate
0.007884
752
0.008299
739
-
0.035287
389 -0.107270499
WACC 7.21
TAX 30%
Long Run FCFGrowth
RATE -8%
Free Cash Flows
Sales
7765395
0
8174100
0
9279300
0 98367000
1028740
00
Earnings Before Interest
and Tax
1559235
0
1641300
0
2047000
0 20646000
2299900
0
NOPAT
1091464
5
1148910
0
1432900
0 14452200
1609930
0

18. 18 | P a g e
NetOperating Capital
Expenditures -3400050 -3579000 -3740000 -3623000
-
4082000
FCF 7514595 7910100
1058900
0 10829200
1201730
0
FCF GrowthRate -0.05
-
0.252988
951
-
0.022180
771 -0.098865802
PresentValue of FCF
915297.8
076
963471.3
764
1289768.
575 1319025.579
1463739
.342
Terminal Year Firm
Value
Value in
2016
Free CashFlow Year -
2016 7514595
TVFirm = FCFof
2016/(WACC -G)
Total Value of Firmin
2015
1030129.
364
Firm IntrinsicValue
PV of FCF (Years2012 to
2016)
5951302.
68
Terminal Value
6981432.
043
Total Corporate Value
1293273
4.72
Relative Valuation Techniques
Some of the most common and useful metrics to utilize in relative valuation include:
a) price to earnings ratio
b) return on equity
c) operating margin
d) enterprise value
e) price to free cash flow.
How ever we will look into p/e , p/cf ,p/bv ,p/sales

19. 19 | P a g e
Relative Ratios IBM Accenture HP
Price to earnings ratio
11.63 19.44 6.4
Return on equity
0.92 0.51 0.31
Operating margin
18.67 13.5 5.11
Enterprise value= Market Capitalization + Debt -Cash 178.96B 93B 24.51B
Price to Cash Flow 10.09 21.85 4
Market Capitalization 148.5B 74.36 22.8
ii) Holding Pattern
Market Price of Stock 1 Year 2 Years 5 Years Infinity
154.8 5.60% 0.0368
-
0.177361
IBM is on decline ,I will not
recommend to hold this share till
infinity as of now
Taking a snapshot of IBM 5 Year past returns -:
IBM Risk Returns and
Analysis.xls