Writing Assignment: Financial Statement Analysis – GradSchoolPapers.com

Writing Assignment: Financial Statement Analysis
Fin 427 – 2
Gathering financial data of 2 companies we believe will excel in the technology industry will help us analyze the business and financial performance of both companies. This way our final result will be backed up with data. Income statements, balance sheets and statements of cash flows will be used. The two companies we are using are Hewlett Packard and IBM.
Profitability Ratios
i) ROA
2012 2013 2014
HP -11.63% 4.84% 4.86%
IBM 13.93% 13.06% 10.23%
ii) Return on Sales
2012 2013 2014
HP -10.51% 4.55% 4.50%
IBM 15.89% 16.52% 12.96%
iii) Return on Equity
2012 2013 2014
HP -56.38% 18.75% 18.75%
IBM 88.04% 72.32% 101.30%
Asset Utilization Ratios
i)Fixed Asset Turnover
2012 2013 2014
HP 10.07 9.80 9.83
IBM 7.47 7.22 8.62
ii) Total Asset Turnover
2012 2013 2014
HP 1.11 1.06 1.08
IBM 0.88 0.79 0.79
iii) Inventory Turnover
2012 2013 2014
HP 14.62 14.29 13.23
IBM 23.70 22.18 22.06
iv) Days sales in receivables
2012 2013 2014
HP 49.76 51.60 45.30
IBM 106.80 116.49 125.21
Liquidity Ratios
i) Current Ratio
2012 2013 2014
HP 1.09 1.11 1.15
IBM 1.13 1.28 1.25
ii) Acid Ratio
2012 2013 2014
HP 0.59 0.62 0.66
IBM 0.96 1.07 1.02
iii) Cash Ratio
2012 2013 2014
HP 0.24 0.27 0.35
IBM 0.26 0.28 0.21
Leverage Ratios
i) Leverage
2012 2013 2014
HP 4.85 3.88 3.86
IBM 6.32 5.54 9.90
2012 2013 2014
HP -34.88 22.86 25.94
IBM 44.54 46.71 36.76
Market Price Ratio
i)PE Ratio
2012 2013 2014
HP -1.00936 4.875 6.868421
IBM 13.31177 12.39309 13.53885
ii) Market to Book Value per share
2012 2013 2014
HP 0.569254 0.912779 1.286302
IBM 11.72211 8.958589 13.70983
Here we have decomposed the ROA and ROE multiple for both the companies using the 3-Point DuPont Equation:
i) HP
-ROE: Net Income/ Revenue* Revenue/ Total Assets* Total Assets/ Total Equity
2012: (-12650/120357)* (120357/108768)* (108768/22436)
= -10.5* 1.10* 4.84
= -55.95%
2013: (5113/112298)*(112298/105676)* (105676/22436)
= 4.55*1.06*4.71
= 22.71%
2014: (5013/111454) *(111454/103206) *(103206/26731)
= 4.50*1.07*3.86
= 18.59%
-ROA: Net Income/ Revenue* Revenue/ Total Assets
2012: (-12650/120357)* (120357/108768)
= -10.5* 1.10
= -11.55%
2013: (5113/112298)*(112298/105676)
= 4.55*1.06
= 4.82%
2014: (5013/111454) *(111454/103206)
= 4.50*1.07
= 4.81%
ii) IBM Corporation
-ROE: Net Income/ Revenue* Revenue/ Total Assets* Total Assets/ Total Equity
2012: (16604/104507)* (104507/119213)*(119213/18860)
= 15.88* 0.87* 6.32
= 87.2%
2013: (16483/99751)* (99751/126223)* (126223/22792)
= 16.52* 0.79* 5.53
= 72.27%
2014: (12022/92793)* (92793/117532) * (117532/11868)
= 12.95* 0.78* 9.90
= 100.02%
-ROA: Net Income/ Revenue* Revenue/ Total Assets
2012: (16604/104507)* (104507/119213)
= 15.88* 0.87
= 13.81%
2013: (16483/99751)* (99751/126223)
= 16.52* 0.79
= 13.05%
2014: (12022/92793)* (92793/117532)
= 12.95* 0.78
= 10.10%
Performance Evaluation.
R.O.E. Comparison: From the industry average ROE of approximately 20.71% HP is performing slightly under average at roughly 18.75% and IBM quite above the average at 101.3%. As for HP this is due its slow recovery from its 8.8 billion dollar write down in 2012 because of a $10 billion 2011 acquisition of “Autonomy” a software company of which was accused of committing “serious accounting improprieties” that inflated its value. Investors have long howled that HP paid way too much for Autonomy, and it now appears the company is worth even less than what most critics had estimated. The write-down wiped out HP’s profit for the latest quarter, with the company reporting a nearly $7 billion loss. Predictably, HP’s stock, already at a 10-year low, quickly fell by another 12 percent. On the other hand, we have IBM which is slowly declining but, investors estimates are somewhat indifferent amongst puts, and calls, major investors are encouraging a strong hold even though there has been evidence of steadily declining performance. Major institutional holders include Berkshire Hathaway &Vangaurd Inc. which give justification for the high P/E ratio of 13.5 for IBM.
Price-Earnings Comparison: Performance evaluations of the two companies show that Hewlett and Packard are quite stagnant in returns while IBM is in a steady decline. Price-Earnings Ratios for HP and IBM are 6.9 and 13.5 respectively in 2014. HP on the other hand was under speculation by investment firms after their buyout of “Autonomy” software co. which tanked and spike the initiation of long and short puts, by investors. IBM is expected to recover from its current contractionary period by investors thus the high PE ratio relative to its historical performance, as well as the majority firm share distribution allotted to major investment firms such as Berkshire Hathaway and Vanguard Inc.
Current ratio Comparison: Current ratio comparisons for both firms are as expected at roughly 1 for each of the firms. At 1.15 for HP and 1.25 for IBM in 2014, both firms are hanging at roughly the same as the industry sector average for firms of their respective sizes. As indicators of each firm’s ability to repay their debt particular to monetary liabilities, each firm has assets to retire liabilities in the long-term.
Acid-Test Ratio Comparison: As commonly known, the current ratio is not a great indicator of a firm’s debt to asset ratio without the Acid-Test Ratio analysis. Acid-Test ratios for HP and IBM are .66 and 1.02 respectively in 2014. As expected, HP is well below 1.0 in its acid test ratio and proves that HP compared to its most recent 3 years is still recovering from its fallout with “Autonomy” inc., massive managerial discontinuity and its failed launch of its tablet computer in 2012, but is not yet close to recovering enough liquidity in assets to cover current liabilities. HP on the other hand at 1.02 has liquidity just over the 1.0 barrier which is a “no-go” for investors.
Total Asset Turnover Ratio Comparison: Asset turnover ratios for HP and IBM are 1.08 and .79 respectively in 2014. This comes as a little odd because the asset turnover of these two firms is the dollar return to sales and/or revenues per dollar invested in assets. This means that oddly enough HP is performing slightly better than IBM in this ratio meaning that HP may have a slight edge in market growth in the long term. Still, asset turnover ratios for both firms hovering around 1.0 is less than ideal for the typical investor. But, due to the fact that IBM has near a 5X larger ROA than HP at roughly 100% serves as collateral for their subsequently low asset turnover.
Leverage Ratio Comparison: Leverage ratio comparisons for HP and IBM are 3.86 and 9.90 respectively in 2014. Both firms seem to rely much more on debt rather than equity to finance ongoing operations.
Conclusion: Starting with HP, according to the decomposition of its profitability ratios mainly Return on Equity, Profit Margin and Return on Assets, HP is slow but, consistent with returns. As well as looking at the above table, notably by the low P/E ratio it becomes evident that investors are leaning bearish in their stock decisions for HP. Market to book ratio’s for IBM and HP in 2015 10.09 and 2.73 respectively. ROE for HP is 18.75% and 101.30% for IBM. ROE of both firms are quite comparable but, in terms of profitable returns these are very average. The P/E ratio for both firms is also quite low and growth from these two firms is quite stagnant. These two firms will have very similar performances in the future. A forecast of the future for these firms would lean towards a slightly better performance from IBM in the future. To conclude our analysis of IBM and HP inc. investing in IBM notably would be a safer investment but, will not yield above market value returns in its industry in its short term outlook.
References
View Filing Data. (2012, August 29). Retrieved November 1, 2015, from http://www.sec.gov/cgi-bin/viewer?action=view&cik=47217&accession_number=0001047469-14-009977&xbrl_type=v
View Filing Data. (2012, August 29). Retrieved November 1, 2015, from http://www.sec.gov/cgi-bin/viewer?action=view&cik=47217&accession_number=0001047469-13-011417&xbrl_type=v
View Filing Data. (2012, August 29). Retrieved November 1, 2015, from http://www.sec.gov/cgi-bin/viewer?action=view&cik=47217&accession_number=0001047469-12-011417&xbrl_type=v
View Filing Data. (2012, August 29). Retrieved November 1, 2015, from http://www.sec.gov/cgi-bin/viewer?action=view&cik=51143&accession_number=0001047469-14-001302&xbrl_type=v
View Filing Data. (2012, August 28). Retrieved November 1, 2015, from http://www.sec.gov/cgi-bin/viewer?action=view&cik=51143&accession_number=0001047469-13-001698&xbrl_type=v
View Filing Data. (2012, August 29). Retrieved November 1, 2015, from http://www.sec.gov/cgi-bin/viewer?action=view&cik=51143&accession_number=0001047469-12-001742&xbrl_type=v

 

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