A Financial Analysis of HP Company and IBM Company

AFinancial Analysis of HP Company and IBM Company

ExecutiveSummary

Thisparticular report provides detailed evaluation and analysis of thecontemporary and probable liquidity, profitability and financialstability of HP Company and IMB Company which are technologiescompanies in the United States of America. The method used foranalysis comprises of vertical and horizontal of the most common sizebalance sheet and the income statement as well as current, quick anddebt ratios (DeFranco, Kothari, &amp Verdi, 2011).Other diverse calculations comprise of P/E ratios, acid test ratios,return on equity ratios, current assets ratios among other ratios.The ratios employed in this report are found in the appendices. Thefindings from the data analyzed shows that both the HP and IBM areconsidered to be above average industries. In comparison to this, HPCompany outperformed IMB Company in the general technology revenuesand the accounts receivables turnover and HP Company is more stablein terms of production backed by its financial statements and thismakes the company more viable for investment. According to theanalysis, both companies’ current positions are positive whichmeans that the companies are fighting to control their costs and alsoinvesting their assets well.

Accordingto the analysis, the major areas of weaknesses need furtherinvestigation and immediate action by the company management. Thelimitation that arises from the analysis is the detailed explanationof shareholders equity and liabilities which were not fullyrepresented in the financial statements. The results are based on themost recent three years.

Tableof Contents

ExecutiveSummary……………………………………………………………………………….1

Introduction…………………………………………………………………………………………………………………….3

HPCompany background…………………….……………………………………………3

IMBCompany background………………………………………………………………..4

Common-Sizedand Comparative Financial Analysis…………………………………………….4

IncomeStatement Analysis………………………………………………………………..4

BalanceSheet Analysis……………………………………………………………………5

FinancialRatio Analysis……………………………………………………………………..……6

Liquidity……………………………………………………………………………………6

Long-termdebt-paying ability…………………………………………………………….7

Profitability………………………………………………………………………………..8

Investoranalysis………………………………………………………………….……….8

of financial performance………………………………………………………………9

Conclusionand recommendation for investment……………….………………………….……10

References………………………………………………………………………………………..10

Appendices……………………………………………………………………………………….11

Themain aim of this financial analysis is to compare the financialpositions of Hewlett-Packard Company and International BusinessMachine Corporation. Both companies are considered to be AmericanMultinational Technology companies since early 1990’s. In thisparticular paper, I will assess each of the company’s backgroundusing the income statements and balance sheet from 2013 to 2015 usingvertical and horizontal analysis as the methods of analysis (Fridson,&amp Alvarez, 2011).I will break down each of the company profitability ratios, liquidityratios, long-term debt ratios and the investor analysis ratios. Theanalysis report will pay much attention to the current ratios, acidtest ratios, receivables turnover, inventory turnover, assetsturnover, earning per share ratio, debt to assets ratio and return onassets. The analysis report will also comment on the current prospectof HP and IBM and come up with the recommendation that will enhancethe industry.

Hewlett-PackardCompany (HP)

Hewlett-PackardCompany is considered to be an American Multinational firm that hasits headquarters in California, Palo Alto. The company developed andprovided an extensive range of hardware components and softwaresrelated services to its customers, small and medium-sized firms andalso big firms that include governments, education, and healthcenters. The company was founded in 1939 by William Hewlett, and itskey product lines comprise of personal computer devices, companiesservers, systems products, softwares and varied types of printers andimaging products. As at 31stDecember 2015, HP Company had an income of US $138.854 Billion, netrevenue of US $7.013 Billion and operating income of US $ 9.185Billion (HP Annual reports, 2013, 2014 &amp 2015).

InternationalBusiness Machine Corporation (IBM)

IBMis considered to be an American International Technology andConsulting Company that has its headquarters in New York, Armonk.International Business Machine Corporation usually makes and alsomarkets some computer middleware, hardware and also the computersoftwares (Healy,&amp Palepu, 2012).The company also provides infrastructure, hosting, and the consultingservices in diverse parts that vary from nanotechnology to mainframecomputers. International Business Machine Corporation is consideredhaving originated in the year 1911 as a Computer Tabulating andRecording Company via the amalgamation of the main Tabulating MachineFirm, the Computer Scale Firm. IMB Company has grown through theyears from being a single organization that manufactures and alsosells the computer hardware’s to one of the biggest company in theUnited States of America currently. As at 2015, IBM Company had anincome of US $81.741Billion, net revenue of US $13.190 Billion andoperating income of US $15.944 Billion with more than 350,000employees worldwide (IBM Annual reports, 2013, 2014 &amp 2015).

Common-Sizedand Comparative Financial Analysis

Analysisof the Income Statement

HPcommon size income statement heightens a slight increase for revenuenet product sales relative to revenue from 64.5% in the financialyear 2013 to 66.8% in the year 2015. However, under the trendanalysis, HP reported a decrease of 4.6% for revenue from productsales in 2015 though for the fiscal year 2014 the company had anincrease of 1.8%. IBM common size income statement shows a decreaseover the three-year period on revenue from product sales from 40.2%to 37.8% in 2013 and 2015 respectively. Under the trend incomestatement, IBM reported an increasing decrease on product sales of 3%and 6.4% in years 2014 and 2015. The three-year average for productsales heightens that HP sold 65.8% while IBM sold 39.1%. Theperspective substantiates that HP was able to sell more productscompared to what IBM sold over the three-year average.

Theselling, general and administrative expense is another significantaspect for the two firms. Under the statement of income using thevertical analysis, HP recorded relatively the same percentage overthe three financial years with the expense being 11.8%. IBM selling,general and administrative expense increased from 22.8% in 2013 to25% in 2015. Using the trend analysis, HP reported an increase of0.6% and a decrease of 8.2% in 2015. IBM reported a less significanttrend in that for the year 2014 the decrease was 0.1% and in 2015 adecrease of 1.2% was recorded. Using the three-year analysis, HP hada lesser selling, general and administrative expense compared to IBMby recording 11.9% compared to 23.9%.

Thenet earnings for HP in relation to net sales under the common sizeanalysis of the income statement show a slight decrease of over thethree years with the year 2013 reporting 4.6% compared to 4.4%reported in 2015. The net earnings for IBM decreased from 16.1% to13% in 2013 and 2015 respectively. Under the trend analysis, thecomparative net income was a decrease of 2.0% and 10.9% for years2014 and 2015. The three-year analysis describe that IBM had a highernet income of 15.3% compared to HP which posted a net income of 4.5%.

Analysisof the Balance Sheet

Thecommon-size statement of financial position for HP Company reflectstotal current assets to total assets three-year average from 2013 to2015 of 48.2% and total liabilities to total assets three yearaverage of 41.6%. The current assets compared to the total companyassets decreased in 2014 by 0.4% but was able to rebound to 2.8% in2015 while the current liabilities decreased by 5.2% and 4.3% in 2014and 2015. IBM Company reflects a three-year average of the currentassets to the total asset of 40.4% while for the current liabilitiesto total asset the company had 32.2%. IBM recorded a decrease overthe two comparative years 2014 and 2015 of 3.8% and 17.2% and also adecrease in the current liabilities by 1.4% and 14.7% over the samecomparative periods.

HPlong-term debt to total equity increased from 15.7% in 2013 to 20.4%in 2015 signifying that the company was reliant on long-term debt tofinance research and development of new products. IBM also had anincrease of the long-term debt to equity ratio from 26% to 30.3% inyears 2013 t0 2015 also signifying it needed funds for research anddevelopment. Over the three-year average, IBM has a higher long-termdebt of 28.7% compared to HP Company which had a long-term debt of17.2% signifying that IBM had a higher solvency risk compared to HPCompany.

FinancialRatio Analysis

Liquidity

Currentratio vs. quick ratio

HPCompany three-year average current ratio for 2013 to 2015 was 1.23%,1015 and 1.11% and the Quick ratio was 0.80, 0.73 and 0.69. Ascompared with IBM Company three-year average current ratio for 2013to 2015 was 1.24%, 1.25% and 1.28% and the quick ratio was 1.07, 1.02and 1.07. Both companies’ three-year average current ratios are 1.0which is positive. Both Companies current ratio shows that they maynot be utilizing short term finance effectively.

Dailysales inventory vs. Inventory turnover in days

HPCompany inventory holding period was shorter than IBM Company becauseHP Company daily sales inventory in the three years average ratio is21.27 and inventory turnover in day’s ratio of 13.21 and IMBCompany having an average ratio of 31.27 and inventory turnover inday’s average ratio of 22.54. HP Company is able to move stock morethan IBM Company.

Day’ssales in receivables vs. accounts receivables turnover in days

IBMCompany three-year average of days sales in debtors ratio was 19.56and the average accounts receivables turnover in days ratio was 8.74compared to HP Company average of days sales in debtors ratio was24.98 and the average accounts receivables turnover in days ratio was7.62. HP Company compared to IBM Company is able to collect on itsaccounts receivables two times faster than IBM Company.

Long-termDebt-paying ability

Debtratio vs. average debt ratio

HPCompany three-year average debt ratio was 0.86, decreasing from 0.87in 2014 and 0.88 in 2015. As compared to IBM Company, the debt ratiowas 0.83 in 2015, a decrease from 0.87 and 0.86 in 2014 and 2013respectively. Despite the decreasing ratios from both companies, theystill show positive signs of having almost equal assets toliabilities and thus lower financial risk which is a good aspect forcreditors.

Profitability

Netprofit margin vs. total assets turnover

Mostcommon way to measure company profitability is to measure the returnon sales and the ability to generate sales by selling its assets. HPCompany three-year average net profit margin from 2013 to 2015 was4.64%, 4.12%, and 3.95% and the average was 4.23%. As compared to IBMCompany, the three-year average net profit margin was 4.00%, and thetotal assets turnover was 0.85. HP Company has a slightly lowerprofit margin than IBM that indicates better cost control and highertotal assets turnover than HP Company indicating its efficiency atusing assets to generate income (Robinson,Henry, Pirie, &amp Broihahn, 2015).

Investor’sAnalysis

PriceEarnings Ratio

Companiesusually gauge the future earning capability by using the P/E ratio. HP Company’s price earnings ratio three-year average from 2013 to2015 was 4.62 and IBM Company had an average P/E ratio of 11.96.While HP P/E ratio showed that their stock has been selling at 4.62times earnings, IMB stock was selling for about 11 times earnings.This shows that IBM Company has a higher growth opportunity thanFord.

of financial performance and suggestions for improvement

BothHP Company and IBM Company demonstrate signs of strong financialratios and leaders in the technology industry. HP Company shouldcontemplate on improving the liquidity of their accounts receivablesand inventories. Since both companies have positive quick ratios, HPCompany is best at moving its stocks at a faster pace and thencollecting on their accounts receivables. From the analysis, bothcompanies demonstrate positive signs of low financial risk that aremost vital to the creditors because in the long-term they will beprotected in case of any insolvency. HP Company is better atcontrolling its cost and also investing their respective assets whilethe IMB Company is considered more efficient at utilizing theirassets t generate income. IBM Company has a higher margin of profitthan the HP Company which means that they control more shares in thetechnology industry.

Conclusionsand recommendations for investment

HPCompany and IBM Company have gone through extreme financialdifficulties with the great success of Apple Inc. and MicrosoftCorporation, but conversely, they have both become second profitableleaders in the technology industry. Though both firms are great firmsbacked by strong financials, IBM Company is a better firm forinvestors to invest in its stocks because IBM Company’s stock sellsfor only 2 times their earnings as compared to HP Company that sellsfor 6 times IBM Company earnings (Schroeder,Clark, &amp Cathey, 2011).From a dividends point of view, HP Company has a higher operatingcash flow dividend ratio compared to IBM Company which indicates thatthe company is better at covering cash dividends with their annualcash flow. In general, HP Company is a stronger and more profitablefirm than IBM Company that diverse investors should contemplate ininvesting.

References

DeFranco, G., Kothari, S. P., &amp Verdi, R. S. (2011). The benefitsof financial statement

comparability.Journalof Accounting Research,49(4),895-931.

Fridson,M. S., &amp Alvarez, F. (2011). Financialstatement analysis: a practitioner`s guide(Vol.

597).John Wiley &amp Sons.

Healy,P. M., &amp Palepu, K. G. (2012). BusinessAnalysis Valuation: Using Financial Statements.

CengageLearning.

Hofmann,E., &amp Lampe, K. (2013). Financial statement analysis of logisticsservice providers:

waysof enhancing performance. InternationalJournal of Physical Distribution &amp Logistics Management,43(4),321-342.

IBMAnnual reports (2013, 2014 &amp 2015). Retrieved from

https://www.sec.gov/Archives/edgar/data/51143/000104746916010329/a2226548z10-k.htm

HPAnnual reports (2013, 2014 &amp 2015). Retrieved from

http://quicktake.morningstar.com/stocknet/secdocuments.aspx?symbol=hpq

Robinson,T. R., Henry, E., Pirie, W. L., &amp Broihahn, M. A. (2015).Internationalfinancial

statementanalysis.John Wiley &amp Sons.

Schroeder,R. G., Clark, M. W., &amp Cathey, J. M. (2011). Financialaccounting theory and

analysis:text and cases.John Wiley and Sons.

Appendices

Table1

Table2