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International Business Machine | IBM | - Computers - software

26-Feb-2012



Performance Trend  |  Valuation  |  Growth  
$ in Millions. Fiscal year ends in December. Figures are consolidated and restated.



Warren Buffett purchased 5.4% stake in IBM for more than $10 billion back in 2011 which was very surprising because he had a notorious aversion to technology companies. We have added the 2002 to 2010 financial statements of IBM in our database, check the Performance, Valuation and Growth Pages where you can clearly see why Buffett liked Big Blue. Also check out Warren Buffett's investment in Petro China.


Profitability Ratios


Gross, Operating, Net Profit Margin





A slow but steady increase in gross, operating and net profit margins. In Dec 2002 IBM's net profit margin was 4.4% while in 2010 it was 14.8% which demonstrates its journey from a commodity hardware player to the more profitable software and consulting business.


Return on Equity





From an investor's perspective, ROE is a key ratio. The ROE (after subtracting preferred shares) tells common shareholders how effectively their money is being employed. Look for a ROE greater 10%. IBM's ROE has been steadily rising

Median 9 year ROE 33%

Return on Equity = ( Net Income - Preferred Dividend ) / Shareholder's Equity



Free Cash Flow





Free Cash Flow is a measure which is ignored by most investors. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its Property, Plant and Equipment (PPE) also called as Capital Expenditure (Capex). FCF can be used by the company to invest in other projects, thus enhancing shareholder value. IBM is a FCF cow - a company which generates ample amount of free cash flow.

Free Cash Flow = Cash flow from operations - Capital Expenditure



Leverage Ratios


Current Ratio





Current Ratio measures the company's current assets against its current liabilities. Ideally the current ratio should be greater than 1.5. Avoid investing in companies whose current ratio is less than 1. There are exceptions to this rule, some good companies can have less than 1 or even a negative current ratio when they recieve money faster from their customers than they have to pay to their vendors.

Current Ratio = Current Assets / Current Liabilities



Interest Coverage Ratio





An interest coverage ratio less than 1.5 is a red flag. The higher the ratio the less a company is burdened by debt. If a company has no debt or the loan interest is being paid by interest income from investments or other activities the ratio is zero which of course is excellent. A negative ratio tells us that the company cannot even pay its interest on loans from its operating income, stay far away from such companies.

Interest Coverage Ratio = ( Operating Income - Taxes ) / Interest



Overall Performance


Company Performance





Watch the overall performance of revenue and profit, needless to say you should invest in a company whose numbers are going up.



Stock Dilution





Buffett's point to investors was share buybacks at a reasonable price can add significant value for long-term shareholders. When a company buy backs its own shares the existing shareholders own more of the company and get more dividends. IBM has steadily been buying back its own shares for a long time.