IBM Corporation case study
Question 1
| 1996 | 1997 | |||||
| Dec | Marc | Jun | Sep | Dec | Total | |
| Net Income | $ 2,023.00 | $ 1,195.00 | $ 1,446.00 | $ 1,359.00 | $ 2,093.00 | $ 6,093.00 |
| Total Shareholder’s Equity | $ 21,628.00 | $ 19,951.00 | $ 20,109.00 | $ 19,756.00 | $ 19,816.00 | $ 79,632.00 |
| ROE | 9% | 6% | 7% | 7% | 11% | 8% |
ROE = Net income/ Shareholders Equity.
| 1998 | 1999 | ||||||||
| Marc | Jun | Sep | Dec | Total | Marc | Jun | Sep | Dec | |
| Net Income | $ 1,036.00 | $ 1,452.00 | $ 1,494.00 | $ 2,346.00 | $ 6,328.00 | $ 1,470.00 | $ 2,391.00 | $ 1,762.00 | $ 2,089.00 |
| Total Shareholder’s Equity | $ 18,865.00 | $ 18,577.00 | $ 18,635.00 | $ 19,433.00 | $ 75,510.00 | $ 18,306.00 | $ 19,158.00 | $ 20,068.00 | $ 20,511.00 |
| ROE | 5% | 8% | 8% | 12% | 8% | 8% | 12% | 9% | 10% |
| 2000 | ||
| March | ||
| Net Income | $ 1,591.00 | |
| Total Shareholder’s Equity | $ 19,518.00 | |
| ROE | 8% | |
The factors and trends that significantly contributed to IBM’s productivity include earnings per share, cash flow, and gross margins. The company’s shareholder’s equity did not fluctuate with a more significant margin in all quarters. The lowest from 1996 to 1999 was $18,306 million, while the highest during that period was $21,628 million. The company’s ROE expanded to 12%, revealing that the company identified a suitable approach to maximize all the assets contributed by its shareholders. IBM reported an increase in revenue; for instance, the company in 1997 had an income of $17,308, 000 in the first quarter. However, the revenue grew consistently to $25,131,000 million in the final quarter of 1998. Although the company recorded consistent growth in its revenue from 1997 to the last quarter in 1998, its income started to diminish at an alarming rate.
Every financial year, cash plays an essential role in a firm’s profitability. Although IBM had fluctuating cash flows since 1996, it is evident that cash helped the company handle short-term requirements in every quarter. Furthermore, IBM’s gross margin was highest in the final quarter of 1998 at $9,809 due to a substantial increase in revenue in that quarter. Nonetheless, the company’s lowest gross margin was in the first quarter of the year 1998 at $ 6,450. The primary reason for a reduced gross margin at the beginning of 1998 was due to the high cost of goods sold. Overall, IBM’s revenue decreased by 27%.
Question 2
IBM experienced stable revenue growth from the first quarter of 1998 to the first quarter of 2000. Additionally, the company reported the highest revenue growth of $25,131 in December 1998, while its revenue dropped to $17,308 in March 1997. IBM revenue decreased sharply from $24,182 in December 1999 to $19,348 in March 2000. The drop in revenue during that period was about 25%. Notably, IBM had irregular revenue growth from 1996 to 2000, although the company reported increased revenue in December for all the years due to improved shopping activities as a result of festivals.
Due to increased revenue in December 1998, the company recorded the highest gross margin, which stood at $9,809. IBM’s lowest margin was $ 6,450 in the first quarter of 1998. The gross margin in this quarter decreased substantially due to the high cost of goods sold in that period. The percentage drop in revenue was about 27% from $ 8,333 in the final quarter of 1999 to the first quarter of 2000. Notably, the company has been recording reduced gross margin for nearly all first quarters of all years.
IBM’s receivables increased by about 9.1% when comparing the first quarter in 2000 and the final quarter in 1996. Although the company reported an increasing trend for its receivables, seasonal revenue behavior affected this trend. Overall, the company recorded the highest receivables of $37,324 in December 1999 and the lowest receivables of $30, 857 in March 1997. Therefore, the receivable difference from the highest to the lowest was $6,467 or 20.9% change.
Question 3
Earning per share is calculated by deducting dividends on the preferred stock from net income, and the resultant figure is divided by average outstanding shares. IBM had the lowest EPS in March of every year, although the value increased steadily for other quarters. The company reported the highest EPS in the second quarter of 1999 at 1.32. However, its lowest Eps was recorded in March 1998 at 0.54. One of the primary reasons for IBM’s increased earning is comparatively high income and gross margin, especially in the last two quarters as opposed to the first two quarters. In most cases, the company’s selling, general, and administrative expenses remained low in the second quarter of 1999 compared to other quarters in all years. Consequently, a decrease in costs significantly contributed to reduced operating expenses, which further increased operating income.