IBM profitability and financial performance analysis

IBM Profitability

IBM's profits and ROE increased dramatically over the period of four years, from 1996 to 2000. There were a number of factors that helped contribute to Big Blue's profitability in this case. First, there was a spike in revenues that lead to a stable increase starting in 1998 and really solidifying in 2000. This increase in revenue allowed the gross margin to increase; therefore positively impacting net income for the company, as operating expenses remained relatively stable during the same period. Moreover, cash levels and EPS were other factors that helped boost IBM's profitability.

Moreover, IBM had growth in revenue, receivables, and gross margins. Revenue growth spiked beginning in 1998 and remained stable until 2000. This increased the cash flow the company was able to work with, as operating costs and expenses also remained stable, with no major increases that would have eaten into the new increases in revenue. Additionally, the company's receivables increased dramatically over the period of 3 years examined in the evaluation. There was a stable increase of receivable numbers that spiked in December of 1998 and continued to remain above $34,000 (in millions) for the next five quarters. The gross margin reported in the evaluation also had a slow, but steady increase over the years examined. 1996 saw a gross margin for the year at about .60 and this steadily increased over the next four years to peak at 0.64 in 1999. IBM saw a steady incline in the gross margin, which essentially helped boost revenue and earnings per share throughout those later years.

The peak season for IBM seems to be during the holiday season, and thus numbers from December tend to be higher than other periods of the year. Still, numbers from June of each year also show that the company goes through a second seasonal summer period where sales are up. Therefore, IBM would most likely keep higher levels of inventory during its seasonal peak periods. Also, the receivables are greater during seasonal peak periods. Thus, December and June show the highest revenue. Still, the gross margins of these periods balance out, as there is more money being spent during these seasonal periods as well. Still, since IBM does not have an extreme peak season, unlike other industries like tourism, the company should not be affected by seasonality in terms of making crucial decisions regarding working capital.

IBM also saw an increase in overall earnings per share during this period.