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  1. Compute the five component ratios of a decomposition of ROE (net profit margin, total asset turnover, return on assets, financial leverage, return on equity) for IBM’s fiscal years 2016-2019 (present your results)
  2. Answer & Explanation
  3. Solved by verified expert
  4. 1.    
  5. Net Profit Margin 
  6. 2016 14.85%
  7. 2017 7.27%
  8. 2018 10.97%
  9. 2019 12.22%
  10.  
  11. Total Assets Turnover 
  12. 2016 68.03%
  13. 2017 65.18%
  14. 2018 64%
  15. 2019 55.99%
  16.  
  17. Return on Assets 
  18. 2016 10.11%
  19. 2017 4.59%
  20. 2018 7.07%
  21. 2019 6.20%
  22.  
  23. Financial Leverage 
  24. 2016 5.39x
  25. 2017 6.07x
  26. 2018 6.29x
  27. 2019 6.25x
  28.  
  29. Return on Equity 
  30. 2016 64.55%
  31. 2017 32.46%
  32. 2018 51.56%
  33. 2019 44.94%
  34.  
  35. 2.    
  36. For the net profit margin, the percentage suddenly dropped in 2017.  This is the year that they made the lowest sales as well as the lowest net profit.  The good thing is that, in 2018, the net profit margin increase again.  The trend is decreeing in total assets turnover.  Sales every year fluctuates but the change is minimal. The reason behind this is that the total assets increase every year but the increase in total sales is not proportion to the increase in total assets.  The trend in net profit margin is the same in return on asset except for the result for the year 2019.  Although the net profit increase, the return on equity decreased.  This is because the total assets increased high this year.  For the four years, the company have low return on assets.  This means that they are not efficiently utilizing their resources which they must.  Fi this continues, they may generate loss and they may have a liquidity problem.  Every year, the financial leverage ratio increase.  This means that the company is financed more on liability than equity.  This can be related to the net profit because if the company borrows money, they will have to pay more interest and paying more interest will lower the net profit.  There is no particular trend in return on equity.  But, the 2016 result is the highest.  This means that each and every investment in the company’s equity earned the particular net profit percentage.  If the company maintain it high, it will attract more potential investors. and they will not have to borrow money from the bake.
  37.  
  38. 3.    
  39. 2016
  40. Q1 23.38%
  41. Q2 25.32%
  42. Q3 24.06%
  43. Q4 27.24%
  44.  
  45. 2017
  46. Q1 22.94%
  47. Q2 24.37%
  48. Q3 24.20%
  49. Q4 28.49%
  50.  
  51. 2018
  52. Q1 23.96%
  53. Q2 23.57%
  54. Q3 23.57%
  55. Q4 27.34%
  56.  
  57. 2019
  58. Q1 23.57%
  59. Q2 24.84%
  60. Q3 23.37%
  61. Q4 28.23%
  62.  
  63. 4.    
  64. In 2016, the last quarter is the biggest contribution of the segment to the total revenue.  Each quarter, the segment’s revenue is increasing.  The trend is also increasing in 2017 and the fourth quarte percentage is higher than in 2016.    The trend in 2019 is it goes up and it goes down but the last quarter increase is really big.  Overall, the company must encourage the segment to make more revenue.  They already make good revenue but they can still make more.  If that happens, the net profit of the company will increase which they will use for their future operations and payments to shareholders in the form of dividends. 
  65.  
  66. 5.
  67. 2016
  68. Q1 46.50%
  69. Q2 47.90%
  70. Q3 46.90%
  71. Q4 50%
  72.  
  73. 2017
  74. Q1 42.80%
  75. Q2 45.60%
  76. Q3 45.90%
  77. Q4 56.97%
  78.  
  79. 2018
  80. Q1 43.20%
  81. Q2 46%
  82. Q3 46.90%
  83. Q4 49.10%
  84.  
  85. 2019
  86. Q1 44.20%
  87. Q2 47%
  88. Q3 46.20%
  89. Q4 51%
  90.  
  91. 6.    
  92. Over all, each quarter, the percentage of gross profit is increasing.  It is always the last quarter that they performed best because of the high gross profit percentage.  The company’s segments can sell more products at a higher price and this is one of the reason why they have good net profit.  If they can generate high profit not only on the last quarter, they can still achieve the2016’s net profit margin or even higher.
  93.  
  94. 7.
  95. 2016
  96. Q2 8.32%
  97. Q3 (5%)
  98. Q4 13.23%
  99.  
  100. 2017
  101. Q2 6.25%
  102. Q3 (0.71%)
  103. Q4 17.70%
  104. Annual (0.97%)
  105.  
  106. 2018
  107. Q2 (1.66%)
  108. Q3 0
  109. Q4 16.02%
  110. Annual (1.01%)
  111.  
  112. 2019
  113. Q2 5.38%
  114. Q3 (5.91%)
  115. Q4 20.80%
  116. Annual (1.53%)
  117.  
  118. 8.    
  119. Every quarter of every year, there is an increase and decrease of the segment’s revenue and they have no particular trend.  From 2017 up to 2019, the total revenue is on a decreasing trend.  This is al though they are generating higher gross profit.  Motivating the segment to make more revenue is the best option.  It is because they are making good gross profit and the reason is that they are regulating the cost of sales and this is a good strategy.  So if they are motivated to make more sales, the revenue coming from them will be higher and there will be an increase in net profit.  Of course, the company will incur costs to motivate the segment.
  120.  
  121. 9.
  122. 2016
  123. Q2 11.58%
  124. Q3 (6.98%)
  125. Q4 20.72%
  126.  
  127. 2017
  128. Q2 13.20%
  129. Q3 (0.06%)
  130. Q4 23.49%
  131. Annual (5.38%)
  132.  
  133. 2018
  134. Q2 4.72%
  135. Q3 2%
  136. Q4 21.45%
  137. Annual 0.35%
  138.  
  139. 2019
  140. Q2 12.07%
  141. Q3 (7.52%)
  142. Q4 33.34%
  143. Annual 0.35%
  144.  
  145. 10. 
  146. Like in revenue, there is also an increase an decrease in the gross profit.  But unlike in revenue, the decrease is very minimal.  As the revenue increase, the cost of sales also increase.  This is so because of the cause and effect relationship that the have.  The amount of changes in this pattern is quite acceptable and still favorable because it have a big increase and a very minimal decrease.  This pattern can be maintained or improved by fixing a particular percentage of gross profit that will cover all their other expenses plus profit.
  147.  
  148. 11. 
  149. Among the segments, the global technology services is the segment that positively influenced IBM.  It is because the revenue generated from this segment is the highest while its cost is not that high.  Therefore, this segment provided the highest percentage in the total gross profit of all the segment.
  150.  
  151. 12. 
  152. Based on the results, the company’s best year is 2016.  It changed in 2017 but starting 2018 it began to strengthen the operations and it really showed on the result of the performance.  Since the company experienced a mini downfall, they will make sure that it won’t happen again.  Their performance is improving each year and they will continue performing well.  The over all sales will improve with the help of each segments.  If they planned their next operations, they must first think how are they going to utilize their resources efficiently.  Because if they will know, they will have good returns and they will maintain their liquidity and solvency.
  153. Step-by-step explanation
  154. 1.    
  155. Net Profit Margin = Net Profit / Revenue
  156.  
  157. 2016
  158. Net Profit Margin = 11,872 / 79,920
  159. Net Profit Margin = 14.85%
  160.  
  161. 2017
  162. Net Profit Margin = 5,753 / 79,139
  163. Net Profit Margin = 7.27%
  164.  
  165. 2018
  166. Net Profit Margin = 8,728 / 79,591
  167. Net Profit Margin = 10.97%
  168.  
  169. 2019
  170. Net Profit Margin = 9,431 / 77,147
  171. Net Profit Margin = 12.22%
  172.  
  173. Total Assets Turnover = Revenue / Average Total Assets
  174.  
  175. 2016
  176. Total Assets Turnover = 79,920 / 117,470
  177. Total Assets Turnover = 68.03%
  178.  
  179. 2017
  180. Total Assets Turnover = 79,139 / [(125,356 + 117,470) / 2]
  181. Total Assets Turnover = 65.18%
  182.  
  183. 2018
  184. Total Assets Turnover = 79,591 / [(123,382 + 125,356) / 2]
  185. Total Assets Turnover = 64%
  186.  
  187. 2019
  188. Total Assets Turnover = 77,147 / [(152,186 + 123,382) / 2]
  189. Total Assets Turnover = 55.99%
  190.  
  191. Return on Assets = Net Profit / Total Assets
  192.  
  193. 2016
  194. Return on Assets = 11,972 / 117,420
  195. Return on Assets = 10.11%
  196.  
  197. 2017
  198. Return on Assets = 5,753 / 125,356
  199. Return on Assets = 4.59%
  200.  
  201. 2018
  202. Return on Assets = 8,728 / 123,382
  203. Return on Assets = 7.07%
  204.  
  205. 2019
  206. Return on Assets = 9,431 / 152,186
  207. Return on Assets = 6.20%
  208.  
  209. Financial Leverage = Total Liabilities / Total Equity
  210.  
  211. 2016
  212. Financial Leverage = 99,078 / 18,392
  213. Financial Leverage = 5.39x
  214.  
  215. 2017
  216. Financial Leverage = 107,631 / 17,725
  217. Financial Leverage = 6.07x
  218.  
  219. 2018
  220. Financial Leverage = 106,453 / 16,929
  221. Financial Leverage = 6.29x
  222.  
  223. 2019
  224. Financial Leverage = 131,202 / 20,985
  225. Financial Leverage = 6.25x
  226.  
  227. Return on Equity = Net profit / Total Equity
  228.  
  229. 2016
  230. Return on Equity = 11,872 / 18,392
  231. Return on Equity = 64.55%
  232.  
  233. 2017
  234. Return on Equity = 5,753 / 17,725
  235. Return on Equity = 32.46%
  236.  
  237. 2018
  238. Return on Equity = 8,728 / 16,929
  239. Return on Equity = 51.56%
  240.  
  241. 2019
  242. Return on Equity = 9,431 / 20,985
  243. Return on Equity = 44.94%
  244.  
  245. 3.    
  246. 2016
  247. Q1 = 18,684 / 79,920 
  248. Q1 = 23.38%
  249.  
  250. Q2 = 20,238 / 79,920
  251. Q2 = 25.32%
  252.  
  253. Q3 = 19,225 / 79,920
  254. Q3 = 24.06%
  255.  
  256. Q4 = 21,770 / 79,920
  257. Q4 = 27.24%
  258.  
  259. 2017
  260. Q1 = 18,155 / 79,139
  261. Q1 = 22.94%
  262.  
  263. Q2 = 19,289 / 19,139
  264. Q2 = 24.37%
  265.  
  266. Q3 = 19,153 / 79,139
  267. Q3 = 24.20%
  268.  
  269. Q4 = 22,543 / 79,139
  270. Q4 = 28.49%
  271.  
  272. 2018
  273. Q1 = 19,072 / 79,591
  274. Q1 = 23.96%
  275.  
  276. Q2 = 18,756 / 79,591
  277. Q2 = 23.57%
  278.  
  279. Q3 = 18,756 / 79,591
  280. Q3 = 23.57%
  281.  
  282. Q4 = 21,760 / 79,591 
  283. Q4 = 27.34%
  284.  
  285. 2019
  286. Q1 = 18,182 / 77,147
  287. Q1 = 23.57%
  288.  
  289. Q2 = 19,161 / 77,147
  290. Q2 = 24.84%
  291.  
  292. Q3 = 18,028 / 77,147
  293. Q3 = 23.37%
  294.  
  295. Q4 = 21, 777 / 77,147
  296. Q4 = 28.23%
  297.  
  298. 5.
  299. 2016
  300. Q1 = 8,688 / 18,684 
  301. Q1 = 46.50%
  302.  
  303. Q2 = 9,694/ 20,238
  304. Q2 = 47.90%
  305.  
  306. Q3 = 9,017 / 19,226
  307. Q3 = 46.90%
  308.  
  309. Q4 = 10,885 / 21,770
  310. Q4 = 50%
  311.  
  312. 2017
  313. Q1 = 7,770 / 18,155
  314. Q1 = 42.80%
  315.  
  316. Q2 = 8,796 / 19,289
  317. Q2 = 45.60%
  318.  
  319. Q3 = 8,791 / 19,153
  320. Q3 = 45.90%
  321.  
  322. Q4 = 10,866 / 19,072
  323. Q4 = 56.97%
  324.  
  325. 2018
  326. Q1 = 8,239 / 19,072
  327. Q1 = 43.20%
  328.  
  329. Q2 = 8,628 / 18,756
  330. Q2 = 46%
  331.  
  332. Q3 = 8,797 / 18,756
  333. Q3 = 46.90%
  334.  
  335. Q4 = 10,684 / 21,760 
  336. Q4 = 49.10%
  337.  
  338. 2019
  339. Q1 = 8,036 / 18,182
  340. Q1 = 44.20%
  341.  
  342. Q2 = 9,006 / 19,161
  343. Q2 = 47%
  344.  
  345. Q3 = 8,329 / 18,028
  346. Q3 = 46.20%
  347.  
  348. Q4 = 11,106 / 21,777
  349. Q4 = 51%
  350.  
  351. 7.
  352. 2016
  353. Q2 = (20,238 – 18,684) / 18,684
  354. Q2 = 8.32%
  355.  
  356. Q3 = (19,226 – 20,238) / 20,238
  357. Q3 = (5%)
  358.  
  359. Q4 = (21,770 – 19,226) / 19,226
  360. Q4 = 13.23%
  361.  
  362. 2017
  363. Q2 = (19,289 – 18,155) / 18,155
  364. Q2 = 6.25%
  365.  
  366. Q3 = (19,153 – 19,289) / 19,289
  367. Q3 = (0.71%)
  368.  
  369. Q4 = (22,543 – 19,153) / 19,153
  370. Q4 = 17.70%
  371.  
  372. Annual = (79,140 – 79,918) / 79,918
  373. Annual = (0.97%)
  374.  
  375. 2018
  376. Q2 = (18,756 – 19,072) / 19,072
  377. Q2 = (1.66%)
  378.  
  379. Q3 = (18,756 – 18,756) / 18,756
  380. Q3 = 0
  381.  
  382. Q4 = (21,760 – 18,756) / 18,756
  383. Q4 = 16.02%
  384.  
  385. Annual = (78,344 – 79,140) / 79,140
  386. Annual = (1.01%)
  387.  
  388. 2019
  389. Q2 = (19,161 – 18,182) / 18,182
  390. Q2 = 5.38%
  391.  
  392. Q3 = (18,028 – 19,161) / 19,161
  393. Q3 = (5.91%)
  394.  
  395. Q4 = (21,777 – 18,028) / 18,028
  396. Q4 = 20.80%
  397.  
  398. Annual = (77,148 – 78,344) / 78,344
  399. Annual = (1.53%)
  400.  
  401. 9.
  402. 2016
  403. Q2 = (9,694 – 8,688) / 8,688
  404. Q2 = 11.58%
  405.  
  406. Q3 = (9,017 – 9,694) / 9,694
  407. Q3 = (6.98%)
  408.  
  409. Q4 = (10,885 – 9,017) /9,017
  410. Q4 = 20.72%
  411.  
  412. 2017
  413. Q2 = (8,796 – 7,770) / 7,770
  414. Q2 = 13.20%
  415.  
  416. Q3 = (8,791 – 8,796) / 8,796
  417. Q3 = (0.06%)
  418.  
  419. Q4 = (10,856 – 8,791) / 8,791
  420. Q4 = 23.49%
  421.  
  422. Annual = (36,223 – 38,284) / 38,284
  423. Annual = (5.38%)
  424.  
  425. 2018
  426. Q2 = (8,628 – 8,239) / 8,239
  427. Q2 = 4.72%
  428.  
  429. Q3 = (8,797 – 8,628) / 8,628
  430. Q3 = 2%
  431.  
  432. Q4 = (10,864 – 8,797) / 8,797
  433. Q4 = 21.45%
  434.  
  435. Annual = (36,348 – 36,223) / 36,223
  436. Annual = 0.35%
  437.  
  438. 2019
  439. Q2 = (9,006 – 8,036) / 8,036
  440. Q2 = 12.07%
  441.  
  442. Q3 = (8,329 – 9,006) / 9,006
  443. Q3 = (7.52%)
  444.  
  445. Q4 = (11,106 – 8,329) / 8,329
  446. Q4 = 33.34%
  447.  
  448. Annual = (36,477 – 36,348) / 36,348
  449. Annual = 0.35%
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