Comparative analysis of two companies

Accenture Plc. And IBM: An Analysis

In this text, I will be concerning myself with Accenture Plc. And International Business Machines Corporation - IBM. In so doing, I will be seeking to determine the performance of each company in an attempt to identify which of the two entities could be considered a viable investment option. In addition to being in the same industry, i.e. Information Technology Services industry, the stocks of both companies are traded at the New York Stock Exchange -- NYSE.

Accenture Plc. And IBM: An Overview

Accenture according to Yahoo! Finance (2013) "provides management consulting, technology, and business process outsourcing services worldwide." With approximately 261,000 employees on its payroll, the company has in the past extended its reach to cover numerous locations across the globe. Currently, Accenture has operations in over 120 countries (Accenture, 2013). As the company further points out in its website, its theme since its formation has been rapid transformation and continuous innovation. With its headquarters in Dublin, it currently regards itself "a leader in today's global marketplace (Accenture, 2013).

Currently, Accenture's CEO is Mr. Pierre Nanterme. Nanterme is also the chairman of the board. Other top executives of the firm include but they are not limited to Ms. Pamela J. Craig, Mr. Martin I. Cole, and Mr. Alexander M. Van't Noordende who happen to be Chief Financial Officer, Technology Group Chief Executive, and Management Consulting Group Chief Executive respectively (Yahoo! Finance, 2013). Some of the main competitors of Accenture are IBM, HP Enterprise Services, and Deloitte Consulting LLP.

When it comes to IBM, the company according to Yahoo! Finance (2013) "provides information technology products and services worldwide." Established in 1911, the company has built a name for itself in the marketplace as a leading multinational technology company with interests in various parts of the world. The company is currently headquartered in Armonk, New York and is considered one of America's largest firms based on the number of employees currently engaged with it.

IBM is currently headed by Mrs. Virginia M. Rometty who happens to be its Chief Executive Officer and also Chairperson of the Board. Other individuals at the helm include but they are not limited to Mr. Mark Loughridge, Mr. Stephen a. Mills, Mr. Pat Toole, and Patricia Murphy who according to Yahoo! Finance (2013) are the C.F.O., Software and Systems VP and Group Executive, C.I.O., and Investor Relations VP respectively. Some of IBM's key competitors are Microsoft Corporation, Hewlett Packard, and Accenture Plc.

Part B

Key Financial Data of Accenture and IBM

In this section, I will largely concern myself with both companies' financial data over the last three-year period. The table below presents financial data which in my view is worthy of my consideration.

Table 1: Key Financial Data

Accenture

IBM

2012

2011

2010

2012

2011

2010

Sales (in '000')

29,777,985

27,352,914

23,094,078

104,507,000

106,916,000

99,870,000

Income after Tax (in '000')

2,553,510

2,277,677

1,780,656

16,604,000

15,855,000

14,833,000

Share Price

60.44

53.61

36.97

Number of Outstanding Shares

1.117B

1.163B

1.228B

EPS

0.96

0.81

0.67

2.61

2.31

1.97

A Brief Analysis of Financial Data

From the data above, both companies have shown impressive sales growth. The income after tax has also been on an upward trend in both cases. While the income after tax in the case of Accenture grew by 10.8% between the years 2011 and 2012, the income after tax in the case of IBM grew by 4.5% during the same period. The observed increase of both the share price and earnings per share is an indicator that stockholders of both companies are more likely to continue experiencing both capital and revenue gains going forward.

Part C

Ratio Computations

In this section, I will be concerning myself with an analysis of common financial ratios. The relevance of financial ratio analysis cannot be overstated when it comes to the determination of not only the financial stability of companies but also their future performance. In this section, I will mostly focus on liquidity ratios, financial leverage ratios, asset management ratios and lastly, profitability ratios. The table below presents the ratios I will be relying upon to determine which company is the most appropriate investment alternative.

Table 2: Financial Ratios

Accenture

IBM

2012

2011

2012

2011

1. Liquidity Ratios

Current Ratio

1.55

1.45

1.13

1.21

Cash Ratio

0.82

0.72

0.24

0.28

2. Financial Leverage Ratios

Equity Multiplier

4.02

4.06

6.32

5.78

Debt-to-Equity Ratio

2.90

2.93

5.32

4.78

3. Asset Management Ratios

Receivables Turnover

5.76

5.28

4.27

3.43

4. Profitability Ratios

Return on Assets

0.15

0.14

0.14

0.14

Return on Equity

0.62

0.59

0.88

0.79

Financial Ratios: Analysis

A lot can be discerned about the performance of the two companies above from the financial ratios presented. To begin with, when it comes to the two liquidity ratios I have computed above, they will help us determine how the two companies compare in their ability to settle their short-term liabilities should they become due. For the most recent financial period, Accenture's current ratio is 1.55 while that of IBM is 1.13 (see table 2). From the look of things, both companies would be able to settle their short-term obligations should they become due. This is more so the case given that they have a current ratio of more than 1, i.e. An indication that they have more current assets than current liabilities. However, one could say that given that Accenture has a slightly higher current ratio than IBM; it is more liquid than the latter and hence less risky. Further, given its higher current ratio, Accenture is in a better position to bargain for favorable terms with short-term creditors. Next, we have the cash ratio. According to Rich, Jones, Mowen, and Hansen (2009, p.635), "while the current and quick ratios assume that receivables will be collected, the cash ratio does not make this assumption." For this reason, this particular ratio specifically measures the ability of an entity to settle its obligations (short-term) using cash. In relation to this particular analysis therefore, Accenture happens to be in a better position to settle its short-term debts using cash. Again, in addition to placing Accenture in a better bargaining position for better credit terms from short-term creditors, the cash ratio clearly demonstrates that Accenture could settle most of its short-term obligations using cash and cash equivalents. In that regard, the company could be regarded more liquid than IBM.

Next, we have financial leverage ratios. These ratios come in handy in the measurement or determination of a given entity's long-term solvency. Accenture's equity multiplier for the most recent financial year is 4.02 while that of IBM is 6.32. This particular ratio according to Gallagher and Andrew (2007) is an important indicator of an entity's amount of financial leverage. As the authors further point out, a firm that makes use of debt alone to finance its assets would have an equity multiplier of 1.0. On the other hand, a firm that makes use of a mixture of debt and equity should have an equity multiplier of above 1.0 (Gallagher and Andrew, 2007). In our case therefore, IBM comes across as having a higher financial leverage than Accenture. What this essentially means is that the unlike Accenture, IBM finances a larger portion of its assets using debt. When it comes to the debt-to-equity ratio, the table above gives us the debt-to-equity ratio of Accenture during the most recent financial period as 2.90. That of IBM is given as 5.32. This particular ratio in the words of Rich, Jones, Mowen, and Hansen (2009, p.639) "is a more inclusive view of debt recognizing that if corporations did not have current liabilities such as accounts payable, they would have to take out other borrowings or sell stock to finance its assets." In that regard, this particular ratio is a worthy indicator of the proportion of debt and equity a given entity makes use of to finance its assets. IBM's higher debt-to-equity ratio is an indicator that the company has been aggressive than Accenture in its utilization of debt to finance its growth.

Also computed in table 2 above is the receivables turnover ratio which happens to be an asset management ratio. Taking the most recent financial year into consideration, Accenture has a receivables turnover ratio of 5.76 while that of IBM is 4.27. This particular ratio according to Stickney, Weil, Schipper, and Francis (2010) is an indicator of how quickly a business entity collects cash. This effectively means that in comparison to Accenture, IBM collects its receivables faster. Essentially, a company should collect the monies it is owed at the earliest opportunity so that it can make use of such monies by either reinvesting or settling expenses.

Lastly, it would also be prudent to take into consideration the profitability ratios discussed above. To begin with, Accenture's return on assets ratio seems to be slightly higher than that of IBM. This particular ratio as Gallagher and Andrew (2007) point out is a measure of how effectively a given business employs its assets. With that in mind therefore, Accenture comes across as being slightly more effective in the employment/utilization of its assets than IBM. However, it is important to note that when it comes to the return on equity ratio, the shareholders of IBM seem better-off than those of Accenture. This is particularly the case given that the former has a higher return on equity ratio than the latter. As Needles and Powers (2012) observe, this particular ratio should be viewed as an indicator of whether or not a given entity has earned a return that can be regarded favorable to its stockholders.