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Ibm and Accenture Case

Essay by   •  October 1, 2012  •  Research Paper  •  1,673 Words (7 Pages)  •  2,047 Views

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Executive Summary

IBM and Accenture are both huge companies and uses five factor DuPont analysis to achieve a return on equity. IBM has a higher return on equity than Accenture, and therefore the management are more efficient in generating shareholder value per dollar invested. However both the companies are performing better than the industry average. IBM does also take lesser number of days to convert cash on hand compared to Accenture and industry average. But, Accenture is taking more days than industry average on converting into cash. For the company's credit rating we only consider the quantitative factors as it is difficult to get the in depth information on the qualitative factors. We consider the average of three years to get the credits ratings of the company. According to the quantitative factors rating methodology, IBM is rated as Aa3 and Accenture as Aa2 rating. Both the companies belong to the investment grade. Since both the companies do not have preferred shares, cost of debt and cost of equity are used to determine the weighted average cost of capital. The weighted average cost of capital of IBM and Accenture are 3.73 percent and 10.99 percent. The coefficient of beta and risk free rate is the major influenced on the weighted average cost of capital. Because of the higher value of weighted average cost of capital, Accenture is at higher risk in undertaking the new projects. The distribution payout ratio for both the companies is also determined to find how much percentage is paid out to the shareholders and how much percentage is used to reinvest in the business. IBM has a distribution payout ratio of 30.3 percent and Accenture has 81.9 percent distribution payout ratio in 2011. Since the distribution payout ratio of IBM is lesser than the Accenture, the management of IBM is more efficient than Accenture.

Introduction

The purpose of this paper is to find two companies in the same exchange to further analyse using DuPont analysis, working capitalization, moody's rating, cost of capital and distribution ratios. The two main companies which are examined are IBM and Accenture. Both the companies are in New York Stock Exchange and belong to the information technology sector. In order to take the average of the industry, eight other companies that belong to the same IT sector are chosen. Those companies are Microsoft Corporation, EMC Corporation, Dell Inc, Computer Sciences Corporation, Automatic Data Processing, Mantech International Corporation, Hewlett-Packard Co, and Apple Inc. The reason for choosing these companies is because they have the business description with the similar primary and secondary North American Industry Classification System (NAICS) code and Standard Industrial Classification (SIC) code such as computer related service, packaged software, business service, peripheral equipment manufacturing etc. The company's financial statements from the last five years are used to determine the required analysis.

DuPont Analysis

DuPont analysis is an expression which breaks ROE into five parts and to understand the factors affecting the company's ROE. ROE measures the return a company generates on its equity capital.

In 2009, IBM reaches its maximum ROE of 74.37% from 36.56% in 2007 and has a slight fall to 73.43% in 2011. However, the company is doing much better than the industry's average. Accenture reaches its maximum ROE in 2008 at 73.5% from 62.8% in 2007 and fall to 67.8% in 2011 and nevertheless Accenture is also performing better compare to the industry's average. This rise and fall for both the companies is due to the effect of five components in determining the ROE.

Tax Burden

This measures the effect of taxes on ROE. From the last past five years, there has been a rise in the tax burden for both IBM and Accenture, accounting to 71.9% in 2007 to 75.5% in 2011 and 47.5% in 2007 to 64.9% in 2011 respectively. However, Accenture is performing below the industry's average of 68.7% in 2007 to 75.95% in 2011and IBM is more or less closer to the industry average. The increase in the tax burden in both the companies indicates that taxes declined as a percentage of pre-tax profits. This inclined in IBM is because net income margin improved 0.8 points to 14.9% in 2010 versus 2009 and 14.8% improvement in 2011 versus 2010 and due to increase in operating pre-tax income and margin of 1 points in 2010 versus 2009 and 0.3 points in 2011 versus 2010 and also the effective tax rate in 2011 was 24.5% which has been dropped from 24.8% in 2010 and again dropped from 26% in 2009. Also, the inclined tax burden in Accenture is also due to its effective tax rate of 27.3 % in 2011 that has been dropped from 29.3% in 2010.

Interest Burden

Interest burden for IBM in 2011 has been the minimum so far compared to the previous four years and for Accenture has inclined in 2011 from 2010. And both the companies are close to the industry's average. Both IBM and Accenture have more than 100 percent in all the five years except for Accenture in 2010, but can be accounted to 100% since its 99.9%, which indicates that net non-operational gains had made EBT to become greater than EBIT. Also interest burden measures the effect of interest expense on ROE. Interest expense for Accenture in 2011 is the same as 2010; however interest expense for IBM has increased in 2011 from 2010 and it's primarily driven by higher average debt levels, partially offset by lower average interest rates.

Profit Margin

This ratio measures the effect of EBIT margin and is a major driver on ROE. Form the past five years, IBM has inclined its profit margin from 13.7% in 2007 to 18.9% in 2011 and its performing above the industry's average and as well the Accenture also inclined its profit margin from 11.6% in 2007 to 12.7% in 2011 though the company's profit margin is below the industry average. These results indicate that both the companies are improving its operating profitability. The increase in profit

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