IBM

Financial health: Fair6.4/10

6 strengths, 3 concerns. Weakest points: debt to equity, current ratio, peg ratio.

• Debt to equity: 1.88 (Concern, benchmark < 0.5) — Debt of 1.88x equity is high against the 0.5x benchmark. It has improved over the last 4 years.
• Net debt vs cash flow: 3.9y (Watch, benchmark < 4 years) — Net debt of $47.7B is 3.9x annual free cash flow — about 4 years of cash flow to repay.
• Current ratio: 0.96 (Concern, benchmark > 1.5) — Short-term assets cover only 0.96x short-term liabilities — below 1.0, meaning bills due this year exceed the assets on hand to pay them. It has been broadly flat over the last 4 years.
• Return on equity: 34.8% (Strong, benchmark > 15%) — Earns 34.8% on shareholder equity, comfortably past the > 15% mark.
• Gross margin: 58.0% (Strong, benchmark > 40%) — Keeps 58.0% of revenue after the direct cost of sales, comfortably past the > 40% mark.
• Net margin: 16.0% (Strong, benchmark > 10%) — Turns 16.0% of revenue into profit, comfortably past the > 10% mark.
• Free cash flow: $12.1B (Strong, benchmark positive) — Generated $12.1B of free cash flow after capital spending. It has improved over the last 4 years.
• Revenue growth: 4.7% (Watch, benchmark > 10%) — Revenue changed 4.7% year on year, short of the > 10% mark.
• Earnings growth: 25.0% (Strong, benchmark > 10%) — Earnings changed 25.0% year on year, comfortably past the > 10% mark.
• PEG ratio: 2.19 (Concern, benchmark < 1) — At 2.19, the price looks expensive relative to expected growth — Lynch treated 1.0 as fair value.
• Payout ratio: 57.5% (Strong, benchmark < 60%) — Pays out 57.5% of earnings as dividends, leaving room to keep paying.