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.
Cash Conversion Cycle10
Capital Structure Changes15
IBM’s Cost of Capital17
Accenture’s Cost of Capital18
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 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...