IBM Message Board - Msg: 6387388

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Technology Stocks : IBM

IBM 297.59

+2.5%

Nov 21 9:30 AM EST

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To: art slott who wrote (4229)	11/12/1998 6:37:00 AM
From: Jacques Newey	Read Replies (1) of 8218

Art: A cautionary note...have you read the Nov 9 edition of Fortune magazine? There is an article on page 193 which discusses the concept of economic value added (EVA). According to Fortune: "EVA is simply annual operating profits after tax - minus a special charge for the cost of capital". Bottom line: IBM's EVA was NEGATIVE ($-1.5 BILLION) in 1997 Fortune: "The (cost of capital) charge corrects a glaring LOOPHOLE in standard accounting. In financial statements, companies pay nothing for equity capital. It looks like FREE MONEY. But EQUITY IS REALLY EXPENSIVE....If a company DOESNT EARN AT LEAT ITS CAPITAL COST... , it can't keep attracting new investment." What was IBM's 1997 Return on Capital (ROC)? Answer: 10.5% What was IBM's 1997 Cost of Capital (COC)? Answer: 12.8% ROC - COC= 10.5%-12.8% = - 2.3% Compare those numbers with Intel: INTC's EVA was POSITVE ($+4.8 BILLION) in 1997 INTC's 1997 Return on Capital (ROC)= 42.7% IBM's 1997 Cost of Capital (COC)= 15.1% ROC - COC= 42.7%-15.1% = +27.6 % GE, MSFT, KO, CSCO also had good numbers. I know why I sold my IBM and continue to hold INTC. Do you know why you continue to own IBM? Other than the stock price? Hint: Look under the covers. You may not like what you see. I didn't. All the best,

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