Return on Assets Apple Inc - Research Paper Example

?The of the assignment: The The Dr. Ron Lentz The Financial Management 534 Financial Research Report Introduction Apple Inc. is a major technological company located in Silicon Valley. The company is in the business of designing, manufacturing and marketing mobile and media electronic devices, software applications, networking solutions, a range of consumer electronics and support services. The company is one of the giants in the mobile and communications industry. Rationale for choosing Apple Incorporation Apple Inc. has shown considerable stability over the years of financial downturn. The company has held up strongly even in highly volatile markets. Also, the company has an enviable customer base that is extremely loyal towards the iOS platform. The company has maintained historical records of maintaining a customer retention percentage of more than 90%. The analysts and the investors are considering Apple as a strong buy based on the Fibonacci model. The Fibonacci retracements state that the stock prices follow a trend of rising strongly, then falling down to a lower price followed by a significant upturn. This justifies the fall of the stock prices in the fourth quarter of 2012 followed by a steep rise in the stock prices starting from the first quarter of 2013. Apple is considered as a fundamentally and technically strong company ideal for investment in its stocks (Edwards, 2007). The value driven mutual funds consider Apple as an important stock for investment and almost 40% of these mutual funds hold positions in Apple with more than USD 1 billion of assets. The biggest investors of the world are expected to accelerate the growth of shareholder value of Apple through buy backs and dividend pay-outs. The balance sheet of Apple is strong with zero debt value and high cash reserves of more than USD 1.45 billion. Around 74% of the analysts in the Wall Street hold a strong buy on the shares of Apple Inc. Moreover, the company is projected to surpass the earnings expectations by the end of the last quarter of 2013. The stocks of Apple Inc. represent more than 13% of the 100 stocks in NASDAQ and remain the most famous stock to invest by the hedge funds. Ratio analysis  Ratio Analysis for Apple Inc. Ratios 2013 2012 2011 Return on assets 0.18 0.24 0.22 Current ratio 1.68 1.50 1.61 Quick ratio 1.64 1.48 1.58 Debt Equity ratio 0.68 0.49 0.52 Debt ratio 0.40 0.33 0.34 Price earnings ratio 13.96 11.75 13.77 EPS 39.75 44.15 27.68 Working Capital 29628000 19111000 17018000 Return on Assets The Return on Assets percentage indicates the profitability of the assets of a business in terms of earning revenue for the business (Brown, 2003). Ideally, the return on assets should be greater than 5%. In the case of Apple Inc. the ratio of net income to total assets decreases from 22% in 2011 to 24% in 2012 and to 18% in 2013. The return on assets ratio for Apple is quite high compared to the industry standards and indicates that the business is efficient in employing the stakeholder’s assets in generating income. The better use of the assets i.e. debt and equity in a business is represented by a higher percentage of ROA. Though the ROA percentages of Apple Inc. have decreased from 2011 to 2013, yet the investors would consider 18% ROA as a positive factor for investing in the stocks of Apple Inc. Current ratio Current ratio is used to measure how equipped the business ids to pay off its short term obligations like payables and debts using the current assets in the business like inventory, cash and other receivables. Current ratio is simply calculated by dividing the current assets by the current liabilities which include short term debts and other liabilities that are due within a period of less than a year. An ideal current ratio is valued at 2:1. The current ratios of Apple Inc. are measured at 1.61 in 2011, 1.50 in 2012 and 1.68 in 2013. Thus, the current ratios of Apple Inc. are strong over the three years indicating that the business is highly capable in meeting it short term liabilities with the use of its current assets. The investors would perceive Apple as a financially healthy company when it comes to evaluating the liquidity ratios of the business in the last three years. Quick ratio Quick ratio is used in financial analysis as a liquidity ratio to indicate the company’s ability to meet the short-term obligations by the use of its most liquid assets. The quick ratio is calculated by dividing (cash and equivalents + marketable securities + accounts receivable) by current liabilities. Inventories are excluded from the current assets as they are not liquid assets. A higher quick ratio indicates stronger liquidity position for the business. The quick ratio of Apple Inc. remains almost stable over the three years under study being 1.58 in 2011, 1.48 in 2012 and 1.64 in 2013. The company is quite lucrative in its liquidity positions and is expected to gain interest from the investors (Helfert, 1999). Debt to equity ratio Debt to Equity ratios is a used to indicate the degree of financial leverage of a business. The debt to equity ratio is calculated by dividing the total liabilities of the business by the shareholder’s equity and measures the proportion of debt and equity used by the business to finance its resources. The debt equity ratio should ideally be 1:1 but it varies for different industries. The debt –equity ratio of Apple Inc. varies from 0.52 in 2011 to 0.49 in 2012 to 0.68 in 2013. Apple Inc. has a healthy debt-equity ratio which indicates that the business is efficient in managing the equity to pay off the short term and long term debts. The company shows no symptoms of potential debt problems. Debt Ratio The debt to asset ratio measures the extent of debt in a business as compared with its assets. The ratio also is an indicator of whether the company can pay off its debts in the time of emergency using its assets. Debt ratio is used to interpret the proportion of the assets in the business that is financed by the debts. If the ratio is greater than 1, it indicates that the company has more of debts compared to the assets. A debt ratio is calculated by dividing the total debts by the total assets of the company. The debt to asset ratio of Apple Inc. is 0.34 in 2011, 0.33 in 2012 and 0.40 in 2013. The ratios are maintained at a lower side indicating lower financial risk for the company. The debt to asset ratio of Apple Inc. also suggests strong financial health of the business. Price earnings ratio The P/E ratio is calculated by dividing the Market value per share by the Earnings per share (EPS). The price earnings ratio is a valuation ratio used to compare the current share prices with the EPS of the business. Apple Inc. has a high P/E ratio of 13.77 in 2011, 11.75 in 2012 and 13.96 in 2013 which indicates high earnings growth for the company in future. The high price earnings ratio of the business is maintained due to the market expectations from the company and the growth of the business through the design and launch of innovative products bringing in more revenue for the business (Nonaka, 2001). Earnings per Share (EPS) The EPS is the amount of income that the business generates for each unit of the outstanding shares. The earnings per share (EPS) can be calculated by dividing the Net profit by the number of outstanding shares and is expressed as a percentage. For a profit making and high performing company, the earnings per share increase on a year to year basis. The EPS of Apple Inc. varies from 27.68 in 2011, to 44.18 in 2012 and 39.75 in 2013 thus establishing it as a strong potential company for investment purposes. The high EPS of the business adds to the intrinsic value of the business and makes it lucrative for investment purposes. Working Capital Analysis Apple Inc. has a quite healthy working capital with strong cash and cash equivalent and short term investments. The business reflects a balanced approach towards the maintenance of creditors and suppliers in terms of payment periods. This ensures strong support of the suppliers for a long time period. The working capitals are maintained at high values indicating the efficiency of the business in running its day to day business effectively and with minimum financing required from outside sources (Asthana, 2013). Stock price analysis The last 10 years average of the price earnings ratio of Apple Inc. has been maintained at almost 17 times the earnings from the business indicating that the stock prices of Apple Inc. stocks to go up to almost $700. The stocks of Apple Inc. are considered as income bearing stocks as well as value creating stocks. The business maintains a dividend rate of 2.27% which is higher compared to the Dow Jones Industrial Average of 2.25% and Standard and poor 500 Index of 1.93%. As the stock prices of Apple experienced a fall, the price attractiveness of the stocks gained momentum. When the Apple shares are traded at a lesser value, investors are more interested to buy the stocks as the stocks of Apple are priced at a highly deflated rate and from the valuation point of view. Apple Inc. sells for 14 times the trailing earnings and the stock price are expected to reach between USD 680-USD 700 by the end of 2013. Risk Level of the company for Investment The prices of the stocks of Apple are deemed as highly deflated according to the investor’s viewpoint. There’s always some level of risk associated with financial investments. The risk factor is low for investing in Apple Inc. as the company is expected to grow at an accelerated rate and so it is likely that the stock prices would increase. So, this time can be considered as the right time to invest in the Apple securities as they are trading at a lower price than they are generally traded. Investing for a short term in the stocks of Apple is risky as the prices are not likely to go up in a small period of time. Going long on the stocks and holding them for a long period would negate the risks of investing in the shares of Apple Inc. This would take care of the risk of short term volatility in the market. The long term investments are generally more assured forms of investing in the Apple shares but they can also be susceptible to unforeseen risks arising in the market due to sudden fluctuations or crashes in the stock market. The beta value for the company is impressively low at 0.63 indicating the high stability of the stocks. The EPS as calculated above is also very strong at 39.75 making the stocks highly attractive for investment. Also, the company has a continuous dividend yield of around 12.20 which also proves the strength of the company and lower risks for investing. Profile of the potential investor The potential investors of Apple Inc. are long term investors who are looking for moderate risk and high return from their investments. The highly credible individual investors in the world prefer the stocks of Apple as a great investment option considering the high stability of the stocks even during economic downturns. The company has an array of individual investors, institutional investors as well as the mutual fund and hedge funds as their major investors. The investors who are inclined to make huge investments and use the strategy of holding the stocks for a long term find Apple Inc. an attractive investment stock. Considering the low risk, high stability, growth and high return from the stocks, Apple Inc. remains one of the favorite investment options for both individual and institutional investors. 5 years Stock price movement of AAPL Inc. (Yahoo Finance, 2013) Conclusion Apple Inc. is high performing and cash rich company which has shown extreme stability even in times of volatile market trends. The company maintains impressive financial ratios which indicate efficient management of the business and potential for future growth. The company also maintains balanced earnings for funding purposes, low level of liabilities, zero debts and sufficient equity in the business. The business has shown efficiency in management and operational strategies and is expected to maintain a strong financial and managerial position for a long time to come. Recommendations The investors can be strongly recommended to invest in the stocks of Apple Inc. considering the high potential of the company to surpass the expected limit of earnings. The analysts have suggested Apple Inc. as a business with strong financial health and stability. Apple Inc. is also renowned for its strong management of costs and generation of revenue. The business holds enormous potential for future sustainability through its continuous research and development processes. The stocks of the company are attractive for investment due to the strong financials of the company and the expectations of the market from the business. References Asthana, S. (2013). Financial reporting and capital markets/stock market returns. International Journal of Accounting, Auditing and Performance Evaluation. Vol. 8(1). Brown, K. (2003). Investment Analysis and Portfolio Management. Boston: Thompson Learning. Edwards, R. (2007). Technical Analysis of Stock Trends, Ninth Edition. Florida: CRC Press. Helfert, E. (1999). Techniques of Financial Analysis: A Practical Guide to Measuring Business Performance. New York: McGraw Hill. Nonaka, I. (2001). Towards a new theory of innovation management. International Review of Financial Analysis. Vol. 9(3). Yahoo Finance. (2013). Basic chart for Apple Inc. (NasdaqGS). Retrieved from: http://finance.yahoo.com/q/bc?s=AAPL+Basic+Chart. Read More