Inclusive Financial Analysis of Apple Company - Essay Example

Apple inclusive financial analysis Introduction Financial ratios are vital in both financial and accounting fields. Just with a glance at any ratio one is able to conclude the performance of a given company. According to (Elliott, B., & Elliott, J., 2008), company’s success cannot be relied on ratios alone, and as a matter of fact ratios are just figures representing the overall corporation efficiency in different segments. Ratios have enhanced the perceptive people had towards accounting. Nowadays people need information to be brief but have much insight from it. Financial ratios have proven to be effective in delivering information in brief, but with relevant, and accurate content. The following are financial ratios for APPLE INCLUSIVE for the year ending 2012, 2013, and 2014. Horizontal and vertical analysis Horizontal analysis compares how a company runs its operation across different segments in different years, and emphasizes on cash allocation and generation (Bull, 2008). While vertical analysis compares the amount allocated to an item against the total that was available in a given year. Horizontal analysis The current assets for APPLE INCLUSIVE rose by 27.1%; in 2013 and dropped to 18.8% in 2014. It was a result of decrease of short-term investments by 38.8%. Total liabilities increased by 44.2% in 2013 and rose by 107.9% in 2014. It was as a result of the abrupt increased current liabilities by 64.6%. The total stockholder’s equity rose by 5% in 2013 and decreased by 6% in 2014. The revenue for the year ending 2014 increased by 17% but the cost of production too increased by 27% making the net income to decrease by 6%. Vertical analysis The value of current assets rose by 35% in 2013 and dropped to 32% in 2014. The value of long term investments decreased from 56% in 2012 to 52% in 2014. Current liabilities moved increased by 7%; this is because of increased account payable by 49%. Gross profit for APPLE INCLUSIVE decreased from 43.8% in 2012 to 38.5% in 2014. The reason to this can be blamed on the increased cost of goods from 56.1% in 2012 to 61.4% in 2014. The net income was impacted by the above increased in cost of production, resulting in a decrease by 5.1%. Profitability ratios Profitability ratios are a reflection of how a company is efficient in generating income. These ratios are “seductive” to investors; an investor would like to know how profitable is the corporation before they decide to invest. Everyone expects to value for their money. Profit margin for 2012, 2013, and 2014 are 0.267, 0.217, and 0.216 respectively Gross margin for 2012, 2013, and 2014 are 1.65, 1.74, and 1.79 respectively From the above ratios, it might look contradicting how the two ratios give a different interpretation of the financial performance of APPLE INCLUSIVE. Profit margin shows the net income of from the net sales while gross margin shows the gross income from the net sales. Interpreting the above ratios, the year 2012 APPLE had a higher profit margin of 0267. The ratio means that for each dollar APPLE used in that year it earned $ 0.28. The gross margin ratio for year 2014 was highest with 1.79. This is interpreted as for each dollar APPLE used it earned $1.79. Gross margin ratio is inclusive of all costs incurred in the production of the goods and services. Profit margin, on the other hand, has deducted all costs. According to (Berry, 2011), it is prudent to use the profit margin as opposed to use of gross margin when determining profitability of a firm. As indicated by the above ratio year 2014 had the highest gross, but with low income to the company. Gross margin can be higher due to the increase in sales, and it should not be forgotten increase in sales increases the cost of production in terms of services like administrative. Return on Equity for the year ending 2012, 2013, and 2014 are 0.35, 0.3, and 0.35 respectively. ` ROE indicates how investors gain the value for their money they have invested in the company. This ratio is fundamental for other investors who are willing to invest in the company. For the year 2012 and 2014 ROE was the highest. For each dollar, an investor had invested in APPLE INCLUSIVE they received 0.35. It was a good return to investors, but investors don’t expect all the return to be disbursed into their account. A portion of the return has to be retained for growth of the company. It is a brilliant call of action since an increase in the value of shares is interlinked with the growth of the company. Liquidity ratios Liquidity ratios indicate if the company will be able to pay its short term liabilities when it is due. A liquidity ratio of greater than one indicates a firm is capable to pay-off its current obligation without interfering with its normal operations (Chattopadhyay, 1982). Current ratio for the year ending 2012, 2013, and 2014 are 1.46, 1.69, and 1.1 respectively. Working capital ratio for the year ending 2012, 2013, and 2014 are USD 19,111, USD 29,628, and USD 5,083 respectively. Quick ratio for the year ending 2012, 2013, and 2014 are 1.31, 0.97, and 0.89 respectively. From the above liquidity ratios, one can conclude that APPLE INCLUSIVE is stable and will be able to pay its due in time. However, its stability for the past three years has been dwindling as reflected in the ratios. In analyzing each ratio, the cause for the dwindling can be established. Current ratio was 1.46 in 2012 but dropped to 1.1 in 2014. In 2014, APPLE INCLUSIVE had increased its current liabilities by 64.5% has indicated in the horizontal analysis. Though the current asset value rose by 18.8%, it could not cover-up the increased current liabilities. The working capital; which shows the amount available for the company that financial year after settling its due also decreased abruptly from USD 29,628 to USD 5,083 a difference of USD 24,545. According to Bull, (2008), quick ratio indicates how fast a company can be able to pay its due by just including items in the balance sheet that can be easily converted into cash. The ratio uses short investments, net receivables, cash and equivalent. Suppliers use this information to be certain of the company reliability and creditworthiness. From the ratio analysis, in the year 2012 APPLE INCLUSIVE was able to pay its due in time easily as compared to 2014. In 2014, the ratio was 0.89, and it is not recommended. Solvency ratio Solvency ratios differ from liquidity ratios on the basis that it analyses the firm overall capability to pay its due if it happens to be closed (Chattopadhyay, 1982). It is from these ratios that a firm can be deemed to be bankrupt or not. Debt to equity ratio for the year ending 2012, 2013, and 2014 are 0.49, 0.68, and 1.1 respectively. Equity ratio for the year ending 2012, 2013, and 2014 are 0.67, 0.6, and 0.48 respectively. Debt to equity ratio for the year ending 2012, 2013, and 2014 are 0.33, 0.4, and 0.52 respectively. From the above solvency ratios, the solvency state of APPLE INCLUSIVE is defective especially the debt-equity ratio for 2014. The company had its assets being financed more by debt than stakeholder’s equity. This is risky for a business to operate at that state. No investor will ever invest in a company that has a poor solvency ratio; in other words a company that is in debt (Berry, 2011). In the year 2012 the solvency state of APPLE INCLUSIVE was satisfactory; 67% of the assets were financed by the shareholders as compared to 2014, 48%the assets were financed by shareholders. It can be explained either because of the increased short and long term liabilities by the company or the withdrawal by shareholders by 6%. Efficiency ratios Efficiency ratios are indicators of a firm adeptness in managing its inventory. Inventories are crucial in a firm’s success, and proper management should be in place to ensure the company does not incur unnecessary costs (Muller, 2003). Asset turnover for APPLE INCLUSIVE for the year ending 2012, 2013, and 2014 are 0.23, 0.18, and 0.17 respectively. Inventory turnover for APPLE INCLUSIVE for the year ending 2012, 2013, and 2014 are 111.1, 15.5, and 53.2 respectively. Day’s inventory turnover for APPLE INCLUSIVE for the year ending 2012, 2013, and 2014 are three, twenty-three, and seven days respectively. From the ratios, it is clear that APPLE had an exemplary inventory management in the year 2012 that the other two years. The inventory turnover rate in 2012 was magnificent, recording a rate of 111.1. This means that APPLE had sold 111 times the asset it had at the end of year 2012 fiscal year. Comparing with 2013 when it had a low inventory turnover rate of 15.5; it indicates the company did not have many sales and, as a result, it had lots of inventories thus increasing the cost of maintaining inventory. According to Muller, (2003), using the day’s inventory turnover, one can predict how long can the inventories last. For instance, the closing inventory for the year ending 2013 can last for only 23 days. It is the management duty to ensure new inventories are in place to prevent inadequacy. Conclusion Comparing the ratios for APPLE inclusive from the year ending 2012 to 2014 it can be noted that 2012 was the excellent year for APPLE inclusive. The management should check on its inventory control that had impacted the firm to have a low inventory turnover in 2013. Though in 2014, it improved to 53.2, at the end of this financial year the turnover should have made tremendous improvement with the recent launch of Iphone 6 and 6 plus. The profitability capability of the company can be enhanced by cutting down some costs in the administrative services. For instance, in the year 2014 administrative cost grew by 19.5% and while revenue increased by 16.8%. This difference is wide and “eats up” a company profit. However, the future of APPLE inclusive is bright; this is evidenced by the increased allocation of research and development fund by 78.7%. References Berry, L. (2011). Financial accounting demystified. New York, NY: McGraw-Hill. Bull, R. (2008). Financial ratios: How to use financial ratios to maximise value and success for your business. Oxford: CIMA. Chattopadhyay, P. (1982). Solvency and liquidity ratios. Bombay: Commerce. Elliott, B., & Elliott, J. (2008). Financial accounting and reporting (12th ed.). Harlow: Financial Times Prentice Hall. Muller, M. (2003). Essentials of inventory management. New York: AMACOM. Apple incl. financial statement. (2014 September). Retrieved February 21, 2015, from https://searchwww.sec.gov/EDGARFSClient/jsp/EDGAR_MainAccess.jsp?search_text=income statements for unum group&isAdv=false Surprisingly findings from the analysis The vertical analysis on the income statement gave outrageous results, but they were valid. Analysis on income generated by a company proved that low gross profit does not necessarily means poor performance, and at the same time high gross profit does not indicate great performance. These misconception occurs when one have a glance on the financial statements of a company, and judge by the figures. From the APPLE INCLUSIVE financial statements year ending 2014 recorded the highest ($70,537) gross profit while 2012 had the lowest ($ 68,662,000). Many will choose 2014 has the year APPLE was successful, but from the analysis 2012 performed as compared to 2014 with an income of 26.7% against the total revenue. 2014 had an income of 21.6% against the total revenue. This analysis clear shows that the gross profit is not a determinant to a company’s success. The value of closing inventory entered in the balance sheet as a current asset can explain the efficiency of a company and profitability. Most people consider increase in inventory as profitable to a company. From the analysis the profitability of a company depends on how much a company is able to sale in a given financial year (inventory turnover). The analysis proved that a high closing inventory reflects poor inventory management, sales and less profit. This is evidenced by the high inventory level for year ending 2013 valued at $ 6,882,000 while that of 2012 was low valued at $ 791,000. The analysis has proven that 2012 had the inventory turnover of 111 and recorded high profit of 26.7 as compared to that of 2103 which had inventory turnover of 15.4 and profit of 21.6%. Read More