DuPont Analysis: Apple vs Samsung - Research Paper Example

DUPONT ANALYSIS: APPLE VS. SAMSUNG Introduction Apple Company is a leading world manufacturer and marketer for mobile phones, portable digital music player, personal computers and laptops and media devices. Software and other services necessary for the proper functioning of the devices are also offered by the company including networking and third party software and hardware products. The firm was incorporated in the year 1977. From then it has grown and acquired many firms including Locationary Inc, Hopstop Inc, Algo trim AB, PrimeSense Ltd., Topsy Labs Inc, Burstly Inc, Novauris Technologies Ltd and Beats Electronics. It is a recognized world brand that has led the process of digital migration in communication and computers. The main products produced by the firm are iPhone, iPad, Mac, iPod, iTunes, Mac App Store and iCloud. Apple Company primarily trades its shares in the NASDAQ while it’s also listed in other exchanges including mexico and paris. Samsung started as a small business solely owned by a Korean based business man who was mainly involved in export business. The business grew from exporting dried fish vegetables and fruits to manufacturing the products themselves. Years later the firm diversified its product line to electronics. The giant firm then expanded operations opening up branches all over the world while retaining its original brand name Samsung. The firm comprises more than 78 different companies and affiliates in its wide range of products. In the electronics sector, Samsung produces a wide variety including mobile phones, tablets, televisions and home appliances. The firm is worth being a bench mark for Apple Inc due to its experience and achievements in the market. The products of Samsung compete well with Apple products in the market thus the need to compare them. Overview of strength and weakness of the companies’ efficiency relative to the benchmark firm The efficiency of the firm can be measured using the DuPont analysis. DuPont analysis measures assets of their gross book value to produce a higher return on equity. The use of the gross book value is aimed at getting the actual return on equity without accounting for depreciation which artificially reduces the return on equity. Depreciation reduces the return on equity, but is not an actual activity that reduces income, but a value assumed that the asset depreciates by during the course of its usable life. To get the return on equity, the following formula is used: ROE=profit margin * total asset turnover * equity multiplier Profit margin = profit/sales Total asset turn over= sales/assets Equity multiplier= asset/equity Return on equity Year 2013 2012 apple Inc 0.2995 0.4672 Samsung Company 1.0562 0.2390 The firm, Apple Inc is currently not performing well when performance is measured using the DuPont identity. Apple Inc has a low return on equity compared to its competitor Samsung. Investors interested in investing in Apple are likely to get a lower return on their investment compared to Samsung. The return on asset for Apple Inc is 0.2995 converted to percentage will be 29.9%. This is a small percentage since it is less than 50%, thus the firm is not able to earn much for the investments it makes. On the other hand, Samsung return on equity is 1.0562 which when converted to percentage will give a 105.62%. The high percentage implies that Samsung is able to earn more than 100% for its equity invested. The low return on equity for Apple Inc is attributable to the low profit margin, which is 0.2167 and low total asset turnover which is 0.8256. The profit the firm earns is very low compared to the sales of the firm leading to low profit margin. The low profit margin may be caused by high operating expenses so that most of the firm’s sales revenue is used to cover for the operating expense. The end result of higher operating expense is low profit margin. However, the firm is performing better in managing its operating expense since it has a higher profit ratio than Samsung which has a ratio of 0.1332. Though the return on asset is 0.8256, it is still low compared to that of Samsung, which has a return on asset ratio of 1.0682. The equity multiplier is the higher ratio of the three ratios used to calculate the return on equity, but has the greatest variance with that of the competitor. The equity multiplier is 1.6744 compared to 7.4234 of Samsung. The low equity multiplier is an indication that Apple is investing little amount of capital in assets compared to the amount of equity of the firm. Therefore, the competitor, Samsung is stronger in asset base due to its huge investment in asset compared to the amount of equity held. (Apple Inc 46, & Samsung 21). Detailed analysis of strength and weakness of Apple Inc relative to Samsung A detailed analysis of the financial report of Apple and its benchmark Samsung will reveal the root of the problem leading to low profitability of the firm. The ratios to be analyzed are Operational ratio to measure asset use efficiency (asset turn over) and sales efficiency (profitability), financing ratio to measure leverage, financing ratio to measure liquidity. Current ratio The liquidity ratio of choice is the current ratio. Current ratio is the ratio of current asset to current liability. The current ratio measures the firm’s ability to meet its current debt obligation using its current assets. Current ratio= current liability/current assets Year 2013 2012 Apple Inc 1.6786 1.4958 Samsung 3.3418 3.0385 Apple Inc has a fairly high current ratio but not as high as that of Samsung. When the current assets of apple cover current liabilities 1.6 times, Samsung covers 3.3 times. Thus, Samsung is in a better position to pay its debtors using its debts than Apple. A high current ratio increases the credit worthiness of the firm so that more creditors are willing to lend to Samsung more than Apple. Asset turn over To measure asset use efficiency, asset turnover is the ratio to compute. Asset turnover is the ratio of sales to total asset. The ratio shows the proportion of sales attributable to assets of the firm. The higher the ratio the better the firm is performing. Year 2013 2012 Apple Inc 0.8256 0.8889 Samsung company 1.0682 1.1106 Since a higher ratio is more preferable than a lower ratio, Samsung Company is performing better in its utilization of assets. The higher the ratio the more sales attributed to the firm’s assets. Therefore, it is conclusive that Apple’s assets do not generate as much income as that of its competitor Samsung. Profit margin Sales efficiency measures the profitability of the firm relative to its competitors. The gross profit margin is a ratio of gross profit to net sales. It shows the percentage of sales that is profit. A higher percentage is preferable to a lower one because high percentage means the sales income has a high proportion of profit thus the firm is very profitable in its operating activities. Year 2013 2012 Apple Inc 0.3762 0.4387 Samsung 0.3978 0.3702 The gross profit margins for the two firms are close to equal. Though Samsung is slightly ahead by about 0.02, the firms have almost equal profitability from their sales. Therefore we can say Apple is doing well on its gross profitability margin since it’s almost equal to that of its key competitor. Financial liverage Financial leverage ratio measure the total liability to stakeholder’s equity. The ratio measures the amount of equity and debt the firm is using to finance its activities. It’s a ratio of total liability to shareholders equity. Year 2013 2012 Apple 0.6754 0.3285 Samsung 0.4270 0.4905 Apple has a higher financial leverage than Samsung Company. Therefore, Apple is using more debt to finance its activities than equity. As a result, Apple is at risk of having volatile income due to interest rates expense. Worse still, if the firm is not able to pay up its debts it is at risk of takeover by creditors. Managing human resource A ratio of sales to liability can be used to measure the firm’s effectiveness in managing its human resource. The choice of sale to liability is because employees generate sales while they are a liability to the firm. Therefore, the amount of sales they bring to the firm should be higher than the accompanying liability. Thus a higher ratio is preferred. Year 2013 2013 Apple 2.048 0.9767 Samsung 3.5700 3.3747 Employee efficiency of Apple is lower than that of Samsung since it has a lower ratio of sales to liabilities. Overall conclusion about the firm’s strength and weakness Apple Inc is performing fairly well in the market but its performance financially is no that attractive when compared to Samsung. The firm is depending so much on liabilities to finance its activities so that share holders can only claim less than 40% of the firm’s asset in case of liquidation. Though the firm is covering most of its expense, the level of coverage is still lower compared to Samsung. The firm can probably invest more in assets that generate more income so as to increase its profitability. Stock analysis The price per earnings ratio is the commonly used ratio to measure stock value of the firm. It shows the number of times a stock is trading as per its earnings per share. Price earnings ratio = stock price per share/ earnings per share Year 2013 2012 Appe 14.01 11.9175 Samsung 0.0736 9.8818 Therefore, the shares of Apple are trading 14 times more than the earnings of the firm while the stock of Samsung is trading at a price lower than its earnings per share. Investment advice Apple stock price. Source: http://finance.yahoo.com/echarts?s=aapl+Interactive#{%22range%22%3A%225d%22%2C%22scale%22%3A%22linear%22} From the chart above, the stock price for apple has been unstable for a while. The stock price keeps fluctuating with the latest showing a downward trend. Therefore, I would advise investors not to make any investment since the price is showing signs of further decrease. Only when the price starts appreciating should the investor make the move. References Apple Inc (2014). United States Securities and Exchange Commission Form 10-K Annual report 2013. Available from: http://investor.apple.com/secfiling.cfm?filingid=1193125-13-416534&cik= Samsung (2014). 2013 Samsung electronics annual report. Available from: http://www.samsung.com/us/aboutsamsung/investor_relations/financial_information/downloads/2013/2013-samsung-electronic-report.pdf Yahoo (2015). Finance: Apple Inc NASDAQ real time prices. Available from: http://finance.yahoo.com/q/hp?s=AAPL&a=11&b=12&c=1980&d=11&e=31&f=2012&g=m Read More