Apple Incorporation Financial Analysis - Example

Apple Incorporation Financial Analysis Student’s Name Institutional Affiliation Table of Contents Executive Summary……………………………………………………………………………….3 A. Introduction & Company Background……………………………………………………4 B. Ratio Analysis…………………………………………………………………………….5 C. Analysis of Statement of Cash Flows.……………………………………………………9 D. Potential Shareholder’s Perspective……………………………………………………...10 Conclusion & Recommendation…………………………………………………………………11 References………………………………………………………………………………………..12 Executive Summary Apple’s liquidity; profitability and gearing ratios all fall above the industry averages meaning that the company has made stringent efforts to translate sales into revenues; used a mixed policy that ensures to utilize debt as well as equity funds in equal measure in order to maintain control of operations and take advantage of the low interest rates on borrowings; as well as ensure to maintain a strong cash resource base for meeting its future short term commitments. As a result of this, then potential shareholders should invest with the firm since they will be able to enjoy dividends from their investments as most of the resources will be used for investment purposes as opposed to meeting commitments. Thus, investors should go ahead and put in their money with the company. E. Introduction & Company Background Apple Inc is a technological company that is fully engaged in the designing, production and marketing of mobile communication and media-based devices, PCs; portable digital music players while also ensuring to diversify into selling of a set of distinctive software, networking solutions as well as third-party digital content (Apple Inc. 2015). Some of the most popular products produced by this company, over the years for the global market, include; the iPhone, iPad, Mac; and, the recently launched Apple watch and TV. Notably, it is also focused on the selling and distribution of both consumer-based and professional software applications like the iOS and operating systems iCloud and Apple Pay (Apple Inc. 2015). It is important to note that the firm has made efforts to sell and distribute most of its products to the global market through a set of its retail stores; online stores as well as distinctive direct sales force. Other distinguished forms for which these products reach the international markets involve selling through third-party cellular network carriers and value-added resellers. It is based in California having been established in 1977. The firm’s current chief executive officer is Tim Cook (Apple Inc. 2015). Its business strategy focuses of bringing about the perfect user-experience for its underlying customer-base by way of coming up with innovative hardware; software and services. In essence, its underlying business strategy greatly relies on its unique capacity to ensure the designing and development of in-house operating systems; application hardware and software as well as services to its wide-array of customers throughout the world. For the purpose of ensuring the continuity of its strategy, Apple has refocused on expanding its immediate base in order to prompt discovery and delivery of unique digital content and application through the Web (Apple Inc. 2015). It certainly upholds the concept of a high-quality purchasing experience with distinctive set of knowledgeable sales personnel that are able to portray the immediate value of the firm’s most notable products and services so that it can continue to attract and retain the existing clientele base. The focus of this paper is to try and examine the recently published financial reports of the company to ascertain whether or not to invest with it. It should be noted that the analysis covers a ratio analysis for the period between 2014 and 2015. In doing so, the analysis would entail a comparison of the company’s competitor: Samsung as a benchmark and whose recently published annual report is of the financial year ending 2014, in order to establish the current position of the firm. F. Ratio Analysis Apple Liquidity Ratio 2014 2015 Current ratio=current assets/ current liabilities 68,531/63,448 =1.08 89,378/80,610 = 1.1 Cash Ratio= Current assets-Inventory/Current liabilities 68,531-2,111/63,448 =1.04 89,378-2,349/80,610 =1.07 Samsung Liquidity at 2014: Current ratio=current assets/ current liabilities = 109,381,617/ 49,410,010 = 2.2 Cash Ratio= Current assets-Inventory/Current liabilities =109,381,617-16,450,560/ 49,410,010 = 1.88 Liquidity Analysis: From the computations above, it can be noted that Apple’s liquidity position sits below the competitor: Samsung. Despite its current ratio increasing from 1.08 to 1.1 in the period between 2014 and 2015 respectively, it still falls below Samsung’s current ratio of 2.2. Similarly, this trend is perceived with its quick ratio that increases from 1.04 to 1.07 in the same period but sits below Samsung’s 1.88 ratio value. From this analysis, it can be noted that Apple’s liquidity position sits below its competitor hence meaning that it is unfairly placed to meet its short-term obligations as and whenever they came due in comparison to its competitor. Gearing Ratio Analysis Apple Ratio 2014 2015 Debt-to equity ratio= total debt/total equity 28,987/ 111,547 = 0.3 53,463+2,500/ 119,355 =0.5 Debt-to-total assets ratio= total debt/total assets 28,987/231,839 = 0.1 53,463+2,500/290,479 =0.2 Samsung Gearing: Debt-to equity ratio= total debt/total equity = 7,627,338+ 96,581/ 159,673,399 = 0.05 Debt-to-total assets ratio= total debt/total assets =7,627,338+ 96,581/218,887,585 =0.04 Apple’s debt-to-equity ratio increases from 0.3 to 0.5 in the two financial periods. This ratio sits below the competitor of 0.05. It means that in comparison to Samsung, Apple is much more dependent on debt funds as opposed to equity from shareholders. The company seems to rely much on debt funds to finance its projects as opposed to accessing these funds through potential shareholders. Similarly, the firm’s debt-to-total assets ratio increases slightly from 0.1 to 0.2 in 2014 and 2015 respectively; with these values sitting below the 0.04 ratio related to its main competitor; Samsung. Despite this increase in the ratio value; they however fall within the recommended standard values thereby ascertaining to the fact that Apple strives to also include a recommendable degree of debt funds to finance some of its existing asset base. In essence, it is ascertained that the company used the proceeds from the issuance of unsecured short-term promissory notes or rather commercial paper for purpose of finance its general corporate purposes that include; dividends and shares repurchase (Apple Inc, 2015). Most notably, in 2014, Apple engaged most of debt funds to complete numerous business acquisition processess that include the direct acquisition of Beats Music LLC that provides subscription streaming music service as well as Beats Electronics LLC that is fully engaged in the production of Beats headphones; speakers and audio software. Profitability Analysis Apple Year /Ratios 2014 2015 Profit Margin = Net income/sales 39,510/182,795 =0.2 53,394/233,715 =0.2 ROA =Net Income/total assets 39,510/231,839 =0.2 53,394/290,479 =0.2 ROE= net income/total equity 39,510/111,547 =0.4 53,394/119,355 =0.4 Samsung Year /Ratios 2014 Profit Margin = Net income/sales 22,223,194/195,882,955 =0.1 ROA =Net Income/total assets 22,223,194/218,887,585 =0.1 ROE= net income/total equity 22,223,194/159,673,399 =0.1 Apple’s profit margin stands at 0.2 for the two periods in comparison to Samsung’s 0.1. This means that the company’s ability to translate sales into net income has remained relatively steady over time. The company’s ability to translate sales into net income has remained stagnant over time and this might be attributed to ineffective marketing campaigns or even pricing strategies. In fact, it can be linked to the premium prices set by the company that tend to only focus on premium customers thereby limiting the range of sales to other potential customers. The return on assets also remains steady over the period at a figure of 0.2 in comparison to 0.1 for Samsung. It means that the firm still relies on existing management policies of utilizing the existing assets to come up with efficient and enough levels of net income over time. The return on equity ratio also remains steady within the period at a figure of 0.4 in comparison to 0.1 for Samsung. In overall, the profitability ratios seems to be steady over the two periods however; they remain above competition meaning that Apple unlike its rivals is making efforts to translate most of its sales revenues; asset base utilization and equity funds to make enough net income. The level of sales over the years has been dwindling for the company especially in relation to possible reductions in net sales in major categories for its products like Mac and iPad (Apple Inc, 2015). Certainly, the decrease in the level of sales in 2014 in comparison to 2013 was highly related to the weakness witnessed in numerous foreign currencies that relate to both the US and Australian dollar currencies in comparison to major world currencies. The increase in the overall gross profits for 2015 was linked to the conducive shift in products especially those with higher margins and to a lesser extent by the overall improvements on leveraged for fixed costs related to higher net sales. Certainly, these positive facets were fundamentally attributed with a higher product cost structure and with a lesser extent the effect causing a weakness in most of the foreign currencies that relate to higher cost strictures as well as new product lines. G. Analysis of Statement of Cash Flows Apple’s cash generated from operating activities increases tremendously from $59,713M to $81,266M in the two financial periods. This is attributed to major increase in the cash and cash equivalents amounts as well as the net income within the period. It is also important to indicate that the accounts receivables within the two-year period also increased from a negative mark to $611M within the period thereby improving the existing cash resource base. The company’s cash used in investing activities decreases significantly within the two-year period from -$22,579M to -$56,274M in 2014 and 2015 respectively. The tremendous decrease in the amount is highly linked to a major reduction in the level of amounts used for purposes of buying marketable securities as well as a low turnover from the proceeds from sales of these marketable securities within the period. Subsequently, the amounts used in financing activities increases within the period and the improvement is related to a major increase in the level of proceeds got from issuances of term debt as well as repurchase of common stock within the period. As a result, the amounts related to the cash and cash equivalents at end of the two financial periods increases tremendously from $13,844M to $21,120M in 2014 and 2015 respectively. This increase generally means that Apple is fairly positioned in terms of its liquid cash base that is needed for meeting most of its short term obligations as and whenever they fall due. H. Potential Shareholder’s Perspective From a potential shareholder’s perspective, Apple Inc is doing very in comparison to its immediate competitor Samsung and thus, positioned highly within its industry of operation. The company’s liquidity position is stable given its efforts to improve the existing cash and cash equivalent amounts within the last two operational years. The company is able to meet on its short term commitments as and whenever they fall due given the favorable liquidity position. It therefore means that potential investors will not be worried that their investments with the company will be used to clear-off past commitment as opposed to being directed to investment activities. Its profitability position is also fair meaning that potential funds from these investors will be able to attract dividends in future. Certainly, considering the fact that the operational management team seeks to ensure that they optimise both equity and asset base hugely translates to the fact that they will accrue enough profits for dividend distribution in the future. Conclusion & Recommendation From the analysis above, it can be noted that Apple is performing fairly well within its industry. The company’s financial position; profitability and operation management sits fairly above the competitor: Samsung implying that it has ensured to invest well in its operational policies and product innovation over the years. Due to this factor, it is highly recommended that a potential shareholder invest with the firm since it is able to translate the funds to more profits hence more dividends to shareholders in the future period. References List Apple Inc. 2015. Annual Reports. Retrieved from http://investor.apple.com/financials.cfm Samsung 2015. 2014 Annual Report. Retrieved from http://www.samsung.com/us/aboutsamsung/investor_relations/financial_information/annual_reports.html Read More