Free «Financial Answers» Essay

Overview

Apple Inc is a company that is involved in design, manufacture and marketing of Apple products like software, mobile communication devices, personal computers, services, peripherals, networking solutions all over the world with operations in the US, Japan and the Europe. The company also sells a variety of third party Mac, iPhones and iPad and other accessories.

Background Information

Founded in 1977 in the US, Apple Inc initially started as Apple Computer Inc and was renamed as Apple Inc to incorporate the company’s comprehensive product portfolio. Today the company is engaged in a variety of hardware products including portable digital music players, software solutions, media devices, and personal computers (Rambow, 2005).

The Financial Analysis

An analysis of the financial statement of Apple will include a general comparison of the company’s main financial influencing factors; a ratio analysis that will help in providing an in-depth audit of the financial performance of Apple and its effect on the company.

Main Financial Influencers of Apple

The main factors that influence Apple’s financial statements are the revenue, net profit, operating profit, cost of sales, earnings per share. These factors help show the overall financial performance of the company (Rambow, 2005).

 Ratio Analysis

This is used to express how financial statement figures relate to each other. They are used to interpret how the ratios will affect each other as well as the company’s performance and development. There will be comparison of figures within Apple’s own performance over the past years.

Liquidity Ratios

The liquidity ratios help in assessing the amount of cash a company has access to from its own resources in the next one working year. The most common ratios here are quick ratio and the current ratio.

Current Ratio

The normal current ratio is a 2:1 ratio. If the current ratio is higher, then the company has more liquid resources that are available for the company to pay its short-term debts. For example in 2009, the current ratio for apple was higher but still within the norm industry in 2010.

Quick ratio

This is especially considered a more reliable statement of the company’s liquidity. With a 1:1 ratio, it means that the company’s accounts are safe. In 2009, Apple greatly performed but the ratio decreased in 2010 indicating that Apple was able to turn assets quickly into cash. In 2010, we can see that the company’s liquidity ratios dropped from 2009. This is an indication that the Apple’s liability may have increased due to R&D, retail store investments and production of more products.

Profitability Ratios

These ratios are used to calculate a company’s earnings generated in relation to the expenses and costs incurred during the financial year (FY). If the value of a profitability ratio increases, it is an indication that the business is performing well.

Return on Gross Assets (ROA)

The company has invested in fixed assets by an expansion of its retail segment implying that there is a slight decrease in ROA. ROA should not go below 5% but with Apple’s 24.66% ROA, Apple is in a very good position.

Return on Shareholder Equity (ROE)

A high ROE return signifies effective employment of stakeholder investments which in return gives high earnings for the stakeholders. According to the financial statements of Apple, the figures indicate that the company was able to invest effectively for the FY2010. Since ROE ought to be interpreted with debts, it shows that Apple has short-term debts indicating that the company can quickly cover. This kind of investment strategy for Apple can be said to be benefiting both for the shareholders and the company.

Gross ratio

According to the attached report, Apple’s gross ratio decreased in 2010. This can be attributed to the less efficient use of its fixed assets in manufacturing as well as raw materials. However, company comparison shows that the gross ratio is at a high percentage which is a positive indication for profit that is confirmed for the company’s overall results. Basically, Apple had a Apple had a better gross margin than Dell in FY2010

Such positive profitability ratios are an indication that Apple has effectively managed to sales and investments.

Efficiency Ratios

These ratios express the ability of a company to use its resources in a profitable manner. An increasing figure over the years is an indication that the company is efficiently managing its resources.

Rate of stock turnover (ROST)

This is described as the number of times the stock is replaced in the year. A high ROST is an indication of efficient investments while a low ROST will indicate poor sales or stock piling. In the FY2010, Apples sales greatly increased than 2009 which may have indicated inefficient stockpiling in 2009. An increased inventory level may have resulted from the fact that there was a too high prediction of iPad sales and a lower sales rate.

Fixed asset turnover (FAT)

FAT decreased by 27% in FY2010 than it was in 2009. This means that Aplle was less successful in use of its fixed assets in generating sales. A reduced FAT from 2009 also indicates an increase of fixed assets for Apple.

Cost of Sales (COS)

Because of a decreasing ROST and FAT, COS will naturally increase as indicated in the financial report.

Debt Ratio

This is an expression of the percentage of assets that are financed by debts. Accordingly, Apple has only short-term liabilities but no long-term liabilities according to its company website in 2010. Short-term liabilities increased, but Apple was in a position to reduce this in the upcoming financial periods. This means that the risk for Apple remains low.

Investment Ratio

Investment ratios help a prospective shareholder to judge how remunerative an existing or a potential investment may be or is. In FY 2009-2009, Apple did not pay its shareholders hence the dividend yield of $0.00. This means that the company had more financial resources to re-invest and also develop new and innovative products for the market to be able to maintain its peer position.

Earnings per share (EPS)

This allots the company’s profits to the number of available shares. Therefore, EPS is an indication of the company’s overall profitability. According to the report, Apple increased its EPS from FY2009 to 2010 to $15.41 which was a 67% increase. This relates to an increase of about 60% in profits from FY2009. A higher price earnings ratio (P/E) describes a higher demand of Apple shares. This boosts the confidence of shareholders and investors towards a positive future outlook of the company. A higher EPS means that the P/E will also increase (Ehrhardt & Brigham, 2010; Rambow, 2005).

Recommendation and Conclusion

Over the past years, Apple has proven to be a blue chip and lucrative company to invest in. The trend is likely to continue in the near future hence the reason why the FY2010 was a good year for Apple. The company has heavily invested in research and development of new products. This has resulted to launch of innovative products like the iPad and the iPhone enhancing its image as well as company and product desirability. From above, Apple has increased its revenue over the years. However, a negative affect was recognized when analyzing Apple’s efficiency in use of resources. This is because the stock turnover was shown to decrease as compared to the previous year. This had a negative effect on cost of sales (COS) and the fixed asset turnover (FAT).

It is recommended that Apple continues its trend of investing in high end investments. This means that the company needs to invest more in research and development for the success story to be repeated over the years and be on top of its game; ahead of the others. The company ought to also keep services offered by the other third party suppliers like mobile applications, e-books, and music to keep its popularity. For decreased turn over, Apple can introduce improvements in its promotional and marketing skills to boost sales and to keep the negative effects of decrease in stock a thing of the past.