Financial Analysis

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FinancialAnalysis

FinancialAnalysis

AppleInc. uses effective financial management and planning to manage itsbusiness successfully. Financial ratio analysis is essential to helpall Apple’s stakeholders identify trends and measure the overallfinancial status of the company (Wahlen, 2014). Besides, potentialinvestors and creditors usually depend on the ratio analysis whilemaking investing and lending decisions. In the fiscal year 2016, thenet sales dropped by nearly $18.1 billion or 8% as compared to thefiscal year 2015. Apple Inc. attributes the year-over-year slump innet sales of iPhone as well as fluctuations in the value of foreigncurrencies against U.S dollar (Apple Inc., 2016). Apple’ssustainable growth rate has increased though the firm’s capitalreturn program valued at nearly $250 billion. Apple Inc. is focusedon improving its share purchase authorization to $175 billion from$140 billion as well as increasing its quarterly dividend to $0.57from $0.52 per share. The future of Apple Inc.’s health performancelooks bright despite the big drop in profitability given theinvestment the company has made.

FinancialRatios

Revenue

AppleInc. revenue in USD (Million) was 233, 715 in 2015 and 215,639 in2016. The company suffered a drop in revenue, a difference of 18,076million (Apple Inc., 2016). The decline affected its dividend payoutand value of stock in 2016.

NetIncome

AppleInc. net income in USD (Million) was 53,394 in 2015 and 45,687 in2016. The performance demonstrated a drop of nearly USD 7,707 millionwhich impacted its profitability. The performance means a weak EPSratio and reduced benefits to the shareholders as they get a littleincome from their investment or shares (Christensen, 2014).

ProfitabilityRatios

Grossprofit margin

Grossprofit margin refers to the financial metric relied upon to evaluatethe firm’s business model and financial status by showing thepercentage of funds remaining from revenue/income after accountingfor COGS or cost of goods sold (Wahlen, 2014).

In2015, Gross Profit Margin = 233,715-140,089/233,715 = 0.401 or 40.1%

In2016, Gross Profit Margin = 215,639-131,376/215,639 = 0.0391 or39.1%.

Inthe gross margin, Apple earned 39.6 cents on the dollar on averagewithin the two years. The company uses a huge percentage of itsrevenue to cover the operational costs or expenditures. The drop ingross profit margin in 2016 can be attributed to the impact ofweakness in many foreign currencies as compared to the US dollar(Apple Inc., 2016). Additionally, the company attributes the drop topoor leverage on fixed costs from reduced net sales, partly beingoffset by a desirable change in mix to services. Gross profit marginshows how a company successfully creates products or provides itsservices as compared to its competitors (Isberg, 2013). With aninsufficient gross margin, Apple Inc. can fail to pay its operatingexpenses. Changes in pricing strategy, industrial changes, andincreased automation affect the company’s gross profit margin.Apple should continue with its premium pricing strategy to increasethe high gross profit margin.

NetProfit Margin

Netmargin = Net Profit/Revenue.

In2015, the net profit margin was 233715/53394 = 4.4 or 47%

In2016, the net profit margin was 215639/45687 = 4.7 or 47%

Theresult shows there was an increase in net margin of nearly 0.3. Onaverage, Apple had a net margin of 45.5%. Apple’s average 45.5%profit margin shows the firm earns 46 cents as profit for each dollarit collects. The net profit margin is largely used to indicate thelevel of profitability. A high-profit margin does not mean highprofits (Isberg, 2013). Nonetheless, it leads to growth in shareprices which positively impact the company’s profitability. Themetric is highly accurate of the company’s financial health ascompared to cash flows. Besides, Apple Inc. can use the net margin todetermine how its strategies work, compare profitability with itscompetitors, as well as predict profitability based on its revenue(Christensen, 2014). Additionally, because the net profit margin isexpressed as a percentage rather than a dollar amount, as net profitis, it makes it possible to compare the profitability of two or morebusinesses regardless of their differences in size. Finally, AppleInc. can use its net profit margin to forecast profits based onrevenues.

Returnon Assets

Returnon assets (ROA) is used to show the profitability of the companycomparative to its total assets. Apple Inc. uses the ROA to determinehow successful management uses its assets to generate revenue orincome (Christensen, 2014). It is also referred to as return oninvestment it is calculated by dividing Apple’s yearly revenue byits total assets. The return to asset formula is expressed as

Hence,in 2015, Apple Inc. return on assets was 53,394/290,479 = 0.183 or18.3%.

In2016, the return on assets was 45,687/321,686 = 0.142 or 14.2%.

Theassets include both equity and debt used to finance the company’soperations. Stakeholders use the ROA to assess how successful thefirm converts their investment into net income. On average, thecompany has a ROA of 16.25%. The result shows Apple’s ROA reducedby 4.1% in 2016 this means, in 2015 the company earned more revenueon minimal investment. Similarly, Apple Inc. converted its investmenthighly in 2015 as compared to 2016.

LiquidityRatio

CurrentRatio

Thecurrent ratio is used to assess a firm’s capability to repay bothlong- and short-term obligations and liabilities (account payablesand debts) using its assets (inventory, accounts receivable,marketable securities, and cash) (Christensen, 2014). Hence, there isneed to consider Apple’s current total assets (both illiquid andliquid) comparative to the firm’s current total liabilities. Allcurrent liabilities and assets are usually included in assessing theApple’s financial status.

CurrentRatio or working capital = Current Assets/Current Liabilities

AppleInc.’s current ratio in 2015 was 89,378/80610 = 1.11.

In2016, the working capital ratio was 1.35. On average the company hasa current ratio of 1.23 which means the firm can comfortably pay itsobligations given the larger fraction of asset value compared to itsliabilities’ values. A ratio below one (1) usually proves that afirm’s liabilities are greater as compared to its assets hence thecompany can fail to meet its obligations at the particular moment(Wahlen, 2014). The scenario does not mean the company would gobankrupt. Additionally, the average ratio of 1.23 means Apple Inc.uses its current assets efficiently it perfectly secures financesand manages its working capital excellently. Furthermore, theincrease in the current ratio in 2016 by 0.24 means Apple Inc. isefficient in its operating cycle, and it excellently converts itsproduct and services into cash.

MarketRatios

Earningsper Share (EPS)

EPSis a percentage of a firm’s profit assigned to the common stock’soutstanding share. EPS indicates the firm’s profitability. EPS isnormally regarded as the important variable in establishing a share’sprice. Besides, it is relied upon to compute the price-to-earningsvaluation ratio (Christensen, 2014).

EPS= Net income ÷ No. shares of common stock outstanding

In2015, EPS = 533,940,000/5,557,533,100 = 9.58

In2016, EPS = 45,687,000,000/5,332,313,000 = 8.57

In2015, the EPS was $9.58 while in 2016 the EPS was $8.57 (Apple,2016). There was a reduction in EPS by almost 1.01 which can beattributed to the slump in net income in the year 2016 (from 53,394in 2015 to 45,687 in 2015). Shareholders can express concerns withthe performance as they get little income from the investments in thecompany.

Priceto Earnings Ratio

P/ERatio is used to value the current price of shares about itsper-share earnings. P/E ratio is computed as follows:

P/Eratio = Share price/EPS

In2015, P/E ratio = 119/9.58 = 12.45%

Whilein 2016, P/E ratio = 115.59/8.57 = 13.49%

Apple’sP/E ratio increased in 2016 increased by 1.04%. Investors can use theratio to determine the amount of dollar an investor projects toinvest in a firm to get one dollar of the firm’s income. In 2016,investors were willing to pay $13.49 for $1 of the Apple’s presentearnings. Apple’s higher P/E ratio shows that investors areoptimistic of a growth in earnings in the future. Standardizing orgetting the average of the P/E ratio can also help investors make awise decision regarding buying the stock (Isberg, 2013).

DebtMeasures

Debtto Asset Ratio

Thetotal debt to total assets ratio seeks to describe the total amountof debt about its total assets. The analysis allows Apple to compareleverages with its competitors. Mostly, a high ratio indicates ahigh level of leverage and subsequently, high financial risk.Additionally, it entails short-term and long-term debt in addition toassets both intangible and tangible (Isberg, 2013).

In2015, Apple’s debt to asset ratio was 10999+53463/290479 = 0.22 or22%

In2016, Apple Inc.’s debt to asset ratio was 11605+75427/321686 =0.27 or 27%

Theresults show that in 2015, 22% of Apple Inc.’s assets are largelyfunded through debts whereas, in 2016, 27% of Apple’s assets wereused to finance its debts. In 2015, the company had a lower level ofleverage as compared to the year 2016 this means it had a highfinancial flexibility. Apple Inc. strives to service its debts toavoid violating its debt covenants which can lead to liquidation orbankruptcy.

SustainableGrowth Rate

AppleInc.’s sustainable growth rate (SGR) proves that the firm can growand expand at a quicker rate given its current profitability anddividend policy which discourages external borrowing. The favorableSGR that company enjoys means it greatly supports its growth throughits profits or retained earnings (Christensen, 2014). Despite thedecline in profitability in the fiscal year 2016 as compared to thefiscal year 2015 Apple’s profitability and growth are consistentgiven the huge returns it earns from stakeholder’s equity and thebigger percentage of its retained earnings invested in the company(Isberg, 2013).

FutureFinancial Health

AppleInc. has indicated that it will strengthen its business strategy,manage it business geographically, as well as improve its productsand services to increase its market share and sales volume.Similarly, the company has invested heavily investment in developerprograms, supply chain function, as well as research and developmentto compete effectively in the market (Apple Inc., 2016). In thefiscal year 2017, the company projects to increase its sales volumeand strategically manipulate changes in the value of global currencyrates to improve its financial performance (Wahlen, 2014). Continuedinvestment in human capital and technology exceeding $10 billionwould seek to build its capacity as it pursues to increase itsrevenue and financial ratios.

References

AppleInc. (2016). AnnualReport on Form 10-K.Retrievedfrom https://goo.gl/03GHw5

Christensen,T. E., Baker, R. E., &amp Cottrell, D. M. (2014).&nbspAdvancedFinancial Accounting.The McGraw-Hill Companies, Inc.

Isberg,S., &amp Pitta, D. (2013). Using financial analysis to assess brandequity.&nbspJournalof Product &amp Brand Management,&nbsp22(1),65-78.

Wahlen,J., Baginski, S., &amp Bradshaw, M. (2014).&nbspFinancialreporting, financial statement analysis and valuation.Nelson Education