Research Paper: Financial Ratio Analysis

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Financial Ratio Analysis

Liquidity

Apple

Google

Working Capital

Current Ratio

Current Cash Debt Coverage Ratio

A/R Turnover

Inventory Turnover

According to Correia et al., liquidity ratios are of great importance for an individual seeking to gauge a firm's ability to settle its financial obligations as they mature (5-13). To gauge the appropriateness of Apple's liquidity, a look at its current ratio would be necessary. Basically, given that Apple's current ratio is higher than one, the company cannot be said to be encountering any serious liquidity problems at the moment. Hence if Apple's short-term obligations fell due, the company would be able to meet them. However, Apple has a lower current ratio than its competitor. It can be noted that in basic terms, a company with a higher current ratio is better placed to settle its short-term obligations if and when they fall due.

While the accounts receivable turnover looks at the number of times (in average terms) accounts receivables are collected by an entity within a given period of time (usually per annum), inventory turnover is an indicator of the number of times an entity sells and replaces its inventory within a specified time period. Compared to the previous period, the receivables turnover ratio for Apple has slightly increased in the current period. This means that Apple is more effective in the extension of credit as well as debt collection that it was in the previous period. Further, in comparison to Google, Apple seems to be more effective in credit extension and accounts collection as its accounts receivable turnover ratio is higher. Regarding inventory turnover, Apple is also well-off in the current period in comparison to the previous period. Its higher inventory turnover ratio in the current period means that the company's sales are better than during the previous period. In basic terms, Apple's management of inventory and receivables is largely in line with its business strategy which involves innovation and continuous improvement.

Were Apple to be faced with a liquidity crisis, the company would have a number of options at its disposal including but not limited to access to commercial credit, open-end credit and closed-end credit.

Solvency

Apple

Google

Sept 24, 2011

Sept 25, 2010

Dec 31, 2010

Dec 31, 2009

Debt-to-asset ratio

0.34

0.36

0.20

0.11

Cash Debt Coverage Ratio

1.34

0.90

1.11

3.39

Times Interest Earned

Solvency ratios mainly concern themselves with the measurement of "the ability of the company to survive over a long period of time" (Kimmel, Kieso & Weygandt, 700). Given both the industry (personal computers) and business strategy of Apple, the company's financing mix is largely appropriate. Based on the cash debt coverage ratio for the current period, Apple can retire all its debt within a year. Currently, the company's cash debt coverage ratio stands at 1.34. This is in comparison to the previous period where the company could have only managed to settle 90% of its debt given its 0.90 ratio of cash debt coverage ratio. When it comes to Apple's dividend policy, it can be noted that the company has not paid any dividends in the recent past. Hence the company retains most of its earnings.

Regarding Apple's ability to service its debt load, the same ratio discussed in the paragraph above can be used. Based on the fact that the company's debt coverage ratio is greater than 1:1, the company cannot be said to be having trouble servicing its debt load. Thus Apple can easily use the extra funds over and above total debt to initiate new projects. Further, it is also important to note that most of the company's assets are being financed through equity given that Apple has a debt to asset ratio of less than 1. Hence the current level of external financing is significantly low.

Currently, the level of Apple's non-operating expenses is satisfactory given the industry the company operates in. The non-operating assets currently held by Apple could be for a number of purposes. One of these is that such assets could be related in a way to a portion of the business which has since been closed and hence might be put up for sale going forward. Apple could also be holding some non-operating assets so as to diversify operational risks.

Profitability

Apple

Google

Sept 24, 2011

Sept 25, 2010

Dec 31, 2010

Dec 31, 2009

Return on Shareholders' Equity

0.34

0.29

0.18

0.18

Return on Assets

0.22

0.19

0.15

0.16

Leverage (defined as ROE-ROA)

0.12

0.10

0.03

0.02

Profit Margin

0.24

0.21

0.29

0.28

Gross Profit Margin

0.40

0.40

0.64

0.63

Asset Turnover

1.13

1.06

0.60

0.65

Return on Capital Employed (ROCE)

0.39

0.34

0.23

0.22

Cash Return on Assets

0.32

0.25

0.19

0.23

From the onset, it can be noted that apple has largely used its business strategy effectively in the generation of profits. This can be gleaned from a comparison of a number of ratios highlighted above with those of Google; Apples competitor in this case. For instance, in addition to raking in a higher return on equity for its stockholders in the year 2011 than in 2010; Apple also tends to earn more returns for each invested dollar in comparison to Google. This can be derived from the company's return on equity over the two-year period in comparison to that of Google over a similar period. As Mayo notes, return on equity remains one of the most important profitability ratios for investors and stockholders (444). Thus a significantly high return on equity is desirable as it shows how efficient the management of a given company is in achieving higher returns for investors. Hence in the case of Apple, the management of the company is effectively executing the business strategy so as to rake in more returns for each dollar invested. In relation to the return on assets, it is clear that Apple is better-off than Google by far. In basic terms, return on assets measures the performance of a given firm as far as its utilization of assets is concerned in profit generation (Stickney et al. 256). Thus the higher ROA in the case of Apple means that the company is raking in more cash using less investment. Hence, in a way, Apple's investments are being converted into profit in a better way than those of Google. However, it is also important to note that a look at both company's profit margins highlights some differences. In both periods under consideration, Google's gross profit margins and profit margin are much higher than those of Apple. This means that Google is earning more gross and net profit on sales than Apple. However, the fact that Apple is much more profitable than Google given its higher net income figure can be partly explained using the asset turnover ratio. Generally, companies with low profit margins (like Apple) tend to have an asset turnover value that is significantly higher. In this case, this is as a result of competitive pricing on the part of Apple. Lastly, the higher ROCE values in the case of Apple demonstrates that the capital investments of the company are largely profitable while on the other hand; the higher cash return on assets ratio shows that Apple is performing relatively well in relation to other industry members.

Apple's net income has increased from $14,013,000,000 in 2010 to $25,922,000,000 in the year 2011. From Apple's management discussion and analysis, it is clear that Apple's strategy largely contributed towards the sales increase. For instance, in the management discussion and analysis, it is noted that the company expanded its distribution network so as to reach more clients. Further, the management discussion and analysis report notes that the enhanced investment in research and investment continues to be critical to the company's market position and hence profitability. Lastly, Apple's extensive advertising and marketing programs could have contributed to the income change.

In my opinion, I am convinced that Apple's profits will rise next year. This assertion is based on a number of things. For instance, the company's cash return on assets ratio has been on an upward trend in the last two years. This is an indicator that higher earnings are to be expected as the company has more cash (based on the high cash return on assets ratio) to reintegrate inform of replacements and/or upgrades. Further, by retaining most of the earnings earned, the company could have more funds on its disposal for purposes of research and development, product development etc. Such undertakings are likely to have a positive impact on the company's future earnings.

Cash Flows

Apple (figures in thousands)

Google (figures in thousands)

Sept 24, 2011

Sept 25, 2010

Dec 31, 2010

Dec 31, 2009

Net Income

25,922,000

14,013,000

8,505,000

6,520,000

Cash Flow from Operations

37,529,000

18,595,000

11,081,000

9,316,000

Cash Flow from Investing Activities

(40,419,000)

(13,854,000)

(10,680,000)

(8,019,000)

Cash Flow from Financing Activities

1,444,000

1,257,000

3,050,000

233,000

In the two years under consideration. Apple's cash flows from operations have increased by $18,934,000,000. Further, it can also be noted that Apple's cash flows from… [END OF PREVIEW]

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