When evaluating a company’s financial performance, it is essential to examine its financial ratios. These ratios can be classified into different categories. Profitability ratios offer insights into the company’s profitability. Liquidity ratios analyze the company’s current assets and liabilities, indicating how well it manages liquid finances. Leverage ratios concentrate on the company’s debt and its effect on performance. Activity ratios evaluate the company’s inventory and collection period, demonstrating its efficiency in selling inventory and collecting debts.
The other important measures of financial performance include information on dividends, common stock, and cash flows (**Use the text book citation here). Profitability Ratios The profitability ratios of Apple show that the company is doing well financially. The gross profit margin shows the percentage of revenues available to cover the operating expenses and still turn a profit. The higher the percentage is the better off the company is. Over the years, the trend should be moving in an upward position (**Book citation. ). For 2010, 2011, and 2012, Apple’s ratios were 39. 38%, 40. 48%, and 43. 7%, respectively (Apple financials). The trend is increasing over the three-year period, and the percentages are fairly high. Therefore, it can be concluded that the gross profit margin shows positive growth. Operating profit margin shows the profitability of current operations without taking interest charges and income tax into consideration. Like the gross profit margin, the trend over the years should be upward, and higher percentages are better (**Book citation. ). For Apple, the ratios for 2010, 2011, and 2012 were 88. 81%, 90. 74%, 91. 42%, respectively (Apple financials).
The ratio for Apple is steadily increasing, approaching 100%, which shows positive growth. The net profit margin, gross profit margin, and operating profit margin also follow a similar pattern with higher percentages indicating better company performance. This trend is expected to continue over time (**Book). In the past three years, Apple’s net profit margin has been: 21.48% in 2010, 23.95% in 2011, and 26.67% in 2012 (Apple financials). This ratio demonstrates positive growth for Apple but is relatively low compared to other metrics.
The total return on assets ratio is used to calculate the return on assets invested in a business. It involves adding interest to profits after taxes and dividing by total assets, which includes debt and equity financing (**Book). Apple’s total return on assets has shown growth over time, with percentages of 18.64% in 2010, 22.28% in 2011, and 23.70% in 2012 (Apple financials).
Net return on total assets and total return on assets are similar, but the former excludes interest paid and considers only equity-funded assets. For Apple, this ratio signifies positive financial growth due to the lack of debt, resulting in identical values for both ratios. Additionally, return on stockholders’ equity measures the investment return for company shareholders.
The book states that the average ratio value typically falls between 12% and 15% and is expected to rise. Apple’s financial records show that their ratio was 29.32% in 2010, 33.83% in 2011, and 35.30% in 2012. Even when it hit its lowest point over the past three years, the ratio remained significantly above the average range, indicating positive growth for the company as it demonstrates an upward trend. The return on invested capital reflects the earnings shareholders receive from their long-term investment in the company. As previously mentioned, this ratio is anticipated to increase and higher values are preferred according to the book.
Apple financials reveal an upward trend in the company’s ratio over the past three years. In 2010, it was 25.73%, increasing to 29.32% in 2011 and further rising to reach 30.35% in 2012. While these figures are not significantly high, they indicate positive growth for Apple.
The earnings per share (EPS) is another important indicator that represents the earnings generated for each outstanding common stock share. A higher EPS value is generally seen as favorable, with a consistent upward pattern expected. Despite relatively modest values, Apple’s EPS also demonstrates positive growth. The ratio was $0.02 in 2010.
According to Apple’s financials, there was a positive upward trend in 2011 and 2012 with ratios of $0.03 and $0.04 respectively. Apple also displayed strong performance in terms of liquidity ratios. The current ratio evaluates the company’s ability to meet its current liabilities using current assets. A favorable scenario is indicated by a ratio of one or more, meaning that the company can cover its current liabilities. Conversely, if the ratio falls below one, it suggests an inability to meet current liabilities with available assets. Ideally, a ratio exceeding one would be preferred, with anything over two considered even better.
The trend should be increasing (**Book). For Apple, the ratio over the last three years has been 2.01 in 2010, 1.61 in 2011, and 1.50 in 2012 (Apple financials). Although the trend is decreasing, the current ratio still shows good financial standing for the company.
Working capital is the amount of capital a company has to work with after paying off all of their current liabilities. Larger amounts are better, and the trend should be increasing (**Book). For Apple, working capital was $20,956 billion in 2010, $17,018 billion in 2011, and $19,111 billion in 2012 (Apple financials).
In 2010, the company’s working capital decreased, but it increased in 2011, indicating positive overall growth. The value of the working capital suggests good performance. Leverage ratios, such as total-debt-to-assets, long-term debt-to-capital, debt-to-equity, and long-term debt-to-equity ratios show the use of borrowed funds for financing activities and the balance between debt and equity. A low ratio is preferred for total-debt-to-assets and long-term debt-to-capital ratios, while a ratio below 1 is desirable for debt-to-equity and long-term debt-to-equity ratios. Ratios above 1 are not ideal. Times-interest-earned measures the ability to pay annual interest charges with lenders typically requiring a ratio above 2 (*Book).
According to Apple financials, Apple has maintained a ratio of 0 for most of the ratios over the past three years, except for the times-interest-earned ratio which is not computable. Additionally, Apple has demonstrated exceptional performance by having no debt during this period, making them the only company in the industry with such achievement. Regarding activity ratios, the days of inventory ratio indicates the number of days required to use up inventory, with a smaller ratio being desirable and an ideal trend being a decrease (according to the book). Specifically, for Apple, the ratio stood at 9.70 in 2010, 4.40 in 2011, and 3.29 in 2012 as per Apple financials. These figures signify a small ratio with a decreasing trend.
Therefore, Apple’s performance is demonstrated to be good. The inventory turnover indicates how many times inventory is replaced within a year. A higher number indicates better performance, with the trend ideally increasing (**Book). In the case of Apple, the ratio was 37.62 in 2010, 83.03 in 2011, and 111.06 in 2012, suggesting a high number of turnovers per year and an increasing trend (Apple financials). This indicates strong performance by the company. The average collection period reflects the average waiting time for the firm to receive payment on accounts. A shorter collection time is preferred, and the trend should be upward (**Book).
The average collection period for Apple was 30.83 in 2010, 18.10 in 2011, and 25.49 in 2012 (Apple financials). Despite a decline in 2012, most collections were completed within thirty days, indicating good performance.
Regardless of the trend, the overall performance remains positive, demonstrating positive financial performance.
Another important measure of financial performance is the dividend yield on common stock which reflects the return shareholders receive as dividends. A typical yield ranges from 2-3% (**Book). Over the past three years, Apple’s dividend yield was 0% in both 2010 and 2011, and increased to 0.7% in 2012 (Apple financials).
In both 2010 and 2011, Apple did not pay dividends but declared and paid a dividend in 2012.
Thus, despite the small increase in yield, having any dividend is preferable to none and indicates positive financial growth.
The price-earnings ratio, calculated by dividing the current price per share by earnings per share, indicates investor confidence in a company. A ratio above 20 signifies strong confidence while a ratio below 12 suggests unfavorable investment prospects (**Book). In Apple’s case, their financials show a price-earnings ratio of 37.02 in 2010, 20.6 in 2011, and declining to 12.70 in 2012. This downward trend reflects waning investor confidence and doubts about potential returns on investment. One contributing factor could be the absence of dividends despite other positive financial indicators for the company. Additionally, some speculate that Steve Jobs’ death may have impacted Apple’s performance and quality due to his crucial role in its success. The dividend payout ratio measures the distribution of after-tax profits as dividends (**Book).
According to Apple financials, the ratio for Apple was 0% in both 2010 and 2011. However, with the issuance of dividends in 2012, the ratio rose to 6.00%, indicating positive growth for the company. The internal cash flow, which estimates a company’s remaining cash after expenses are paid, can be used for dividends or capital expenditures. As mentioned in the book, Apple’s internal cash flow is expected to continue increasing. In 2010, Apple reported an internal cash flow of $15,040 billion which then increased to $27,736 billion in 2011 and $45,010 billion in 2012 according to Apple financials. These figures show a consistent upward trend in Apple’s financial performance.
According to the book, free cash flow is an approximate measure of a company’s remaining cash after paying bills, dividends, and reinvesting in capital expenditures. It is expected that this amount should be increasing. Apple’s financials show that their free cash flow was $15,040 billion in 2010, $23,136 billion in 2011, and $34,708 billion in 2012. This indicates a positive trend over the three-year period and reflects good financial performance. You can find the Apple financials at http://investor.apple.com/financials.cfm, accessed in December 2012.
