Financial Analysis of Apple, Inc. Essay
When looking at the financial performance of a company, it is important to examine the financial ratios. There are several different classifications of financial ratios. Profitability ratios show the profitability of the company. Liquidity ratios deal with the current assets and current liabilities of the company, and they determine how the company is performing with their liquid finances. Leverage ratios deal with the company’s debt, and how they affect performance. Activity ratios deal with a company’s inventory and collection period, determining how well a company is able to turn over inventory and collect 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).
Over time, the ratio is increasing. It is extremely high, nearing 100%. This shows positive growth for Apple. Net profit margin is similar to gross profit margin and operating profit margin in respect to trend. The higher the percentage, the better the company is doing, and the trend should be increasing over time (**Book). The net profit margin for Apple over the past three years has been: 21. 48& in 2010, 23. 95% in 2011, and 26. 67% in 2012 (Apple financials). This ratio shows positive growth for Apple. It has increased over the past three years, although it is relatively low.
The total return on assets is, as the name suggests, a ratio that determines the return on the assets that have been invested in the business. Interest is added to profits after taxes, and then divided by total assets. This is due to the fact that assets are financed by debt as well as equity. As with the previous ratios, the trend for total return on assets should be upward, and a higher percentage is preferable (**Book). For Apple, this trend shows positive growth. Though the numbers are small at 18. 64% for 2010, 22. 28% in 2011, and 23. 70% in 2012 (Apple financials), the trend is increasing.
Net return on total assets is similar to total return on assets. The difference between the two ratios is that net return on total assets does not take into consideration the interest paid. Net return only looks at the return on assets that were funded by equity (**Book). For Apple, this ratio shows positive financial growth. Since the company has no debt, the ratio values are the same for total return on assets and net return on total assets (Apple financials). Therefore, the growth is positive. Return on stockholders’ equity measures the return that stockholders are receiving on their investment in the company.
An average value is in the 12-15% range, and the trend should be upward (**Book). For Apple, the ratio over the last three years is 29. 32% in 2010, 33. 83% in 2011, and 35. 30% in 2012 (Apple financials). Even at the lowest point over the past three years, the ratio has been well above the average range. Since the ratio is high, and the trend is increasing, it shows positive growth for the company. Return on invested capital shows the return shareholders are earning on the long-term capital invested in the company. As before, the trend should be upward, and the higher the value, the better (**Book).
Apple’s ratio for the past three years has been: 25. 73% for 2010, 29. 32% for 2011, and 30. 35% for 2012 (Apple financials). While these values are not very high, the trend has been increasing over the time period. Therefore, the ratio shows positive growth for the company. Earnings per share shows the earnings for each share of common stock outstanding. The bigger the value, the better, and the trend should always be increasing (**Book). For Apple, this ratio shows positive growth, although the values are very small. In 2010, the company showed a ratio of $0. 02.
The trend shows a positive increase in 2011, and again in 2012, with a ratio of $0. 03 and $0. 04, respectively (Apple financials). Liquidity Ratios The liquidity ratios for Apple also show that the company is doing well. The current ratio shows the ability of a company to pay their current liabilities with their current assets. The ratio should be at least one in order to be considered good. Anything less than one means that a company cannot pay its current liabilities with its current assets. Anything over one is considered desirable, and anything over two is better yet.
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).
While working capital decreased between 2010 and 2011, it increased in 2012. The trend suggests that work is needed, but the value of the working capital suggests that the company is doing very well. Therefore, overall, working capital shows positive growth. Leverage Ratios Total-debt-to-assets shows the extent to which borrowed funds have been used to finance the company’s activities. A low ratio is better, as a higher ratio indicates that the company relies heavily on debt to finance activities. Long-term debt-to-capital shows the amount of capital investment that has been financed by both debt and equity. A ratio below . 5 is desirable, since this suggests that 75% of activities have been financed with equity. Debt-to-equity shows the balance between debt and equity, and a desirable ratio is below one. The farther the ratio is below one, the more likely that a firm will be able to borrow funds in the future. Ratios above one are undesirable. Long-term debt-to-equity shows the balance between long-term debt and long-term equity. Low ratios are desirable as they show the ability to borrow more capital in the future. Times-interest-earned shows the ability to pay annual interest charges. Lenders usually request that the ratio be above two (**Book).
For Apple, these ratios, over the last three years, have been 0, aside from the times-interest-earned, which is unable to be computed (Apple financials). Apple has had no debt over the last three years. This shows outstanding performance by the company as they are the only company in the industry to be able to boast zero debt. Activity Ratios Days of inventory shows the number of days it takes to use inventory. The smaller the ratio, the better, and the trend should be decreasing (**Book). For Apple, the ratio was 9. 70 in 2010, 4. 40 in 2011, and 3. 29 in 2012 (Apple financials). This is a small ratio, and the trend is decreasing.
Therefore, this shows good performance from Apple. Inventory turnover shows the number of times inventory turns over in one year. The higher the number, the better, and the trend should be increasing (**Book). For Apple, the ratio was 37. 62 in 2010, 83. 03 in 2011, and 111. 06 in 2012 (Apple financials). This shows a very high number of turnovers per year, and the trend is increasing. This shows good performance by the company. Average collection period is the average length of time that the firm must wait to receive payment on accounts. A shorter collection time is better, and the trend should be upward (**Book).
Apple’s average collection period was 30. 83 in 2010, 18. 10 in 2011, and 25. 49 in 2012 (Apple financials). The performance is good, with most collection being done under thirty days. The trend shows improvement between 2010 and 2011, but showed a decline in 2012. No matter the trend, the performance is still positive, and therefore shows positive financial performance. Other Important Measures of Financial Performance Dividend yield on common stock shows the return that shareholders receive as dividends. A typical yield is 2-3% (**Book). For Apple, the dividend yield over the past three years was 0% in 2010 and 2011, and 0. 7% in 2012 (Apple financials). In 2010 and 2011, Apple did not pay dividends. In 2012, a dividend was declared and paid. Therefore, the trend is increasing, although the yield is very small. Since a small dividend is better than no dividend, the dividend yield shows positive financial growth.
The price-earnings ratio looks at the current price per share divided by the earnings per share. A ratio above 20 indicates strong investor confidence in the company, while a ratio below 12 indicates that investors find the company undesirable for investment (**Book). The price-earnings ratio for Apple was 37. 02 in 2010, 20. 6 in 2011, and 12. 70 in 2012 (Apple financials). This decline in the trend shows a decline in investor confidence in the company. This shows that investors are not confident that they will see a return on their money. This could be because of the lack of dividend, as all other financial indicators show good performance on the part of the company. This could also be due to the death of Steve Jobs, as many believe that he was what kept Apple going and, now that he is gone, Apple will decline in performance and quality. The dividend payout ratio indicates the amount of after-tax profits that are paid out as a dividend (**Book).
Apple’s ratio for 2010 and 2011 was 0%. With the dividend issued in 2012, the ratio jumped to 6. 00% (Apple financials). The growth between 2011 and 2012 shows positive growth of the company. The internal cash flow is a rough estimate of how much cash a company has after paying all of the bills, which can be used for dividends or capital expenditures. The trend should be upward (**Book). The internal cash flow for Apple was $15,040 billion in 2010, $27,736 billion in 2011, and $45,010 billion in 2012 (Apple financials). The trend for Apple is upward, and therefore shows excellent financial performance.
Likewise, the free cash flow is a rough estimate of how much cash a company has after paying all the bills, all the dividends declared, and all of the reinvestments in the business in the form of capital expenditures. The trend should also be increasing (**Book). For Apple, the free cash flow was $15,040 billion in 2010, $23,136 billion in 2011, and $34,708 billion in 2012 (Apple financials). This shows an increase over the three-year span, and therefore shows good financial performance. Apple financials. Viewed December, 2012 at: http://investor. apple. com/financials. cfm.