Financial Analysis Report Instructions

 

Write a 10-12 page report summarizing the financial statement analysis of your chosen Company (used in the Excel Project).  The report should be written in APA style, and should include a title page, abstract, and reference page.  Conclusions should be supported by 10 scholarly or trade sources, including the course text and the Bible.  (Please note that Investopedia, Accounting Coach, and other similar websites are not considered reputable resources.)

 

Your report should be written according to the following outline:

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I.          Introduction – a general description of the Company, its industry, and major competitors.

II.       Analyze the operating activities of the Company.

A.       Identify the Company’s core income sources.

B.        Identify the Company’s comprehensive income sources.

C.        Examine and discuss the Company’s quality of earnings.

D.       Identify the Company’s sources of operating and non-operating income.

E.        Identify the Company’s sources of transitory and permanent earnings.

III.    Analyze the Company’s sources of cash flows.

A.       Identify trends in the Company’s cash flows in each of the three cash flow categories.

B.        Relate cash flow to the Company’s organizational strategy.

IV.    Discuss the implications of potentially unrecorded assets for the Company.

V.       Comparative and Ratio Analysis

A.       Clearly state the implications of the ratio analysis concerning the following aspects of the Company:

1.                  Liquidity

2.                  Solvency

3.                  Financial Leverage

4.                  Asset Efficiency

5.                  Profitability

6.                  Market Value

B.           Compare and contrast the selected Company, its competitors, and industry averages.

C.           Identify the Company’s strengths and weaknesses.

VI.       Evaluate the Company in relation to a Biblical worldview.

VII.    As of result of your overall analysis, draw conclusions regarding the Company’s future prospects.

 

Submit this assignment by 11;59 p.m. (ET) on Friday of Module/Week 8.

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Apples Inc. Financial Analysis Report

Abstract

Apple Inc. continues to perform better than most companies in the technology and computer industry. It has seen improvements in its sales revenues from year to year. It has continued to grow its brands and services especially the IPhone new versions and software. This paper is going to analyze the different sectors of Apple Inc. It will highlight different aspects of the cash flow statement in terms of the financing, operating and investment activities. Ratio analysis will be used to gauge the performance of these segments and a comparison to the industrial average and its main competitors done. The paper will also seek to analyses the main areas that it has weaknesses and strengths in. The paper also discusses its performance in relation to biblical aspects. Finally, conclusions on the future of the company are made.

Apples Inc. financial analysis report

Introduction

Apple Inc. has been one of the best-performing companies across all sectors and one of the leading mobile manufacturers. It operates in the technology industry and is well known to design and distribute various computer and mobile software. Some of its products include MacBook’s, iPhone, IPad, and home pods speakers. Apple Inc. is one of the big four companies operating in the technology sector alongside giants like Google, Amazon, and Microsoft (Edge & Trouton, 2020). Its headquarters are in Cupertino, California, and was founded in 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne. Apple Inc. employs over 137,000 people in its offices (Miller & Maxwell, 2016). It has been doing amazingly well in the hands of Steve Jobs as the chief executive officer until his demise in 2011. In the year 2018, Apple Inc. was named as the first company to reach the $1 trillion value. Currently, it is the second-largest company in terms of capitalization with a value of $895 billion. It has also received commendations as being the top digital company and world’s most valuable brand is 2019 (Kim, et. al., 2020). Apple Inc. is the third-largest company in the mobile phones industry behind two of its main competitors, Samsung and Huawei. Other competitors include Dell, Lenovo, and Google.

Operating activities of Apples Inc.

Apples Inc. core income sources

Apple Inc. derives its income from an assortment of products and services they offer. Selling of apple products are their main source of income as compared to the provision of services. For instance, in the years 2019, 2018 and 2017 respectively, they achieved a net sales of $213 billion, $225 billion and $196 billion sales from products alone as compared to $46 billion, $39 billion and $32 billion in provision of services (Drzaic, et. al., 2019). Apples products range from IPad tablets, IPhone smart phones and watches, Apple TVs and Air pods wireless. Out of these products, the sale of iPhones was the highest, followed by Mac and then iPads which recorded $142, 381 million, $25,740 million, and $21,280 million respectively. Services they offer are mainly software which include safari browser, iTunes music player, Shazam, iOS, IOS and Mac apple store and MacOS (Edge & Trouton, 2020).

Apples Inc. comprehensive income sources

The total comprehensive incomes for the years 2019, 2018 and 2017 respectively were $2781 million, ($3026) million and ($784) million. Some of the major contributors to the comprehensive income for Apple Inc. include the change in the fair value of marketable securities which was $3802 million in 2019, ($3407) million in 2018 and ($782) million in 2017. Another component is the change in foreign currency translation net of tax which totaled to ($408) million, ($525) million and $224 million in the years 2019, 2018 and 2017, respectively. The change in unrealized gains on the derivatives market also constituted the company’s comprehensive income with ($638) million, $905 million, and ($162) million in the years 2019, 2018 and 2017, respectively.

Apples Inc. quality of earnings

Apple Inc. reported $45,898 million and $70,400 million in retained earnings in the years 2019 and 2018, respectively. This represented a decline in the value by $24,500 million which was a 34.85 decline. The earnings per share in the three years 2019, 2018 and 2017, respectively were $11.97, $12.01 and $9.27 per share owned. There has been a continuous increase in the value added to the shareholders apart from the year 2019 where they recorded a lower capitalization value as compared to the other years. This meant that the value of each share had declined and thus the lower earnings per share. However, we can expect the earnings per share for Apple Inc. to remain fairly consistent given the anticipated growth of the company in the coming years.

Apples Inc. sources of operating and non-operating income

Operating income for Apple Inc. amounted to $63,930 million, $70,898 and $61,334 in the years 2019, 2018 and 2017, respectively. Their major operating income is majorly from the regular sale of their products and services. Some items in the operating expenses include research and development of products and services, selling, general and administrative expenses. The Total non-operating income totaled to $1807 million in 2019, $2005 million in 2018 and $2745 million in 2017. This has been a steady decrease in the non-operating income since 2016. For instance, there were changes in the currency exchange which was a loss of $408 million in 2019, $525 million in 2018, and a loss of $224 million in 2017. There were also changes in the fair value of derivatives which were $23 million in 2019, $523 million in 2018, and $1315 million in 2017.

Apples Inc. sources of transitory and permanent earnings.

Transitory incomes are those short-lived incomes that will not continue in the future. An example of their transitory earning is the excess tax benefit from the equity awards. Payments made in connection with business acquisitions were also incurred in 2019 for a value of $624 million. On the other hand, permanent earnings are those earnings that will continue to flow in the future. An example of a permanent earning is the operating leases which were $1.3 billion, $1.2 billion, and $10.8 billion in the years 2019, 2018 and 2017, respectively. Earnings from foreign subsidies also constitute the permanent earnings of Apple Inc.

Apples Inc. sources of cash flows.

Trends in the Apples Inc. cash flows

  1. Operating activities

In 2018, there was an increase in the cash generated from the operating activities from $64,225 in 2017 to $77,434 million in 2018; whereas in 2019, there was a decline in the amount to $69,391 million. A major contributor to this figure in 2019 was the depreciation and amortization adjustment of $12,547 million and share-based compensation expense of $6,068 million. Other items that came into the operating activities included changes in accounts receivables by $245 million, inventory changes, vendor non-traded receivables, and deferred revenues.

  1. b. Investment activities

Cash generated from the investment activities has been on the increase from the year 2017 to 2019. For instance, the amount of investment cash in 2017 was negative $46,446 and increased to $16,066 million in 2018, and then later to $45,896 million in 2019. This means that they are reducing their investment portfolio by decreasing their investment capital and at the same time, they are receiving proceeds from the maturity and sale of their investments. For instance, the largest investment activity for the year 2019 was proceeds from the sale of marketable securities which amounted to $56,988 million while the proceeds from the maturity of marketable securities was $40,102 million. There was also some purchase of marketable securities in 2019 totaling to $39,630 million as well as some purchase of property plant and equipment worth $10,495 million. Other items in this section were proceeds from non-marketable securities and payments made in connection with business acquisitions.

  1. Financing activities

Cash used in financing activities has been on the increase from the year 2017. For instance, the amount used to finance its operations in 2017 was $17,974 million while in 2018, it increased to $87,876 million and later on increased to $90,976 million in 2019. This is to mean that they are issuing less debt to the public which strengthens their financial position to some extent. It means that they are reducing their liabilities to creditors and investors. Some of the major items under the financing activities is the repurchases of stock which accumulated to $66,897 million in 2019. Another item was the payment for dividends which totaled to $14,119 million. Repayment of debt also amounted to $8,805 million, and the repayment of commercial paper amounted to $105 million.

Relation of the cash flow items to the Apples Inc. organizational strategy

Apple organization strategy is to facilitate growth through innovation. This means that for innovation to take place, research and development have to be embraced. Their mission is to bring the best user experience to its customers through innovative hardware and services (Arocha, 2017). Making great products that will attract the high-income earners is their priority. This objective has been facilitated by their continuous increase in the acquisition of plants, property, and equipment for proper research and development. The company’s investment in their products and services can be seen by their yearly flagship of new IPhone model with the latest being the IPhone 11 released in 2019 and the continuous upgrade to their software as often as possible which in turn brings about easy and smooth usage of their products which are up to date. They also strive to increase their shareholders’ return on investment, as seen by the increase in dividend payout in those three years consecutively (Iglesias, Ind & Schultz, 2020).

Implications of potentially unrecorded assets for the Company

Companies are required by the generally accepted accounting principles to provide transparency in their business transactions. Therefore, unrecorded assets do not bring forth openness and transparency in a company. One implication of unrecorded assets would be tax issues with the tax authorities, Internal Revenue Services (IRS). The IRS would be tempted to conclude that the company is not reporting incomes or benefits from these assets with the aim of evading taxes. Another impact of unrecorded assets is that it does not present a true financial position and this might mislead the investors and other external parties. Unrecorded assets also bring a discrepancy in the amount of revenues and expenses such as depreciation and proceeds from the assets. Companies need therefore to maintain a fair view of their transactions and assets in their financial books.

Comparative and Ratio Analysis

Ratios are figures that provide a comparison between different aspects of a business. For instance, between assets and debts, or between sales and equity. Ratios are used by both internal and external stakeholders as they tell a lot about the performance and the financial position of a company. For instance, investors need to know the rate of return on equity to inform their future returns in case they want to invest in the company. Management might seek ratios to inform them on the day to day decision making as well as their investment capability. The following is a ratio analysis of Apple Inc. in comparison to its competitors – Hewlett Packard (HP) and Microsoft Incorporated, and their industrial average.

a. Liquidity ratios

Liquidity simply means the ability to convert assets into cash. Liquidity ratio is used to measure the ability of a firm or organization to pay up their current obligations as they become due using their short term investment. The two liquidity ratios for Apple Inc. are the current ratio and the quick ratio.

The current ratio measures the proportion of the existing assets to the current liabilities. It simply measure the ability to pay off the current liabilities with the current assets. Apple Inc. current ratio for 2019, 2018 and 2017 respectively was 1.54, 1.14, and 1.28. This shows an increase in all the past three years. This is favorable since it increases their ability to pay off their short-term debt easily. In comparison to their competitors, HP’s current ratio was 0.79 in 2019 while that of Microsoft was 2.53, in the same year. This shows that Microsoft is performing better than Apple Inc. in the short-term but Apple had outperformed HP who have more liabilities than current assets. The industrial average is 1.97 which means that Apple Inc. is performing below the industrial average.

Quick ratio measures the ability of a firm to pay off the current liability with the cash and cash equivalents (quick cash). It’s calculated by dividing current assets net inventory and prepaid expenses by the current liabilities. Apples quick ratio was 1.501, 1.09 and 1.22 in 2019, 2018 and 2017 respectively. This was an increase in 2019. A ratio of above 1 means that there are more quick cash element than the assets and their soundness to meet the short-term obligations on time. HP’s and Microsoft quick ratio was 0.57 and 2.5 respectively for the year 2019. This means that Apple Inc. is second to Microsoft in terms of the ability to pay off short-term debts but is performing better than HP. The industrial average is 1.2 which means that Apple Inc. outperformed most firms in the same industry in 2019.

b. Solvency ratios

Solvency ratios are also known as leverage ratios. These ratios measure the ability of a firm to continue with day to day operations in the long run (Ernawati, Handojo & Murhadi, 2018). They analyze the debt against assets and equity to see how much of the financing will be in the form of debt.

  Formula Apple

2019

Apple

2018

Apple

2017

HP INC. Microsoft Corp. Industry average
Debt to Total Assets Ratio =Total liabilities/total assets 0.733 0.70703 0.642845 1.0356 0.64 0.57
Debt Equity Ratio =Total liabilities/total equity 2.741 2.4133 1.799906 -29.05 1.80 0.94
Long-Term Debt to Equity =Total long-term liabilities/total equity 1.573 1.33134 1.047827 -7.852 1.12 0.56
Times Interest Earned Ratio  =Income before interest and income taxes (EBIT)/interest expense 36 36 23 2.8634 58.93 3.44

 

From the table above, we can see that the debt to assets ratio for Apple Inc. has been on the rise from 2017 to 2019 but it’s still below 1 which means that financing by assets is more than that of debt. This is a good indicator for investors which indicates that company is generating more income from the assets. In comparison to the competitors, Microsoft Inc. is doing better than Apple but Apple is doing better than HP Inc. which has more debts than assets. Apple Company is performing below the industrial average and they can improve their position by reducing debt financing.

A high debt to equity ratio is not good for a company as it shows that it finances activities with loans from creditors rather than shareholders equity. A healthy firm should have more shareholders equity than debt. It’s evident that the debt to equity ratio for Apple Inc. has been on the rise from 2017 to 2019. The company has more debt than the equity which means that they have more financing from creditors. It is also performing poorer as compared to Microsoft Inc. and the industrial average.

The long term debt to equity ratio calculates the percentage of financing from long term debts (those that are due in more than a year) as compared to shareholders equity. A healthy firm should have more shareholders equity than debt. Apple Inc. ratio has been on the increase from 2017 to 2019 and the ratio is above one showing that the firm is less stable as more financing is from debt. It can also be seen that it is doing worse than the other companies in the industry and its main competitor, Microsoft.

The times interest earned ratio is used to measure the amount of income used to cover the interest payable. The higher the ratio the better for a company. In the table above, we can see that Apple Inc. ratio has increased from the past 3 years and that it is performing better than the industrial average and one of its main competitor, HP. However, Microsoft Inc. had outperformed Apple Inc. in this ratio.

C. Asset Efficiency ratios

 

  Formula Apple

2019

Apple

2018

Apple

2017

HP INC. Microsoft Corp. Industry average
Inventory Turnover =Cost of goods sold/Average inventory 40.13 37.1708 58.10422 8.2989 20.80 76
Fixed Assets Turnover =Net sales/(total property, plant, and equipment- accumulated depreciation) 6.961 6.43025 6.785484 21.029 3.45 1.5
Total Assets Turnover =Net sales/average total assets 0.739 0.71681 1.221542 1.7556 0.44 4.18
Accounts Receivable Turnover =Net credit sales/Average accounts receivables 11.28 12.9369 25.64999 9.7423 4.26 57
Average Collection Period =365/Accounts receivables turnover ratio 32.35 28.2138 14.23002 37.465 85.63 6.4

Asset efficiency ratios measure the efficiency of a company to convert assets into income. From the above calculations, Apple Inc. has performed better in the inventory turnover, average collection period and the accounts receivables turnover ratios outperforming its competitors in each of the three. It performed well in the fixed asset turnover ratio and beat both competitors and the industrial average.

d. Profitability ratios

Profitability ratios measure the ability of organizations to generate income or revenues and profits from their assets and equity. These ratios are important to investors, creditors, shareholders and managers (Farfan et. al, 2017).

  Formula Apple

2019

Apple

2018

Apple

2017

HP INC. Microsoft Corp. Industry average
Gross profit Margin =(Total sales – costs of goods sold)/Total sales 0.291 0.27846 0.234963 0.1901 0.66 0.34
Operating Profit Margin =Operating income/net sales 0.246 0.26694 0.267604 0.066 0.34 0.051
Net Profit Margin =Net income/total sales 0.212 0.22414 0.210924 0.0536 0.31 0.032
Return on Total Assets (ROA) =Net income/average total assets 0.157 0.16067 0.257653 0.0942 0.14 0.031
Return on Stockholders’ Equity (ROE) =Net income/shareholders’ equity 0.611 0.5556 0.360702 -2.642 0.38 0.046

 

The gross profit margin ratio measure the ability of a firm to convert its inventory to sales and at what profit. The higher the ratio the better as it means that more profit was achieved. From the calculations above, there has been an improvement in Apples operations in the past 3 years. However, this performance is below the industrial average and their main competitor, Microsoft Inc. It has however outperformed their rival HP Inc.

Operating profit margin measures the percentage of revenue derived from the operating incomes. The higher the ratio the better as it means that more profit was achieved. From the calculations above, there has been a decline in Apples operations in the past 3 years. However, this performance is above the industrial average and their main competitor, HP Inc. It has however been outperformed by their rival Microsoft Inc.

The net profit margin ratio measures the amount of profit derived from each dollar earned. The higher the ratio the better for the firm as it shows that the company is generating more profits. Apple Inc. has remained fairly consistent in this ratio while still outperforming the industrial average and HP Inc. performances. However, it is still lagging behind the performance of Microsoft Corporation with a superior profitability.

Return on assets is another profitability ratio that is used to measure the amount of income that is generated by the assets (Rodrigues & Rodrigues, 2018). The higher the ratio the better the performance and utilization of assets by the company. Apples Inc. return on assets ratio has been on the decline in the past 3 years signifying that there is an increase in assets but not a proportionate increase in revenue. However, its performance is better than the two main competitors and the industrial average which means that it’s more attractive to investors on this basis.

Returns on shareholders’ equity is another profitability ratio that measures the ability to generate income from the shareholders equity (Engel, Lyons & Pannese, 2020). The higher the ratio the better since it signifies that there is a higher return on each dollar invested. Apple has been performing great in this ratio and it has increased its return on equity from year to year outperforming both competitors and the industrial average.

e. Market Value ratios

 

Item Formula Apple

2019

Apple

2018

Apple

2017

HP INC. Microsoft Corp. Industry average
Earnings Per Share (EPS) =(Net income-preferred dividends)/Weighted average common shares outstanding 11.93 11.96 9.24 2.075 5.085 2.22

Market value ratios helps measure performance of publicly traded companies with aspects such as earnings and dividends payments (Kim & Im, 2017). The earning per share measures how much each outstanding share would receive if the company decided to distribute all its income. From the above calculations, we can see an increase in the earnings per share in each of the three years. This means that the company is also experiencing an increase in income. Apple Inc. has issued higher earnings per share in each of the three years as compared to the competitors and the industrial average. This means that the company can easily attract investors on the basis of earnings per share.

Apples Inc. strengths and weaknesses

One of Apples strengths is in providing value for their shareholders in terms of earnings per share. The company has outperformed its close competitors as well as the industrial average. This means that investors will be more willing to invest in the company with the hope of getting greater returns than other firms. Another strength is in the ability of the company to generate revenues from its resources. For instance, it has a superior net profit margin ratio, gross and net profit margin ratios as compared to a majority of the industrial players. This would mean that the managers and employees are utilizing the resources and assets properly. Apple Company is also quite strong when it comes to returns on assets and shareholders’ equity whereby its performance is above average and is still better than its main competitor, Microsoft Corporation. Some of the weaknesses of Apple include its ability to cover long term debt with the equity. This is because it has more debt to equity ratio which means that most of its financing is from creditors and loans facilities. It also exhibits weakness in the accounts receivables turnover ratio.

Apples Inc. operations in relation to a Biblical worldview

Apple Inc. business has continuously proven to be a leader in the technology and computer industry. Steve Jobs never gave up on his dream to make the company successful and even though he is gone, his legacy still lives on in the name of the company. Psalms chapter 128 and verse 2 talks about how we shall eat the fruit of our labor and we shall be blessed and everything will be well with us. The founders of the company gave up their time in order to make the company successful and it has really paid off. Apple Inc. has also been in the forefront giving back to the society. Galatians chapter 6 verse 9 talks about continuously doing well for in due season we shall leap only if we do not give up. As they build the company and increase the values of the shareholders and investors, they should continue giving back to the less fortunate in the society.

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Conclusion

From the performance and analysis of the company’s ratios in comparison to the industrial average and major competitors, it is sound to conclude that apple Inc. Is performing above average and better than most companies in the industry. The fact that it has a higher market capitalization value and at the same time having a formidable product range and services, guarantees continued industrial dominance in the future years. It is doing quite well in terms of creating value for their investors and shareholders by having higher return on investment but they can surely be in a better position by improving their solvency rations. The main reason attributed to their success can be derived from their organizational strategy of bringing more value to the customer by providing superior products and services.

References

 

Arocha, J. B. (2017). Getting to the Core: A Case Study on the Company Culture of Apple Inc.

Drzaic, P. S., Thompson, R., Cote, G., Tann, C. P., Hauck, J. V., Zhang, Y., … & Spence, A. L. (2019). U.S. Patent No. 10,410,568. Washington, DC: U.S. Patent and Trademark Office.

Edge, C., & Trouton, R. (2020). The Future of Apple Device Management. In Apple Device Management (pp. 673-706). Apress, Berkeley, CA.

Engel, R. P., Lyons, B., & Pannese, D. (2020). Liberating Trapped Cash: A Case Study of Apple and Microsoft. The Accounting Educators’ Journal26.

Ernawati, E., Handojo, S. E., & Murhadi, W. R. (2018). Financial performance, corporate governance, and financial distress.

Farfan, K. B., Barriga, G., Lizarzaburu, E. R., & Noriega Febres, L. E. (2017). Financial ratio method peruvian listed companies.

Iglesias, O., Ind, N., & Schultz, M. (2020). History matters: The role of history in corporate brand strategy. Business Horizons63(1), 51-60.

Kim, J., & Im, C. (2017). Study on corporate social responsibility (CSR): Focus on tax avoidance and financial ratio analysis. Sustainability9(10), 1710.

Kim, J., Jun, S., Jang, D. S., & Park, S. (2020). An integrated social network mining for product-based technology analysis of Apple. Industrial Management & Data Systems.

Miller, T., & Maxwell, R. (2016). Apple. In Global Media Giants (pp. 383-396). Routledge.

Rodrigues, L., & Rodrigues, L. (2018). Economic-financial performance of the Brazilian sugarcane energy industry: An empirical evaluation using financial ratio, cluster and discriminant analysis. Biomass and bioenergy108, 289-296.

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