Ratio Analysis Apple PDF

Preview

Summary

Download Ratio Analysis Apple PDF

Description

Ratio Analysis 1. Liquidity Liquidity ratios are used to assess a company’s ability to meet its short-term financial obligations. The acid-test ratio is a much more comprehensive indicator of liquidity than the current ratio as it removes inventory from current assets, as old and obsolete inventory may not be easily converted into cash and cannot be used to pay debts. Apple has seen a significant increase in both ratios from 2018 to 2019 due to an increase in current assets and a decrease in current liabilities driven by; an increase in cash and marketable securities, a decrease in creditors, and the repayment of unsecured short-term promissory notes the company had previously issued. This has decreased the company’s exposure to liquidity risk substantially. The 3.8% increase in stock levels is not an immediate concern with regards Apple’s liquidity as inventory accounts for only 2.5% of current assets.

2. Profitability Gross margin and operating margin are very useful for determining a company’s profitability and when compared year-on-year can be a good indicator of how well the management of the company are in control of both variable and fixed expenses. The return on capital employed ratio is used to analyse how efficiently a company utilises debt and equity to generate profits. Apple has seen a reduction in both gross margin and operating margin of 0.52% and 1.17% respectively. In the 2019 annual report, management noted tariffs on raw materials from China as the reason for the increase in cost of sales, and spending on R&D and marketing as the reason for the increase in operating expenses. Despite the fall in profits, Apple’s return on capital employed has increased by 1.02%. This is due to the share repurchase programme which has seen the company repurchase $96.1 billion worth of common stock in 2018 and 2019. The share repurchase programme indicates that the company has healthy levels of cash to facilitate the repurchase and the management believe the company is undervalued on the stock market.

3. Gearing The proportion of debt and equity a company uses to finance operations is crucial in determining the financial risk that company is exposed to. In years of low profits and cashflow, lowly geared companies can decide to reduce or cease dividends as they are not obliged to make such payments. On the other hand, highly geared companies are contractually obliged to make fixed loan repayments on specified dates and may face insolvency if funds are not available. The interest coverage ratio shows how exposed a company is to fluctuations in profits with regards to repayment

of debt. Apple has seen a small increase in gearing from 2018 to 2019 despite the reduction in overall debt. This is due to the $15.66 billion reduction in shareholders funds caused by the share repurchase programme. The significant reduction in the interest coverage ratio is not an immediate area of concern as there is still considerable excess profits to distribute to shareholders, but it does reveal the undesirable trends of decreasing profit and increasing interest expense which should be addressed by management.

4. Efficiency The cash conversion cycle (CCC) shows how many days it takes a company to convert its investments in inventory and other resources into cash flows from sales. Apple’s CCC marginally increased by 0.33 days leaving the company with a negative CCC of 80.36 days. Apple can avoid paying interest on borrowings by utilising the cash flow from its negative CCC to pay for expenses and finance new projects. The net asset turnover ratio is an indicator of how efficiently a company uses its assets to generate revenue. Although Apple’s Sales have declined, the net asset turnover has increased to 287.5%. This can be attributed to the share repurchase programme which has reduced the shareholders equity in the firm. When compared to main rival Samsung which had a CCC of 112 days and net asset turnover of 98% for the year ended 31 December 2018, Apple is much more efficient at using its assets and resources.

5. Investment The dividend pay-out ratio shows what proportion of profits are paid out as dividends to shareholders. Apple’s pay-out ratio has increased by 2.51% to 25.57% due to increased dividend payments and a reduction in net profit, which is still relatively low compared to other similar companies. The low payment of dividends suggests that the firm is setting aside profits to fund future growth projects which will increase the overall value of the company. The earnings per share ratio is useful for assessing a company’s profitability and is used to calculate the price-earnings ratio, which investors use to determine the relative value of one company’s shares to another. Although there has been a reduction in profits, Apple has maintained the same earnings per share due to the reduction in the number shares outstanding. From 2018 to 2019 Apple’s share price dropped by $3.45, this has resulted in reduced price-earnings ratio of 18.73. Apple has a relatively low price-

earnings ratio compared to the S&P500 which was 21.7 for the year ended 31 December 2019. This suggests that Apple’s stock is undervalued or the market does not anticipate future growth....