The Financial Ratio Analysis of Apple, Inc - the Company's Return on Assets and ROE, the Return on Sales, and Liquidity – Term Paper Example
Ratio Analysis The financial ratio analysis of Apple, Inc. comprises of various useful financial ratios and the comparison of their values is made with the industry averages in order to assess whether the company is performing better than the industry. The results of different ratios are provided in Appendix.
The company’s Return on Assets (ROA) measured has improved over three years’ period. Profit before Taxes / Tangible Net Worth has improved from 41.36% in 2009 to 49.84% in 2011. This is due to 85% increase the company’s profits resulting from sharp increase in the company’s sales. The company has opened up its boutique shops throughout the US which has increased the value of its brand the contributed positively to its business. In comparison to the industry average of 31.30%, the company appears to have outperformed industry participants. In the similar manner, the value of other ratio - Profit before Taxes / Total Assets has also shown improvement from a value of 25.40% in 2009 to 29.39% in 2011. In 2011, the industry average is just 10.20% which implies that the company has been able to post remarkable sales performance and profit generating ability. In case of both ratios, the growth rate of the company’s profits is greater than that of its assets.
Another area of investigation is the Return on Sales (ROS) which is measured by net profit margin and also by sales / total assets indicates an overall improvement. Company’s net profit margin has gone up from 19% in 2009 to 24% in 2011. This is due to the overall success of the company to deliver innovative products to its brand loyal customers and also to customers in new markets like China, India and South East Asian markets(Apple Inc.). The asset turnover that has shown slight decline in 2010 and then improved in 2011, remains below the industry average of 2.2. Though sales per sq ft of the company’s stores remain the highest in the industry but still argument can be made that the growth rate in sales is less proportionate to the increase in its assets.
The company’s ROE has also improved in three years from 26% in 2010 to 34% in 2011. The company’s equity has increased significantly due to the sharp increase in its retained earnings generated from higher level of sales and profits. The company’s P/E ratio has also remained healthy despite of the decline since 2009, the company’s stock still trading at high P/E values over the industry average of 13.95. The decline in P/E suggests that the company’s stock though is still attractive for the shareholders and the company is generating higher profits but its price is not completely reflective of the company’s current potential. Based on the book value per share estimated for three years it can be stated that the company stock is trading at premium price steered up by the innovation that the company has been able to deliver over the years. In case of future problems, if any, with the company’s ability to attract customers the company’s stock can face major decline in its value. This has been the case recently where iPhone5 has been criticized for not being able to attract targeted sales and the company’s stock value has plunged down by almost $160. However, it is still a good buy and investors should wait for the stock price to settle at certain level.
Other areas of investigation including liquidity measured by current ratio indicate that its value has declined significantly from 2.74 in 2009 to 1.61 in 2011 as compared to 1.7 of the industry average. This is due to higher growth of liabilities resulting from accrued expenses and also due to decrease in the company’s cash position and inventories.
The company’s efficiency measured by receivables turnover and inventory turnover indicates improvements over three years and better performance as compared to the industry averages. This implies that the company is able to convert its inventory into sales and receive cash from its receivables quicker than other industry participants. However, the company is taking longer period to pay off its creditors measured by low payable turnover values which remained weak at just 4.40 in 2011 as compared to the industry average of 10.
The company’s solvency position suggests no major change over three years and it remains close to 0.50 which is lower than the industry average of 1.4. The company’s high cash reserve level has allowed the company to meets is business requirements and need for external borrowing has remained not significant. This is due to the reason that the company’s borrowing has increased at a lower rate than the company’s net worth which is fueled by sharp increase in its assets.
Apple Inc. Form 10-K. Cupertino, CA: Apple Inc., 2010.
Apple Inc. Form 10-K. Cupertino, CA: Apple Inc., 2011.
WSJ. P/Es & Yields on Major Indexes. 16 November 2012. [Web]. 17 November 2012. .