Financial ratio analysis is a quantitative method that can be used to gain insight about a company’s operational efficiency, profitability, and liquidity by comparing the information available in financial statements. Data is usually retrieved from financial statements and is used to compare the performance of a company over a certain period of time. Ratio analysis can be used to established the trend of a company’s results over several years of financial reporting periods. Comparing the financial ratio of a company to other competitors in the industry can also be used to gain information about the success of the company. This paper discusses key financial ratios for Apple Inc. through an analysis of the company’s 2015 Annual Report.
Current Ratio
The current ratio is a liquidity measurement used to measure the ability of a company to cover short-term liabilities with the current assets. The formula for current ratio is done by dividing the current assets by the current liabilities. The current ratio from Apple’s 2015 Annual Report was calculated as 1.11. The analysis of the current ratio showed that Apple would be able to meet its current liabilities if it chose to liquidize its assets (Robinson et al., 2015). This is an indicator that the liquidity of the company was good and signified a good financial health. The current ratio was calculated as shown.
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Quick Ratio
The quick ratio is used to identify the most liquid assets that are available to cover current liabilities. The quick ratio focuses on current assets that are easier to convert to cash and provides a better view of the liquidity of a company. The calculation of the quick ratio for Apple was found to be at 0.89 for the year 2015. The quick ratio indicated that the company did not have enough quick assets to cover its current liabilities. The quick ratio does not include the inventory and is a better test to identify whether a company can quickly liquidate its assets (Saleem & Rehman, 2011). The chart shown represents the quick ratio of Apple Inc.
Debt-Equity Ratio
The debt-equity ratio is a ratio that compares the total liabilities to the shareholders’ equity. The debt-equity ratio provides an overview of how much a company’s assets are financed by debt and by the shareholders. A high debt-equity ratio may not be good for a company since it indicates that the company borrows a lot of money. A low debt-equity ratio shows that a significant amount of the company’s assets is financed by shareholder’s equity (Brigham et al., 2016). The debt-equity ratio for Apple was found to be 0.54 for the year 2015. This shows that a significant amount of the company’s assets is financed by the shareholders. An overview of the debt-equity ratio was provided as:
Inventory Turnover Ratio
The inventory turnover ratio measures the efficiency which an organization produces and sells inventory. The ratio measures how a firm sells its inventory. A high inventory turnover ratio indicates that the business is producing its products and selling its products at a fast rate. The inventory turnover for Apple for the year 2015 was calculated and found to be as 59.64 and had increased from 53.18 in 2014. The ratio shows that Apple had a high efficiency in its operation because it had sold more inventory compared to the previous year.
Receivables Turnover Ratio
The receivable turnover ratio provides an analysis of how quickly a company can collect the money that it is owned into the accounts receivable. The quick ratio measures how quickly a company receives money on products it sells. The quick ratio for apple in 2015 was 13.87 and was higher than the value in 2014. This shows that apple had an improvement in its money collection endeavors.
Total Assets Turnover Ratio
The total assets turnover ratio is used to show how a company can make use of its assets and convert them into sales. Apple Inc. had a total asset turnover ratio of 0.80 and had significantly increased from 0.79. The value shows that Apple had a better utilization of its assets for the year 2015.
Profit (Net Margin) Ratio
The net profit margin ratio is a profitability ratio which is used to calculate the net income of a company for every dollar sold. The net margin profit ratio is used to give the relationship between net income and net sales of an organization. The profit net margin of Apple was 22.85% for the year 2015 and was higher than 2014 and 2016. A higher net profit margin showed that 2015 was the most profitable year of the company.
Return on Assets Ratio
The return on asset is a ratio that shows the capability of a company to produce net income from its assets (Brigham et al., 2016). The ROA for Apple was calculated as 18.38% for the year 2015 and was higher than 2016 and 2014. This indicated that Apple made significant profits from its assets for the year 2015 than any other year.
In conclusion, financial ratio analysis can be used to provide information about the financial health of a company. The information from the balance sheet and income statement was used to calculate the financial ratios for Apple. The analysis of the ratio shows that Apple is on a continuous path to growth. 2015 was a good year for the company compared to 2014 and 2016. However, Apple had an averagely good profitability, liquidity and efficiency. This shows that Apple is a good company for investment.
References
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment: Theory And Practice, Canadian Edition . Nelson Education.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis . John Wiley & Sons.
Saleem, Q., & Rehman, R. U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary journal of research in business , 1 (7), 95-98.
