Apple Inc.’s Financial Health

Introduction 

Before purchasing stock or shares from any company, it is always important to understand its financial health. There are many ways of understanding the financial health of a given company. Most people may opt to use the net profits generated. However, net profit does not reflect the actual performance of a company. The net profit could be attributable to investments that were done within the financial year and hence may not reflect the actual performance. However, it should be noted that before an investor can select a given company, he or she must understand or evaluate its past performance. He or she should not only figure out what happened (i.e., how the company performed) but also why it happened (i.e., the causes behind the performance and how the performance reflects the company's strategy ( Jack, 2014) . An investor must be able to answer some questions. The first question is how and why the company’s measures of profitability, efficiency, liquidity, have and solvency changed over the periods being analyzed? ( Robinson, 2012). 

The second question is how do the level and trend of a company's profitability, efficiency, liquidity, and solvency compare with the corresponding results of other companies in the same industry? An investor should also be able to determine key aspects of performance that are critical for a company to successfully compete in its industry and compare the company’s performance relative to those critical performance aspects ( Robinson, 2012) . Lastly, an investor should go an extra step in understanding company's business model and strategy, and how the model and strategy to influence the company's performance as reflected in, for example, its sales growth, efficiency and profitability ( Robinson, 2012) . The best way of understanding the performance of a given company is by calculating financial ratios. Using the Apple Company as an example, the paper intends to establish whether Apple Company is a company worth investing. 

Apple Inc. is a company that has evolved and adapted over time ( Apple Inc. 2016) . Apple Inc.’s strategy is to expand its market share in the personal computing industry while developing and expanding into new related business such as Personal Interactive Electronics and Apple Business Systems ( Apple Inc. 2016) . As a result, Apple Inc. has invented several products other than computers. In 2010 annual report, Apple Inc. reframed its company's strategy ( Apple Inc. 2016) . According to the new strategy, Apple Inc. is committed to bringing the best user experience to its customers through its innovative hardware, software, peripherals, services and Internet offerings ( Apple Inc. 2016) . It aims at providing customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design. Apple Inc. leads in innovation. It has come up with many innovative products. 

The 2015 financial report reveals that Apple Company posted quarterly revenue of $51.5 billion by the end of fourth quarter, which ended on September 26, 2015, and quarterly net profit of $11.1 billion, or $1.96 per diluted share ( Apple Inc. 2016) . These results compare to revenue of $42.1 billion and a net profit of $8.5 billion, or $1.42 per diluted share, in 2014 ( Apple Inc. 2016) . Gross margin was 39.9 percent compared to 38 percent in the previous year-quarter. The growth could be attributable to sales of iPhone and Apple Watch as well as Mac sales and revenue from services ( Apple Inc. 2016) . 

Despite all this, an investor needs to look at other aspects of performance and understand the trend in Apple's performance so as to make informed choices. By using the financial data from 2012 to 2015, the paper intends to determine key financial ratios and use them to interpret whether the Apple Company is a company worth investing. The analysis is based on the fact that there could be possibly other companies within the industry which have better performance than Apple Company. Most of the calculation will be done in excel then pasted into a word file. Graphs will also be drawn to visualize trends and visualize the findings. 

Apple Inc.’s financial ratio analysis 

The most common financial ratios in used include liquidity ratios, which comprise of the current ratio, the quick ratio, accounts receivable turnover, days sales uncollected, inventory turnover, debt ratio, debt to equity ratio, sales growth rate, and asset turnover ( Gibson, 2009) . Each of these ratios gives an organization a perspective concerning a different phase of the operation. 

For example, liquidity ratios measure a firm’s ability to meet its current obligations ( Jack, 2014) . They comprise of ratios that measure the efficiency of the use of current assets and current liability. Borrowing capacity or leverage ratios, on the other hand, measure the degree of protection of suppliers of long-term funds such as the creditors ( Gibson, 2009) . They are also called debt ratios ( Gibson, 2009) . Profitability ratios, on the other hand, measure the earning ability of a firm. It also shows how well the company uses its assets ( Gibson, 2009). 

Apple Inc. Liquidity ratios 

Liquidity ratios indicate the organization's ability to fulfill its financial obligations ( Jack, 2014) . Liquidity ratios help in illustrating whether the organization has sufficient cash or assets that can be converted to cash ( Jack, 2014) . The two major types of liquidity ratios include current ratio, quick ratio, and acid test ratio 

Current ratio 

The current ratio is obtained by dividing current assets by current liabilities ( Jack, 2014) . The current ratio shows an organization's ability to pay short-term debts. Figure 1 illustrates the current and quick ratios of Apple Inc. 

Figure 1: Apple Inc.’s current ratio 

				2012	2013	2014	2015
Current Ratio	Current Assets	/	Current Liabilities	1.495848685	1.678638508	1.080112848	0.285708969

As illustrated in graph 1, i t is clear that Apple Inc. 's performance regarding current ratio is declining. This indicates that the company is having difficulty meeting its current financial obligations. It also means that Apple’s efficiency of the use of current assets and current liability is declining. Short-term creditors tend to shy away from such performances. 

Graph 1: Apple Inc. Current ratio 

Quick ratio 

The quick ratio, on the other hand, measures the ability to pay current liabilities with cash and near-cash items ( Jack, 2014) . It is calculated by diving quick asset by current liabilities. It is sometimes called acid test ratio. The Apple Inc.’s quick ratio is shown below. 

				2012	2013	2014	2015
Quick ratio	Quick assets	/	Current Liabilities	1.03935966	1.228824041	0.670423024	0.725096142

The graph below demonstrates the trend in Apple Inc.'s quick ratio. 

From the chart, it is clear that there is a drop in the performance of quick ratio in the last two years. This drop indicates that the company has been having some problems managing short-term liabilities. This is also not good for investors. They need to find out what could be the reason for investing in the company. 

Leverage ratios 

Borrowing capacity or leverage ratios, on the other hand, measure the degree of protection of suppliers of long-term funds such as the creditors ( Jack, 2014) . They include solvency ratios and debt to asset ratios. 

Apple Inc.’s solvency ratios 

Long term solvency ratio is important as it depicts an organization's long-term financial sustainability or stability ( Jack, 2014) . It is calculated by dividing Net income +depreciation by total liabilities ( Jack, 2014) . The Apple Inc.’s solvency ratios for the three years is as shown below. 

				2012	2013	2014	2015
Solvency ratio	Net income +depreciation	/	Total liabilities	0.721350296	0.44381733	0.32845077	0.312019354

The graph below shows trend in Apple Inc.’s solvency ratio performance 

As illustrated in the graph above, it is clear that Apple Inc.'s solvency ratio is declining drastically. This reduction in solvency ratio is an indication that the company is not okay in paying back the long-term debts. This observation is not good for investors. 

Asset management ratios 

Asset management ratios evaluate how meritoriously a firm is managing its assets ( Jack, 2014) . Positive ratio reveals that an organization can manage its assets efficiently ( Gibson, 2009) . They include inventory turnover, total asset turnover, and fixed asset turnover. 

Inventory turnover ratio 

The inventory turnover shows how quickly the inventory is turning into receivables /cash through sales ( Jack, 2014) . It is calculated by dividing the cost of goods sold by the average inventory ( Jack, 2014) . It indicates how quickly a firm sells its products. If the company has inventory that sells well, the ratio value will be high ( Gibson, 2009) . If the inventory does not sell well due to lack of demand, the ratio will be low. 

Apple Inc.’s inventory turnover is shown below 

				2012	2013	2014	2015
Inventory turnover	Cost of goods sold	/	Average inventory	222.11378	120.8684807	106.3552819	119.2754364

The graph below gives the trend in inventory for the four years. 

The chart reveals that although inventory rose slightly in 2015, the value is significantly lower as compared to the year 2012. Investors should consider other elements before making a decision. 

Fixed asset turnover 

Fixed asset turnover ratio is used to indicate how competently a company is using its property, plant, and equipment ( Jack, 2014) . It is calculated by dividing sales by the number of dollars of net fixed asset investment ( Jack, 2014) . The fixed asset turnover for Apple Inc. is shown below 

. 

				2012	2013	2014	2015
Fixed asset turnover	Sales	/	Total fixed assets	1.321735312	1.278175808	1.119326671	0.873870809

The graph below shows the trend in the fixed asset turnover ratio. 

As indicated in the graph above, it is clear that the Apple Inc.'s fixed turnover ratio is declining. Although it's positive, the trend is declining. An investor needs to consider the overall performance of the company and compare it with competitors so as to make a sound decision. 

Profitability ratios 

Profitability ratios measure the operating efficiency of the enterprise ( Jack, 2014) . Commonly, two major types of profitability ratios are computed, viz., profitability ratios in relation to sales (General ratios) and profitability ratios in relation to investment ( Jack, 2014) . 

An example of profitability ratios includes return on assets, return on equity capital, and return on asset, price-earnings ratio, dividend yield ratio and return on capital employed, gross profit ratio, operating ratio, net profit ratio, cash profit ratio and expenses ratio. 

Return on asset 

Return on asset is a measure of a firm's profitability relative to the amount of its assets, determined by dividing operating profits by total assets ( Jack, 2014) . It is also used to demonstrate the relationship between the income earned by the company and the investment made in a given financial year. Apple Inc.’s return on asset ratios for the three years is as shown below. 

				2012	2013	2014	2015
Return on asset	Net income	/	Average total assets	0.474066249	0.357845411	0.340839979	0.367627264

The graph below gives a visual representation of Apple Inc.'s return on asset ratios. 

Apple Inc.’s performance in relation to competitors 

Apart from understanding the management efficiency and profitability of the company, investors should also compare the company with competitors so as to get a clearer picture. There are many ways of doing this. Some of the ways are evaluated below 

Market value 

Market value is also called market capitalization. The main competitors of Apple Inc. include HP Inc., Intel Corp., Oracle Corp., and Motorola Solutions Inc. Their market share is represented in the pie chart below. 

The chart shows that Apple Inc. has the largest market share. Investors can invest confidently. 

Measures of relative value (P/E, P/B) 

The P/E is one of the most widely quoted statistics associated with any stock ( Jack, 2014) . Investors will often look first for stocks that are trading at a low P/E multiple. This ratio is calculated by dividing the market price of ordinary shares by the EPS 

The P/E ratio for the leading five companies in the industry is shown below. 

From the chart, it is apparent that Apple Inc. the second most preferred company after HP as far as stock is concerned. HP have the most favorable P/E ratio for investors. 

Per-Share 

Earnings per share are also important for investors. It helps them predict how they are going to earn if they invest individual stocks ( Jack, 2014) . The per-share for the leading five companies are depicted in the pie chart below. 

The pie chart shows that Apple Inc. is leading concerning per share. This success means that it is the most suitable company to invest. 

Cash flow 

The Apple's cash flow is also positive. The different elements of cash flow are as shown below 

Cash Flows
Cash from Operations	67527000000
Cash from Investing	-46888000000
Cash from Financing	-13614000000
Capital Expenditures	11609000000
Cash Flow per Share	12.19

Return on Equity (ROE) 

Return on Equity (ROE) gives more details on the performance of a company. ROE = Net income/Total equity. In most cases, return on equity (ROE) consistently above 15% is a sign of a company in good health ( Jack, 2014) . The Apple Inc.’s ROE is shown below. 

				2012	2013	2014	2015
Return on Equity	Net income	/	Total equity	0.353041198	0.299775797	0.354200472	0.447354531

Economic Added Value 

This is the amount by which profits exceed the cost of capital in a given year. It is used to measure company's true return to shareholders after accounting not only for the operating costs but also the cost of the capital it employs ( Apple Inc. 2016) . 

The formula for calculating EVA= Net Operating Profit after Taxes - Invested Capital x Weighted Average Cost of Capital. 

From the Google Finance, today’s Apple Inc.'s weighted average cost of capital is 4.95%. Also, Apple had $199.83 billion in invested capital. By substituting this, we get economic value added of 26.96%. This is very high. It means that Apple is feasible for investment ( Apple Inc. 2016). 

Synopsis 

From the findings above, some observation can be made. First, it should be noted that the value of the stock is attractive. It implies that the company’s overall strength is high. It is also important to note that Apple’s profitability is remarkable. It reflects excellent operating condition and strong management. The cash flow is also well managed. All the values are positive and impressive. The company worth investing in. 

References 

Gibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information . Mason, OH: South-Western Cengage Learning. 

Jack, C. (2014). Generation alt: The new movement in alternative investing . Upper Saddle River, NJ: FT Press. 

Robinson, T. R. (2012). International financial statement analysis . Hoboken, N.J: John Wiley & Sons. 

Apple Inc. (2016). Google Finance . Retrieved from: https://www.google.com/finance?fstype=ii&q=nasdaq:aapl 

Apple Inc. (2016). Stock analysis. Retrieved from: http://www.marketgrader.com/MGMainWeb/stockgrader/sg_classic.jsp?symbol=AAPL 

Appendix: Calculation on key financial ratios 

APPLE COMPANY
								Apple Company	2012	2013	2014	2015
				2012	2013	2014	2015	Current asset	57,653	73,286	68,531	23,031
Current Ratio	Current Assets	/	Current Liabilities	1.495848685	1.678638508	1.080112848	0.285708969	Current liabilities	38,542	43,658	63,448	80,610
				2012	2013	2014	2015	Fixed assets	118,411	133,714	163,308	267,448
Quick ratio	Quick assets	/	Current Liabilities	1.03935966	1.228824041	0.670423024	0.725096142	Total liabilities	57,854	83,451	120,292	171,124
								Total assets	176,064	207,000	231,839	290,479
								Average total assets	88032	103500	115919.5	145239.5
				2012	2013	2014	2015	Net income	41,733	37,037	39,510	53,394
Solvency ratio	Net income +depreciation	/	Total liabilities	0.721350296	0.44381733	0.32845077	0.312019354	Revenue	156,508	170,910	182,795	233,715
				2012	2013	2014	2015
Debt to asset ratio	Total liabilities	/	Total assets	0.328596419	0.403144928	0.518860071	0.589109712	Quick assets	40,059	53,648	42,537	58,450
								Net income+ depreciation	41,733	37,037	39,510	53,394
								Average inventories	395.5	882	1055.5	1174.5
				2012	2013	2014	2015
Return on asset	Net income	/	Average total assets	0.474066249	0.357845411	0.340839979	0.367627264	Cost of good sold	87,846	106,606	112,258	140,089
				2012	2013	2014	2015
Inventory turnover	Cost of goods sold	/	Average inventory	222.11378	120.8684807	106.3552819	119.2754364
Profit margin ratio	Surplus	/	Revenue	0.266650906	0.216704698	0.216143768	0.228457737
				2012	2013	2014	2015
Fixed asset turnover	Sales	/	Total fixed assets	1.321735312	1.278175808	1.119326671	0.873870809
				2012	2013	2014	2015
Total asset turnover ration	Revenue	/	Total assets	0.888926754	0.825652174	0.788456644	0.804584841

Key financial statements 

Income Statement
Revenue	227535000000.00
Net Income	50678000000
EPS from Continuing Operations	9
EPS - Net Income - Diluted	9
Revenue per Share	41.26
Balance Sheet
Total Assets	305277000000.00
Total Liabilities	174820000000.00
Shareholders' Equity	130457000000.00
Total Assets per Share	55.72
Net Assets per Share	23.81
Cash Flows
Cash from Operations	67527000000
Cash from Investing	-46888000000
Cash from Financing	-13614000000
Capital Expenditures	11609000000
Cash Flow per Share	12.19