As a finance manager, my primary responsibility is to conduct research on investments on behalf of my client (Michael) that are in line with his investment goals. Michael is a thirty-five-year-old gentleman seeking growth and challenging investment-oriented employment opportunities in one of the top sales public traded companies in the United States of America. As an upcoming sales and marketing executive, Michael is a risk-taker, an attribute that he gained from having invested in other successful small business ventures. The client also upholds a positive attitude towards entrepreneurship. Michael's goal is to invest in stock in the long term and attains profits in the long run. Based on my financial review as a finance manager, I have to put into consideration my client's level of risk and work to mitigate them.
Considering sales revenues, business model, environment and industry, price-earning ratio, future economic projection, among other parameters, Apple Inc. is an ideal top sales company in the U.S.A. for Michael to invest.
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Company Background
Apple Inc. is a tech-savvy multinational company based in California, America, established in 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne. The company designs, manufactures and sells various consumer electronics, computer software, and online services. The company is considered as one of the big tech-savvy companies in the world alongside Facebook, Google, Microsoft, and Amazon Inc. iPhone smartphones, Mac PCs, Ipads and apple smartwatches, among other consumer electronics, make up the companies hardware products. Apple's software includes iOS, WatchOS, macOS, tvOS, iTunes media player, among others. The company's online services include iTunes Store, Mac Apple Store, iCloud, and iMessage.
Rationale
As stated in the introduction section, I have advised my client (Micheal) to invest in Apple Inc. The following are the most significant reasons that support my recommendation to recommend Michael to invest in Apple Inc.
The success of the company over the years since its establishment in 1976.
Prices of stock of the company.
Company's commitment to innovation and technological advancements.
Consumer Loyalty and Satisfaction.
During the first five years of operation after the year of establishment, the company's revenue grew exponentially. In three years, between 1977 and 1980, its annual sales revenue grew with an average annual growth rate of above 500% from 775,000 USD to 118million USD (Freedom Runners, 2020). Over the subsequent years, the company has been experiencing growth and success.
Since 2007 after launching the iPod, one of the most successful products, the company has become the most influential and productive organization globally. The company was ranked as the leading technology company globally, the number twelve public traded company in the world, and the number one most valuable brand in the world (Forbes, 2015). Apple Inc.'s annual revenue in 2007 amounted to $ 24.6 billion, growing to $37.5 billion in 2008 and $42.9 billion in 2009. The yearly income kept on improving year after year and totaled to $260.2 billion in 2019. The company recorded the highest revenue in 2008, amounting to $265.5 billion. Despite the growth in annual revenue of the company over the years, the income declined from 256.5billion dollars in 2018 to 260.2 billion dollars in 2019.
The stock of the company has also experienced growth over the years. Between 2001 and 2014, the stock price of the company grew from 1.47USD to 110.38USD. During the period, the price to earnings ratio was ahead of its market share. Today the stock price of the company stands at 117.32 USD. The increase in the company's stock price over the years has been enhanced with multiple breakthroughs of different products and services and brand satisfaction and loyalty. However, in spite of the tremendous growth in stock price, the company experienced a drastic upheaval in 2015 when the stock price fell by 14% from their highest stock prices of 134 USD.
The company's commitment to innovation and technological advancements also makes the company ideal for Michael to Invest. Being known for its product breakthrough, the company will continue to reinvest in its product line, building on its success and retaining brand loyalty, which could indisputably result in additional company development in the future.
Reasons Why I Selected Apple Inc. Stock As The Most Suitable Investment For My Client
Before deciding on the most suitable investment for my client, I assessed my client's small business ventures and personal interests, principles. Then aline them with the company that will sufficiently facilitate the attainment of my client's goals and aspirations. Different investors have different interests and aspirations that must be understood by financial managers.
My client is interested in a challenging growth-oriented business environment. The tech industry that Apple Inc. belongs is a growth-oriented industry experiencing growth and innovation year in year out. With multiple multinational tech-savvy corporations in the industry, the sector offers a challenging growth-oriented opportunity for my client.
My client also upholds a positive attitude towards entrepreneurship. The company maintains an entrepreneurship culture investing in multiple innovations to enhance product breakthroughs. My customer also has substantial capital interested in long-term goals rather than quick returns on investments and willing to face mild market fluctuations. He does not have any worry about time but is fascinated with long term investments that will rise in value over time.
The investment strategy that I am adopting for Michael is to purchase a significant amount of stock categorized as both growth and worth and retaining the stock for a prolonged time to allow capital growth and development. With the Adoption of this strategy, Apple Inc. is the most suitable investment option for my client.
Ratio Analysis
I had to conduct an investigation on the company's financial well being to recommend my client to invest in Apple Inc. To do so, I had to undertake an assessment and evaluation of the company's past three years of financial records. I used ratio analysis for the last three years to determine the financial well-being of the company. The financial ratios offer investors a technique to evaluate the performance of the company. They measure companies' efficiency in operations, liquidity, stability, and profitability and avail more relevant information to investors than raw financial data. I used the following financial ratios to conduct my evaluation regarding the performance of the company;
Quick Ratio
The quick ratio analyses the liquidity by measuring how well the current assets can cover the current liabilities of the company. The quick ratio is determined by totaling cash and other equivalents, marketable investments, and accounts receivable, and dividing that total calculated by its short-term loans or current liabilities. The quick ratio was 1.56 in 2019. This denotes that for each dollar in current liability, the company has $1.56 in liquid assets. In 2018, the quick ratio was 1.25 and 1.20 in 2017 (Vasilaki & Tsakalidis, 2019). From the three past years, the company's quick ratio is greater than 1 in all the years. This demonstrates that Apple Inc. has more liquid assets to cover its short-term liabilities, indicating that Apple Inc. has had better financial health in the past three years.
Current Ratios
The current ratio also evaluates a company's ability to cover its current liabilities using current assets. It is determined by dividing the current assets with current liabilities of a company. In the past three years, the current ratios of Apple Inc. have been higher than 1. i.e., 1.60, 1.30, and 1.24 in 2019, 2018, and 2017 respectively. This indicates that Apple Inc. has the financial resources to remain solvent in the short-run since the company can pay debt obligations out of the current assets (Li, 2016).
Earning Per Share Ratio
This ratio determines how cost-effective a company is and the success of the business. It measures how much of net income each share of common stock has earned over a specific period. To determine the earning per share ratio, divide the net income less preferred dividend by the total number of shares of common stock outstanding of the specified period. For the 12 months ending 30 th June 2020, Apple Inc EPS ratio was $13.19, a 12% surge year-over-year. However, the EPS declined by 0.17% to $11.89 in 2019 from $11.91 in 2018. The positive in EPS in the year ending 30 th June 2020 indicates that the company's shareholders are making money hence suitable for investment.
Debt To Equity Ratio
This ratio is used to assess the financial leverage of a company. It shows the relative proportion of shareholders' equity and debt used to finance the assets of a company. The debt to equity ratio is computed by dividing the total liabilities by the total shareholders' equity. The company's debt to equity ratio was 0.88, 0.79, and 0.79 in 2019, 2018, and 2017, respectively. This means that in the past three years, the company's assets were more funded by equity rather than debt (Li, 2016).
The Basic Earning Power Ratio
This ratio determines the worthiness of investment of the company. The BEP is computed by dividing the earnings before interest and taxes by the total assets of a company. Apple Inc. BEP for the quarter ending 30 th June 2020 was $2.61, an 18.64% increase year-over-year. The annual basic earning power ratio was $0.012.
Based on the above evaluation of the financial records, Apple Inc. has excellent financial health, liquidity, stability, and substantial possible expansion. The analysis conducted on the financial ratios supports my recommendation for my client (Michael) to invest in Apple Inc.
References
https://www.macrotrends.net/stocks/charts/AAPL/apple/debt-equity-ratio
https://www.macrotrends.net/stocks/charts/AAPL/apple/eps-earnings-per-share-diluted
https://www.macrotrends.net/stocks/charts/AAPL/apple/eps-basic-net-earnings-per-share
Freedom Runners, (2020) THE GROWTH AND DEVELOPMENT OF APPLE INC. AS THE TOP TECH COMPANY WORLDWIDE [Online] Available from https://freedomrunners.org/the-growth-and-development-of-apple-inc/
Newsroom, (2020) Apple Reports Record First Quarter Results [Online] Available from https://www.apple.com/ke/newsroom/2020/01/apple-reports-record-first-quarter-results/
Li, H. (2016). Profitability Assessment of Apple Company .
Vasilaki, M., & Tsakalidis Jr, G. (2019). Apple Inc. Equity Valuation.
