Evaluation of Corporate Performance: Apple Inc.
Apple, Inc. is a U.S. based company that has its registered office in Cupertino, California. The company has a long history of innovative progression and it will not be wrong to state that the company has changed the ways of telecommunication. It has opened up new arenas of technology development and competition between electronic companies has become fierce in the last 15 years or so due to the company’s ability to develop new and unique products. The company sells computers, laptops, hard drives, tablets, music accessories, phones, etc. The company has its own operating system that runs on its devices. The company is investing in research and development to diversify its products and services. In this report, the financial performance of Apple, Inc. is evaluated on the basis of specific assumptions regarding its sales and cost of sales in the next two years i.e. 2016 and 2017. Through the analysis, it is evaluated that the competition in the market and development of new technologies is likely to affect the company’s ability to generate the same level of profit. The financial analysis of the company’s performance is based on the forecasts of income statement and balance sheet and the financial ratio analysis, which involves the calculation of key financial ratios pertaining to its liquidity, leverage, asset management, profitability, and market position.
2015 Financial Performance
Before forecasting for the next two years, it is important to discuss the company’s performance in 2015 (the last year reported). From the income statement, it could be noted that the company’s sales revenues were $233.715 billions in 2015. The net income was $53.394 billions that implied net profit margin of 22.85%. It is quite high for an electronic company. It is further noted from the company’s annual report that the company’s ability to generate substantial profits has generated significant cash flows for the company. The company has recently launched new programs and products that are likely to take the company into a horizon. The company had been managing its business and competition well by introducing new technologies and models of its products that has helped the company to generate new demand and grow at the same time. The balance sheet of the company indicated that the total assets were $290.479 billions. Its total liabilities were $171.124 billions and total equity was $119.355 billions. The company had a strong cash position with $21.12 billions.
Projected Income Statement
The projected income statement is provided in the following. The sales and cost of sales are increased by 10% in both 2016 and 2017. Operating expenses are adjusted for 2016 and 2017 based on the estimated inflation rates which are 1.49% and 2.37% respectively. The following formula has been used to calculate the projected sales, cost of sales, and expenses.
Previous Year * (1+Applicable Rate)
The tax rate applied to the company’s net profit before tax has been calculated using 2015 figures of provision for income taxes and dividing it by the net profit before tax. The tax rate applied in the year 2015 is 26.4% that is also applied to net profit before tax of 2016 and 2017.
Projected Balance Sheet
The company’s projected balance sheet is prepared by forecasting values of assets, liabilities, and equity by adjusting retained earnings of the company by the net income for the year. It increases the total shareholders’ equity of the company. Based on the following accounting equation, it could be indicated that the increase in the right-hand side due to the increase in the company’s equity the asset value has to be adjusted as well.
Financial Ratio Analysis
The financial ratio has been performed and values of different ratios include in different categories of analysis are provided in the following table.
The current ratio determines the capability of the company to pay off its short-term obligations. The current ratio is used by the suppliers and investors to assess the short-term solvency of the company and to decide whether or not the company should be given credit. The current ratio of the company was 1.11 in 2015, but the forecasts indicate that the liquidity position of the company would enhance in future due to which current ratio is expected to increase up to 1.85 and 2.69 in 2016 and 2017 respectively. The quick ratio of the company is also expected to increase from 1.08 of 2015 to 1.82 and 2.66 in 2016 and 2017 respectively. The primary reason behind the significant increase in the company’s current and quick ratio is that Apple believes in holding its current assets in the form of cash reserves. In the latest earning report produced by the company, it has revealed its cash reserves to be $215 billion. These cash reserves also include marketable securities and cash equivalents. Furthermore, a majority of the cash reserves of the company are stored outside U in overseas accounts due to which the company does not have to pay US taxes. Hence, cash reserves are apple’s major strength and can play a considerable role in the company’s future growth and expansion plan .
Debt to equity ratio assesses in determining the financial leverage of the company . It is calculated by dividing total liabilities by the shareholders equity. As of December 2015, the total liabilities of the company were $165.01 billion, which was lower than $171.1 billion for the period ended September 2015. These changes in the debt level indicate that the company is moving away from the risky approach of debt financing. The main reason behind lowering debts could be that it had increased the interest payments of the company in the past due to which debt financing had become more expensive as compared to the equity financing. Hence, keeping in view such factors, it is forecasted that the debt to equity ratio of the company would be 0.95 and 0.69 in 2016 and 2017 respectively.
The account receivables of the company in 2015 were 16.849 in 2015. It represents the total amount the company owes to the companies with which it does business, such as retailers, wholesalers, government agencies and cellular networks. The receivable turnover of Apple was 13.87 in 2015, but the extended credit policies of the company indicate that its ratio will increase up to 15.26 in 2016 and 16.78 in 2017. The increase receivable turnover and receivable collection period indicate that the company's management lacks the efficiency in devising debt collection policy. Major increase in collection period could increase the chances of bad debts which in turn could impact the working capital of the company. It is also important to note that extension of credit terms is a risk; however, Apple has credit insurance that has limited its risk to the exposure.
Payable turnover ratio reflects the period in which the company can pay off its creditors. The major portion of the copay’s current liabilities includes the account payable of $35 billion and commercial paper of more than $8 billion. Issuance of commercial papers is the significant reason behind the increase in the company’s liabilities. The company to finance the activities of share buyback and dividend payments issues them. These commercial papers are of great benefit to Apple as the company in operational activities of highly important nature utilizes them and turn the working capital cycle of the company also benefits from these activities. It is therefore expected that payable turnover of the company would increase to 4.34 and 4.78 in 2016 and 2017, from the lower ratio of 3.95 in 2015.
Inventory turnover determines the efficiency of the company in managing its inventory. The ratio reflects the fact that the Apple’s supply chain is one of the best in the world, both in the terms of revenue growth and return on assets. In the electronics industry, the company has largest sales due to which its inventory was sold in as quickly as 6.12 days in 2015, making its inventory turnover of average 59.64 times a year. In the recent past, the company has shut down its warehouses in order to limit its overstocking. The impact of this decision suggests that the inventory turnover of the company will further enhance to 65.6 and 72.16 times in 2016 and 2017 respectively.
In 2015, Apple's revenue growth was impressive, and its gross margin improved significantly to reach 40.06%. It was primarily driven by improvement in cost cutting measures, economies of scale, and higher prices for new Apple iPhones. However, it is expected that the gross margin of the company will not show any considerable improvement in upcoming years since there has not been any price increase in the company’s phones in after 2015 . Moreover, a slump in revenue growth indicates that it will not be an easy task for Apple to obtain benefits of economies of scale in the near future. Hence, the gross margin is kept same in the forecasted financial statements.
At the beginning of 2016, Apple reported quarterly earnings of $18.4 billion, which is largest in history by far. Although the company has launched only a single device, iPad Pro, in the fourth quarter of 2015, its iPhone 6S and 6S plus sales have soared, contributing to the highest revenue ever recorded by any corporation. Furthermore, the major growth of the company is driven by its services and other product sales. Services of the company include iCloud, AppleCare, app store, and Apple Pay. The revenue from these services grew by 26% in 2015 and reached $6.05 billion. Revenue from products such as Apple TV and Apple Watch also enhanced by 62% and reached $4.2 billion in 2015. All these factors led the company net margin to reach 22.85% in 2015, and it is forecasted that it will further grow up to 23.35% by 2016.
However, return on equity of the company is expected to decline from 44.74% of 2015 to 33.46% and 27.25% in 2016 and 217 respectively. The major reason for this decline is the increase in equity financing by the company. However, due to growth in income level, the decline in a ratio is not expected to impact the performance of the company in long term.
The company reported return o equity of 44.75% in 2015 which has risen in comparison to the past due to high financial leverage. However, it is expected to be partially offset by the asset turnover in upcoming years. The reason is that the company is expected to increase its assets as a part of its expansion plans, this expansion plans will impact the ratio and will most likely cause it to decline. On the other hand, DuPont analysis shows that the net profit margins of the company are higher, and it is expected by the analyst that the earnings will grow with an average of 12% per annum in the upcoming two years.
The price earnings ratio had a value of 12.84 in 2015. For analysis, the stock price of Apple Inc. is assumed not to change in 2016 and 2017. Furthermore, the number of outstanding diluted shares is assumed to remain the same. From the analysis, it could be forecasted that the Price Earnings Ratio will have a declining trend in the coming periods . The shareholders of the company may see these results to be against their ability to generate returns from holding the company’s stocks.
References
Apple Inc.:. (2015). Apple Inc.: Form 10-K. Cupertino: Apple Inc.:.
Arnold, G. (2013). Essentials of Corporate Financial Management. New York: Pearson Education Limited.
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Statista. (2016). Projected annual inflation rate in the United States from 2008 to 2020 . Retrieved from http://www.statista.com/statistics/244983/projected-inflation-rate-in-the-united-states/
Vandyck, C. K. (2006). Financial Ratio Analysis: A Handy Guidebook. Bloomington: Trafford Publishing.
