Financial Statement Analysis
Introduction and overview:
The Apple Inc. is one of the leading companies in the production of smart phones and other latest hardware appliances. The main products of the Apple Inc. are Iphones, laptops, tablets and other small appliances. The Apple Inc. is listed on the major stock exchanges and they have a number of stores all over the world that are providing the best customer relation and increasing the sales. The Apple Inc. is performing business in the technology field and their main competitors are Samsung, HTC, Intel and Motorola. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
Horizontal Analysis of Last Three Years:
Importance of horizontal analysis of financial statements
Horizontal analysis of the financial statement means to compare the elements of the financial statements line by line with the same and relevant elements of the financial statements on the yearly or quarterly basis. The main importance or the advantage of horizontal analysis of the financial statements is that it identifies any lacking or strength in the controls of the business. Any material change in the line by line analysis of the financial statements shows the efficiency and effectively of the business over the attributes of the financial statements. Moreover, any significant change can highlight the errors or frauds, and deep analysis can confirm any mistake or adverse movement. (Joseph)
Balance Sheet
The first important component of the balance sheet in the last three years is the goodwill account and the increment in the goodwill account. The goodwill account is constantly increasing in the last three years from $4,616 to $5,414. The main reason of the increment is the possible acquisitions from the Apple Inc. therefore, the increase in the goodwill shows that the company is in a good position and acquiring good projects and businesses to enhance their business growth and the goodwill. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
Another important component of the balance sheet is the short term investments. The short term investments in the year 2014 were $11,233, which increased in year 2015 and ultimately reached $46,671 in the year 2016. The most important signal for the readers of the balance sheet is that the Apple Inc. has the extra cash or investment capacity and it is increasing in the last three years. This growth in the short term investments shows that the business is profitable and utilizing the maximum profits from their cash and cash equivalents. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
Another important element of the balance sheet is the inventory and the receivable levels of the business. The level of inventory and the receivables are relatively at the similar levels in the last three years, which shows that the relevant departments are following the budgeted plan for these accounts. The consistency also shows that these two important accounts are in the control of the management. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
In the liability section of the balance sheet, the increment in the long term debt is the important element because it is increasing at a rapid growth. The long term debt in the year 2014 was $28,987, in the year 2015 was $53,329 and ultimately reached $75,427 in the year 2016. This increase in the long term liability will increase the gearing ratio of the business. However, it is important to consider that the Apple Inc. is performing well and it is highly probable that these borrowings were performed to gain financial benefits and reduced cost of debt. Therefore, the total number of shares issued in the last three years is around four millions each year, which shows that the company is favoring the debt financing as compared to the equity financing. Moreover, the long term debt is not a financial issue for the Apple Inc. because their retained earnings per year are higher than the overall long term debts. In the year 2016, the retained earnings are $96,364 and the total long term debt is $75,427, which shows that the company is in a position to pay their total loans easily. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
Income Statement
The important element of income statement in relation to the business of Apple Inc. is the expense of research and development. The expense of research and development in the year 2014 was $6,041 which increased to $8,067 in year 2015 and increased in 2016 to $10,045. This increase in the research and development shows that the Apple Inc. is focusing on the future growth of the business and also retaining the market share of the business. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
The adverse movement of the selling and general administration shows that the expenses have increased in the last three years. However, this constant increase is not in the line of revenue of the business. In the year 2016, the selling and general administrative expenses are higher than the previous three years at $14,194 and the revenue for the year is lower than the previous year. Therefore, the adverse movement shows that the selling and general administrative expenses are not performing as per the trend shown in the income statement. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
Ratio Analysis:
The current ratio of the Apple Inc. is increasing in last two years. The current ratio of Apple Inc. in the year 2016 is 1.35 times, which shows that the Apple Inc. has the capacity to pay their current liabilities in relation to their current assets. Therefore, the current liabilities are in the control of the company and an increase of 0.35 times will be managed by the current asset levels. Moreover, in the year 2015, the current ratio is 1.11 times, which is in a favor of Apple Inc. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
The quick ratio of the Apple Inc. is also favorable in terms of liquidity of the business in last two accounting periods. There is a positive increase in the quick ratio, which is 0.25 times. This increase shows that the current liquid assets of the business are capable of paying the total current liabilities up to 0.95 times. Moreover, the increase in total short term investments is the main reason in the increment of the current and quick ratio. These short term investments can be redeem if the company is facing liquidity issues. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
The cash to current liabilities ratio in the year 2015 is 0.26 times and in the year 2016 is 0.25 times. The cash to current liabilities ratio is constant in both years and the main reason is that the ‘cash and cash equivalents’ and current liabilities are decreasing. However, the main point is that the both attributes are decreasing and the reduction in the current liabilities is a positive sign. Moreover, the investments in the short term investments are increasing during the year 2015 from $20,418,000 to $46,671,000 which is the main reason of the reduction in cash and cash equivalents. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
Competitor’s Liquidity Position (Samsung Electronics Co. Ltd.)
On the basis of above calculated ratios, the liquidity position of the Samsung is far better than the Apple Inc. The current ratio is almost 1 times higher than Apple Inc. and the cash to current liabilities is also reasonably high. The main reason is that the Samsung Electronics Co. Ltd. has wider range of products as compared to the Apple Inc. Moreover, the wide range of products is providing the larger market share and therefore, the profitability and the liquidity position is better than the Apple Inc. ("005930.KS Income Statement | Balance Sheet | Cash Flow | SamsungElec Stock - Yahoo Finance")
Recommendation
On the basis of ratio and horizontal analysis of the Apple Inc., it is recommended to the investors that the investment in the Apple Inc. is a good opportunity. The main reason is that the financial risk rate is lower as compared to the other companies and the future growth prospects are high. However, biggest threat for the Apple Inc. is the main competitor Samsung. The main reason is that the Samsung has the better financial position as compared to the Apple Inc. However, the investors are diversifying their investments, and therefore, it is recommended that the investors must invest their investment in the Apple Inc. and few other companies. ("AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance")
References
AAPL Income Statement | Balance Sheet | Cash Flow | Apple Inc. Stock - Yahoo Finance. (n.d.).
Retrieved January 08, 2017, from https://finance.yahoo.com/quote/AAPL/financials?ltr=1
Joseph, C. (n.d.). Advantages & Disadvantages of a Vertical & Horizontal Organization.
Retrieved January 08, 2017, from http://smallbusiness.chron.com/advantages-disadvantages-vertical-horizontal-organization-24212.html
005930.KS Income Statement | Balance Sheet | Cash Flow | SamsungElec Stock – Yahoo
Finance. (n.d.). Retrieved January 08, 2017, from https://finance.yahoo.com/quote/005930.KS/financials?p=005930.KS
