Profitability and Credit Risk Analysis: Apple Inc. and Owen Cornings Inc.
The report is based on conducting an in depth analysis of the profitability and credit risk of the two US based public listed companies, Apple Inc. and Owens Coming. For the purpose of conducting profitability analysis we will be having an overlook of how the company reaches to its bottom line profits and what income and expenses are deemed to reach at that figure. In addition, we will be analyzing multiples such ROE(including Dupont), operating margins, etc. for each company . On the other hand, as for credit analysis of the company, we will be discussing the liquidity ratios and leverage ratios of the company. In addition, we will also discuss various loans and their covenants under which the company has obtained the finance. On the whole, the popular 4C’s model of credit risk analysis will be followed.
We are sure that by the end of this report, we will be having a comprehensive overview of the profitability and credit position of both the companies.
About the company- Apple Inc.
Apple Inc. is an American Multinational company that is headquartered in California, United States. The company operates in the consumer electronics industry and offers products like smartphones, tablets, portable music player, laptops and many other entertainment devices. Some of the famous products of the company includes IPhone, IPad, IPod, Macbook, etc. The company also offers paid multimedia services, ITunes Store that is available on its own devices only. With the market capitalization of $653.2 Billion of which 27% is held in cash, it is the most valuable company in the whole word.
About the company- Owens Corning Inc.
Owens Corning is the world largest manufacturer of Fiberglass and other related products. Founded in the year 1937 as a partnership firm between Corning Glass Works Owen Illinois, the company is headquartered in Ohio. The company is also infamous for its bankruptcy in the year 200 from which it successfully emerged out in the year 2006.
Credit Risk Analysis
a) Capacity to Pay:
This is the first yet most important section for credit analysis of a company where we will use the trend in profitability ratios, solvency ratios and liquidity ratios to access the ability of the company to honor their debt obligations and if they are earning sufficient margins to do that.
-Profitability Analysis
These ratios carries great significance at the time of credit risk analysis as they indicate if the company is earning enough margins to honor their debt payments.
Apple Inc.
-Net Income Margin: Net Income/ Revenue
2012: 41733/156508= 26.66%
2013: 37037/170910= 21.66%
-Return on Equity: Net Income/ Total Equity
2012:41733/123549= 33.77%
2013: 37037/118210= 31.33%
-Return on Assets: Net Income/ Total Assets
2012:41733/176064= 23.70%
2013: 37037/207000= 17.89%
Owen Comings Inc:
-Net Income Margin: Net Income/ Revenue
2012: -19/5172= -0.36%
2013: 204/5295= 3.85%
-Return on Equity: Net Income/ Total Equity
2012:-19/3575= -0.53%
2013: 204/3830= 5.32%
-Return on Assets: Net Income/ Total Assets
2012:-19/7568= -0.25%
2013: 204/7647= 2.66%
-Liquidity Analysis
These ratios will help us in evaluating the ability of the entity to honor their short term obligations. On a primary basis, these ratios are useful for short term creditors and material suppliers of the company. Below discussed are the liquidity ratios of both the companies:
Apple Inc.
-Current Ratio: Current Assets/Current Liabilities
2012:57653/38542= 1.49
2013: 73286/43658= 1.67
-Cash Ratio: Total Cash/Current Liabilities
2012:10746/38542= 0.27
2013: 14259/43658= 0.32
Own Corning Inc.
-Current Ratio: Current Assets/Current Liabilities
2012:1617/916= 1.76
2013: 1848/992= 1.86
-Cash Ratio: Total Cash/Current Liabilities
2012:55/916= 0.06
2013: 57/992= 0.05
Solvency Ratios
Another important ratio section that provides a deep insight into the financial structure of the company and if it is able to honor its long-term obligations. These ratios are of great importance for the term lenders such as Banks and Debt holders, etc. Below discussed are the solvency ratios of both the companies:
Apple Inc.
-Debt Ratio: Total Debt/ Total Assets
2012:---
2013:16960/207000= 0.08%
-Debt-Equity Ratio: Total Debt/ Total Equity
2012:---
2013:16960/123549= 0.13
-Times Interest Earned Ratio: Operating Income/ Interest Expenses
2012:---
2013: 48999/136= 3602.0
Owens Corning Inc.
-Debt Ratio: Total Debt/ Total Assets
2012: 2085/7568= 0.27
2013:2028/7647= 0.27
-Debt-Equity Ratio: Total Debt/ Total Equity
2012: 2085/3575= 0.58
2013:2028/3830= 0.52
-Times Interest Earned Ratio: Operating Income/ Interest Expenses
2012: 148/114= 1.29
2013: 385/112= 3.43
b)Analysis of Collateral
Collaterals are the assets which the debt issuer pledges with the financial institution at the time of taking loans and also grants him the right to use the pledged asset to recover any unpaid debt amount back to them(financial institution).
Apple Inc:
Referring to the supplementary notes to the financial statements, we found that Apple Inc. is having long-term debt outstanding worth $16.9 Billion that is unsecured and the company does not have secured debt outstanding for which it offered any collateral to the lender.
Owen Corning Inc.
The supplementary notes to the financial statements extensively discuss the collaterals offered by the company on its long term debt and short-term debt. Important to note, the short-term borrowings for both periods consisted of various operating lines of credit and working capital facilities and these borrowings are collateralized by receivables, inventories or property. The borrowing facilities are typically for one-year renewable terms and the weighted average interest rate on all short-term borrowings was approximately 2.2 percent for December 31, 2013.
On the other hand, as for long-term debt, the company reports that the long-term debt of the company includes senior notes which they classify as unsecured debt, however, the company reports that each of the senior note issued has been guaranteed by the domestic and future subsidiaries of the company.
c)Debt Covenants
Apple Inc:
Since the company do not have any secured debt, it also don’t have any specific debt covenants that impose any sort of limitations on the company neither the same has been discussed under any supplementary notes to the financial statements. Important to note, the company issued debt for the first time in the history of their operations during Q3 of 2013 worth $16.9 Billion of which $3 Billion were floating notes with varied effective interest rates. Below is the summary of unsecured debt instruments of the company:
Owen Corning Inc.
The management discussion and analysis section of the annual report, discusses the various covenants under which the company is operating. Important to note, these covenants are related to the credit agreements applicable to the senior revolving credit facility, senior notes and the receivables securitization facility obtained by the company. Each of the covenant places a restriction over the maximum allowed leverage ratio and a minimum required interest expense coverage ratio. The company claims that it was in compliance with each of the debt covenant till the date of latest financial reporting.
d)Quality of the management
Apple Inc:
The management of the company is a well-known face in the global arena. Lead by its CEO and innovative visionary, Tim Cook, the company’s management continues to be in good news for a shareholder point of view approach. Although at present the company does not have any secured debt that its management needs to show or develop its character to show to the lenders, however, the quality of management at Apple Inc. is unquestionable.
Owen Corning Inc.
Although the company has a good reputation of being the world’s largest manufacturer of fiberglass, but for the management of a company that had been booked with bankruptcy under Chapter 11 in the past, the lenders will always be skeptic over the quality of management of the company and its characters.
Profitability Analysis
-Profitability Ratios
As discussed before, these ratios will indicate the trend in the profit margins of the company and if the trend is positive enough to allow the company to honor its debt payments. Below discussed are few profitability ratios of both the companies:
Apple Inc.
-Net Income Margin: Net Income/ Revenue
2012: 41733/156508= 26.66%
2013: 37037/170910= 21.66%
-Return on Equity: Net Income/ Total Equity
2012:41733/123549= 33.77%
2013: 37037/118210= 31.33%
-Return on Assets: Net Income/ Total Assets
2012:41733/176064= 23.70%
2013: 37037/207000= 17.89%
Owen Comings Inc:
-Net Income Margin: Net Income/ Revenue
2012: -19/5172= -0.36%
2013: 204/5295= 3.85%
-Return on Equity: Net Income/ Total Equity
2012:-19/3575= -0.53%
2013: 204/3830= 5.32%
-Return on Assets: Net Income/ Total Assets
2012:-19/7568= -0.25%
2013: 204/7647= 2.66%
a) Apple Inc.
Common-Size Balance Sheet
Common-Size Income Statement
b)Owen Cornings Inc.
Common-Size Balance Sheet
Common Size Income Statement
Works Cited
Annual Report 2014. (n.d.). Retrieved December 12, 2014, from Owens Corning: http://owenscorning.q4cdn.com/8d46fc42-9d11-4ef2-b161-fafe1e465154.pdf?noexit=true
SEC 10-K Filing. (n.d.). Retrieved December 12, 2014, from Apple.com: http://investor.apple.com/secfiling.cfm?filingid=1193125-13-416534&cik=320193#D590790D10K_HTM_TOC590790_11
