Evaluation of Corporate Performance
Evaluation of Corporate Performance
Apple Inc. is one of the most innovative and the famous corporations in the world today. Apple Inc. is the leading manufacturers of mobile phones, tablets, laptops and other electronic devices. However, their product ‘iPhone’ is the leading smart phone brand as compared to their other products. Apple Inc. was founded in the year 1976 and incorporated in the year 1977. The main aim of the company was to make and produce the personal computer for their clients. Apple Inc. is the second largest company in the smart phone industry on the basis of capitalization at the stock exchanges.
Complete ratio analysis of Apple Inc.
Liquidity Ratios
Liquidity ratios of the business show the capacity of the business to pay their short term loans or short term liabilities in timely manners. In general, the higher liquidity ratio of the business shows that the business is in good position to manage their short term liabilities.
Current ratio:
Current ratio = Current Assets / Current Liabilities
In the current scenario, the current ratio of Apple Inc. is reduced as compared to the current ratio of the previous year. In the year ended 2013, the current ratio of the Apple Inc. was 1.67 and in the year ended 2014, the current ratio is 1.08. Therefore, this reduction in the current ratio is a major signal for the existing and the potential investors of the Apple Inc. The main reason for this reduction in the current ratio is the long term liability which is now due in the year 2014. Moreover, it is clear from the balance sheet of the Apple Inc. that there is no other major change in the current assets and current liabilities of the business. Therefore, the investment decision must not effect due to the current ratio analysis as the business is in a position to pay their short term liabilities from their current assets effectively.
Acid Test Ratio:
Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities
According to the acid test ratio, the Apple Inc. is in the position to repay their short term debts from their short term assets effectively. They have more liquid assets than the amount of short term liabilities to pay on time. However, the main issue from the investment point of view is that the acid test ratio is reduced by 0.59 in one year from 1.63 to 1.04. The main reason for this increase is the accounts payables and the long term liability, which is due in the twelve month period. Therefore, the overall liquidity position of the Apple Inc. is strong and the business is in a position to pay their short term liabilities effectively and efficiently.
Leverage Ratios:
The leverage ratios of the business show the portion of the debt of the business equity and its effects on the sustainability of the business. The debt in the business is the main concern for the shareholders of the business. The Debt financing increases the business risk and the increased level of gearing is an important financial signal for the investors.
Financial Gearing:
Financial Gearing = Debt / Total Equity
The financial gearing ratio is increasing during the year ended 2014 as compared to the year ended 2013 for the Apple Inc. This 11% increase in the gearing of the Apple Inc. is the alarming signal for the current and the potential shareholders. The main reason for this increase in the financial gearing is the increase in the debt financing as compared to the equity financing. Moreover, the total equity of the Apple Inc. is reduced as compared to the year ended 2013. This is a strong signal for the investors to make their investment decisions. In order to make investment decisions, the investors must check the dividend paid in the last few years to ensure that the company is not buying back their stock from the market.
Debt to Equity ratio:
Debt to equity ratio = Debt / Equity
The finance raised by debt in Apple Inc. has increased from 67% to 107% in the year ended 2014. The main reason for this rapid increase is that the Apple Inc. is not paying any interest in relation to the debt financing. The facility of saving the interest is attracting the directors of Apple Inc. to raise finance via debt financing as compared to the equity financing. As compared to the equity financing, the debt financing is cheaper and quicker in the raising of funds. Moreover, in the financial statements of the Apple Inc. there is no interest expense. Therefore, the decision of raising funds via debt financing is in the favor of Apple Inc. at the moment.
Asset management ratios:
Asset management ratios of the business show the efficiency of the business in converting the inventory or a raw material into the sales or revenue. In the business of computers and smart phones, it is very important to capture the market, make sales and launch the improved version of the products before the competitors. Therefore, in the case of Apple Inc, it is very important for the investors to analyze the improvement in the key asset management ratios before making any investment.
Asset Turnover Ratio:
Asset Turnover Ratio = Revenue / Average total assets
In the case of Apple Inc. the asset turnover days in reducing as compared to the previous year. This is a positive signal for the investors of the business. According to the nature of Apple Inc. business, the sales of their products must meet the targets as soon as possible. The main reason for this approach is that the sales of the products are related to the innovative element and any product which is more innovative than the Apple’s product will capture the market. Therefore, it is important to reduce the asset turnover ratio to maximize the profitability of the business.
Inventory Turnover Ratio:
Inventory turnover ratio = Cost of goods sold / average inventory
As far as the nature of Apple’s products is concerned, the reduced inventory turnover ratio is a positive sign for the investors. The inventory is becoming sales of the business in much quicker time as compared to the year ended 2013. This increase in the sales or reduction in the inventory turnover ratio is a strong signal of effectiveness and efficiency of the management in maximizing the profitability. The current and potential shareholders will take account for the inventory turnover ratio in relation to the innovative products of the business. The reduced inventory turnover ratio will help in capturing the market share before the launch of other similar products.
Profitability Ratios:
The profitability ratios of the business show the ability or the capacity of the business to generate profits in relation to the actual expense and the sales of the business. The most attracting part of the financial statement for the investors and the lenders is the profitability of the business. Therefore, in the decision making of investment in any business, the current and potential investors always incorporate the profitability ratios in their decision making.
Gross Profit Ratio:
Gross Profit Ratio = (Gross Profit / Sales) x 100
The gross profit ratio of 39% shows that the Apple Inc. is generating $0.39 for every $1 incurred in the cost of goods sold. The gross profit ratio of the Apple Inc. is increased by 2% as compared to the previous year. This increase in the gross profit ratio is the positive signal for the investors and other stakeholders of the Apple Inc. Therefore, Apple Inc. is improving their performance by utilizing the manufacturing, distribution and other overhead costs effectively.
Net Profit Ratio:
Net Profit Ratio = (Net Profit / Total Revenue) x 100
The net profit margin of Apple Inc. is 21.6% for the last two financial years. The main reason behind this similarity is the continuity, completeness and the proper planning of the management of the Apple Inc. Moreover, the element of innovation is in the control of the management. Therefore, the expenses of the Apple Inc. are managed properly according to their financial statements. The findings from the net profit margin suggest that the business is generating $0.21 from every $1 of investment after deduction of all the expenses of the business. Therefore, the strong control over the expenses of the Apple Inc. is the main positive signal for the investors.
Market Value Ratios:
Dividend Payout Ratio:
Dividend Payout Ratio = (Dividend paid / Total Earnings) x 100
The dividend payout ratio is the most attractive ratio because it identifies the actual amount expected to be paid on the dividends. In the case of Apple Inc. the current year dividend payout ratio is 28%. It shows that the 28% of the total net revenue is distributed in the form of dividends. Moreover, the dividend payout ratio is 28%, which shows that the management of Apple Inc. is keenly interested in maintaining the trust of their existing and potential shareholders.
Share price of the business:
The share price of the Apple Inc. is the important element in the decision making of the investment in Apple Inc. Most of the times, the large corporation’s share prices are higher than other businesses. Therefore, the potential investors ignore the businesses having high share prices. In the case of Apple Inc. the share price is around $112 per share in the stock exchange. On the basis of the financial performance of Apple Inc. the current price of $112 is affordable for the potential investors. Therefore, the tactics of Apple to keep the share price at the affordable rate is another attracting factor for the current and the potential shareholders.
Calculation of Return on Equity (ROE) by DuPont Formula:
Return on Equity = Net profit ratio x Asset turnover ratio x financial gearing
The return on equity calculation via DuPont formula incorporated the operational, asset turnover and the financial leverage of the business to find the return on the equity. In the current scenario, the Return on Equity in increasing from 7.7 to 9.14 as compared to the year ended 2013. Therefore, the increase in the return on the capital employed is a positive signal for the investors.
Economic Value Added:
Economic Value Added = Profit after tax – (capital x cost of capital)
Cost of Equity = [Dividend / Current Market value of stock] + growth in dividends
Cost of equity = [11,126 / 23,313] + 0
Cost of capital = 0.47
Economic Value Added = 39,510 – (111,547 x 0.47)
Economic Value Added = (12,917)
On the basis of EVA, the result is not favorable from the investment point of view. The Apple Inc. is increasing their debt financing in the last years and that is why the EVA for the year 2014 is negative. However, the overall performance of the business is favorable to invest in the business.
Conclusion:
The shareholders must invest in the Apple Inc. because the business is in a good financial position. All the important financial signals, such as dividends per year, gearing and financial risks, profitability and the liquidity of the business are in good and favorable position. Therefore, it is highly probable that the Apple Inc. will generate good profits in the future and the shareholder’s wealth will increase. Moreover, the business is maintaining good control of the expenses of the business. Better control of the expenses of the business shows that the management of the Apple Inc. is interested in reinvesting their funds in an effective and efficient way. Moreover, the dividends are paid annually, which is attractive for those investors who want to invest in the business to generate dividend income on an annual basis. The overall business position is favorable for the investors to invest their funds in the Apple Inc.
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