Part 1
- Liquidity Ratios
Current Ratio = Total Current Assets/Total Current Liabilities
2011: 44988/27970= 1.61
2012: 57653/38542= 1.50
Working Capital = Total Current Assets – Total Current Liabilities
2011: 44988-27970=17018
2012: 57653-38542=19111
- Profitability Ratios
Return on Assets Ratio = Net Income/Average Total Assets
2011: 25922/58185.5= 0.45
2012: 41733/88032= 0.47
Gross Margin Ratio = Gross Profit/Net Sales
2011: 34205/108249= 0.32
2012: 55763/156508= 0.36
Profit Margin Ratio = Net Income/Net Sales
2011: 25922/108249= 0.24
2012: 41733/156508= 0.27
Return on Equity Ratio = Net Income/Average Shareholders' Equity
2011: 25922/38307.5= 0.68
2012: 41733/59105= 0.71
- Leverage ratios
Debt to Equity Ratio = Total Liabilities/Total Shareholders' Equity
2011: 39756/76615= 0.52
2012: 57854/118210=0.49
- Efficiency ratios
Inventory Turnover Ratio = Cost of Sales/Average Inventory
2011: 64431/388= 166.0
2012: 87846/395.5=222.1
Part 2
Financial Evaluation
The current ratio is also known as the working capital ratio. It shows the extent or degree to which the current assets of a company can offset the current liabilities. A ratio of 2 is often realistic, since it means that the company can offset its current liabilities twice using its current assets. Firms may want to maintain a ratio of 1, though; this may not be a proper strategy to cushion the firm from unforeseen contingencies. As seen from the data above, Apple's current ratio is below the recommended ratio of 2. However, the company is liquid since it can offset its liabilities almost twice at 1.6 times in 2011. However, the trend is worrying since the ratio decreases from 2011 to 2012 showing a decrease in terms of liquidity of the firm.
The ROA ratio shows the effectiveness of the company to manage its assets in order to make profits. It shows how well a firm can convert its investments in assets to make profits. As such, a positive ratio is recommended. Apple's ratio shows improvement from 2011 to 2012, indicating improvement in terms of assets use to generate profits. The ratios are also positive, hence effective use of assets.
The Gross margin ratio measures the profitability of selling inventory. A higher ratio is recommended since it indicates the company is making more profit by selling its merchandise. As such, apple's gross margin ratio showed improvement in 2012. Hence, the company can sell its merchandise at a higher profit than 2011. This ratio will also indicate that the company will have enough money to cater for its expenses such as salaries and therefore attract to workers.
The profit margin ratio, though sometimes confused with gross margin ratio, measures the percentage of sales left over after all the other expenses are paid. It is used by the creditors and investors to determine how much the company can convert sales into net income. Apple's ratio is positive, shows an improvement for the previous year and hence the company is effective in generating net income from sales.
The ROE ratio shows the ability of the firm to generate income from the shareholder's equity. A higher ratio is preferred though it must also be compared with the industry's benchmark. Apple's ratio shows about 70% on shareholder equity. This is recommendable.
Each industry has its benchmark of the debt to equity ratio. A firm's debt-equity ratio, therefore, calls for comparison between the firm's trends in the industry to see where the firm is financially. A lower ratio indicates a stable financial firm while a higher ratio indicates a less stable firm. This is because; a higher ratio means that the company is funded more by the investor's money other than the creditors' money. In this case, the firm is considered risky to both investors and creditors. Apple has a ratio of 0.52 in 2011 which reduces to 0.49 in 2012. This shows improved financial performance by the firm since the ratio goes down.
The inventory turnover ratio measures how effective a firm is in managing its stocks. A high turn is recommended since it indicates that the firm does not overspend in buying too much stock and then spend a lot storing non-sellable stock.
Apple's turnover ratio improves greatly from 2011 to 2012. This shows improved activity in terms of sales by the company hence a recommendable work. In addition, it shows Apple's stocks are very liquid hence effective in doing business.
