Financial Research Report – Financial Performance Analysis Of Apple Inc Research Paper Sample
The Profile of the Investor for Whom This Company May Be a Fit 3
Financial Performance Analysis through Ratios and the Risk Level Determination 4
Liquidity/Financial Health 5
Current Ratio 5
Quick or Acid-Test Ratio 6
Efficiency Ratios 7
Days Sales Outstanding 8
Days in Inventory Ratio 8
Payables Period 9
Cash Conversion Cycle 10
Conclusion and Recommendations of the Stock as an Investment Opportunity 10
Financial Research Report – Financial Performance Analysis of Apple Inc
Business Overview of U.S. Publicly Traded Company and the Reason for Selection
As an American multinational corporation, Apple Inc. was founded in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne with headquarter in Cupertino, California, United States. Apple Inc. specializes in the Computer hardware and software, digital distribution and consumer electronics industry. Apple Inc. serves the worldwide area as it owns around 437 retail stores in around fifteen countries with the support of up to 98,000 employees.
With a market leadership in such industry, Apple Inc. designs, manufactures and markets online services, consumer electronics and software and personal computers. This public entity’s popular hardware products include the iPod media player, Mac line of computers, iPhone smartphone and the iPad tablet computer. Online services of Apple Inc. include App Store, iCloud and iTunes Store.
The reason for selecting Apple Inc. for analysis of financial performance is that it reserves the largest market share in computer as well as gadget design and manufacturing industry. This public entity is so important to the U.S. economy that due to Apple Inc. alone, S&P 500 companies posted a positive growth of about six percent in 2012. This annual growth would drop significantly to three percent if Apple Inc. is taken out of the equation .
The Profile of the Investor for Whom This Company May Be a Fit
As the business world is so complex due to a substantial increase in a wide variety of financial products and services, the financial markets, particularly the stock market, contains different kinds of equity investors who pursue different investment objectives. Some of them either wish to benefit from capital appreciation or some want to take advantage of capital preservation. Investors in equity or stock market are accompanied by investors in a debt market where public businesses are able to raise financial capital depending upon their flexibility and leverage.
With such a concept in mind, it is now imperative to determine the profile of investor who wishes to make investments in Apple Inc. by providing the public entity with necessary financial capital which helps the management to fulfill working capital needs. In equity market, there are investors who wish to invest in Apple Inc. to benefit from either the capital or dividend gain.
Investor profile also contains those who are looking to extend financial capital to Apple Inc. for a short period of time of up to one financial accounting year or less. These normally include short-term creditors or investors like trade creditors etc.
Apart from this, Apple Inc. is a good fit for those investors who wish to manage a long-term stake in this publicly traded company. This profile often includes the players in debt markets (such as financial institutions and banks etc) who have a strong urge to earn investment returns in the form of long-term fixed interest obligations.
In short, investment in Apple Inc. is a good fit for every investor who wishes to provide the financial assistance either in the form of debt or equity depending on his investment objective with a short or long term horizon in view. It is this investor profile based on which the financial performance analysis of Apple Inc. is examined into over a period of three recent financial accounting years.
Financial Performance Analysis through Ratios and the Risk Level Determination
In order to analyze the financial performance of Apple Inc. over the last three year period, it is important that one of the widely used financial metric must be examined. This financial metric relates to the financial ratios analysis that involves a careful and thorough investigation into and understanding of any business’s performance.
Under this section, the liquidity ratios, which include current and quick ratios, will be examined into. This is so because these ratios measure the ability of Apple Inc. over a three year period to cover its short-term liabilities of up to one year. To make liquidity analysis of Apple Inc., the following calculations have been arrived after extraction of financial data from annual reports:
The current ratio is measured by dividing total current assets by total current liabilities. This ratio gauges the ability of any company (including Apple Inc.) to cover each dollar of its current liabilities of up to one year or less .
The above calculations in tabular representation reflect that the liquidity position of Apple Inc. improved in two years of 2012 and 2013 but, in 2014, this position declined sharply. In 2013, Apple Inc. had $1.68 in its current assets to repay each dollar of its current liability in the event short-term creditors demand back their investments. However, this liquidity strength declined in 2014 where this company had only $1.08 ($0.60 less) for covering every dollar of short-term obligations.
The global standard for current ratio is 2:1 which makes it apparent that, in all three years from 2012 to 2014, Apple Inc. has been operating below the global benchmark which proves that the company is suffering from liquidity management issues.
Quick or Acid-Test Ratio
For a more detailed and accurate analysis, the quick ratio is analyzed which is also called acid-test ratio. This ratio puts an acidity test on the liquidity of the company under review because it includes only the most liquid current assets in the equation. Normally, quick ratio excludes inventories and prepayments from calculations because both of them are not easily or readily convertible to cash without diminution/decline in the financial value .
Like current ratio, analysis of the quick ratio confirms that the liquidity strength of Apple inc. increased from 2012 to 2013 but due to certain problems in the liquidity and cash management, a major decline in liquidity measures was witnessed in 2014. The global benchmark for quick ratio is 1:1 which reveals that, in 2012 and 2013, Apple Inc. had $1.24 in most liquid assets to repay every dollar of current liability which increased by $0.18 over a one year period which is a sign of good liquidity management . However, this ratio declined in 2014 that shows a possibility of liquidity trap for Apple Inc.
As per the global standard, Apple Inc. operated above the worldwide standard of 1:1 in 2012 and 2013. This reveals that Apple Inc. outperformed all other multinational companies in the same industry by improving its liquidity strength in one year. Amazingly, the liquidity strength for this entity declined sharply in 2014 which is confirmed by the fact that Apple Inc. underperformed the global industry benchmark that proves to be an alarming position to the management.
Depending upon the liquidity position of Apple Inc. from 2012 to 2014, one may say that the liquidity position of the publicly traded U.S. Company deteriorated in 2014. Due to this decline in liquidity strength, the risk of default has increased for Apple Inc. and there is a sharp reduction in safety margin to investments of short-term creditors.
In view of this, Apple Inc. may find it difficult to raise money from short-term creditors (such as trade creditors, suppliers and banks etc) due to dramatic reduction in liquidity position for 2014. Apart from this difficulty, a slight decline in value of current assets may greatly harm the ability of Apple Inc. to continue business as a going concern due to problems concerning liquidity management .
In this section, the efficiency with which the management of Apple Inc. generates cash by collecting cash from clients and turn ending inventories to sales revenue will be examined into. It is imperative to note that Apple Inc. considers a financial accounting period of 365 days. Additionally, the manner and time period in which Apple Inc. repays its suppliers or trade creditors will also be analyzed with the help of following ratios and their calculated figures.
Days Sales Outstanding
The above calculations make it apparent that in all three years from 2012 to 2014, Apple Inc. has been taking many days to make cash collections from its customer base. This is particularly made evident by dramatic decline in receivable turnover in 2013 and 2014.
In 2012, Apple Inc. made efforts to collect cash from its customers within nineteen business days. In 2013, Apple Inc. became short by six to seven business days by taking a total of 25 or 26 days approximately to make cash collections against its credit sales.
This position further weakened when the management showed its inefficiency to collect cash in thirty days by becoming short of five more days to manage working capital needs. Due to continuous increase in taking more time in cash collections, the liquidity position was threatened and finally became dramatically weak which is evident from declined liquidity ratios for 2014.
The decline in timely cash collections proves that Apple Inc. was in practice to provide extended credit to its customers with relaxed credit terms. This may prove to be fruitful for the business to increase the number of customers. Despite this, it is not good for Apple Inc. to keep extending credit, with extremely relaxed credit terms, every year which is detrimental for its liquidity strength ahead in upcoming years as dictated by liquidity ratios for 2014 .
Days in Inventory Ratio
This ratio tends to measure the management efficiency to covert ending inventories to sales revenue. Analysis of derived calculation provide evidence that from 2013 to 2013, Apple Inc. became short by one business day to generate sales revenue whereas it wasted two more days in sales generation from 2013 to 2014. This position is harmful for the business because if Apple’s products do not reach their shelves on time, the business may lose its clientele because customers may switch to use competitors’ product and services .
Declining inventory turnover for Apple Inc. suggests that business earnings might have been overstated due to either failure to realize inventory write-downs or excessive capitalization. The trend analysis and financial performance also points out that Apple’s inventories might include obsolete products in the face of intense competition because technology changes every second .
As the inventory turnover has declined in 2013 and 2014, it is important to note that in those years, the cost of financing inventories may be really very high for Apple Inc. with regards to inventory handling and storing costs.
In this way, Apple Inc. may lose it profit generation capacity because when the business turnover and stake is really very high, becoming short by even a single day to sell a product by reaching shelves on time is not excuse but a necessity to remain into the business.
This decline in ability to generate sales on time may point out to the fact that Apple Inc. may be facing issues concerning its supply chain and distribution activities as well as its advertising campaigns. It also reveals a critical condition that the business might be losing it sales due to a decline in the demand of its products. It usually happens when competitors offer more advanced and up-to-date products/services at a more reasonable price than Apple Inc.
In both years, 2012 and 2013, Apple Inc. repaid its suppliers within the time frame of seventy four business days. This position further improved in 2014 when Apple Inc. obtained favorable credit terms from vendors to make payment lately by eleven days thereby repaying its suppliers in a total of eighty five business day period. This trend is good for liquidity management for financing of working capital needs and repaying creditors lately, but on time to secure business’s reputation.
Cash Conversion Cycle
It is important to analyze this financial metric despite the fact that it represents only a time frame of cash management but not a financial ratio. It represents only the time period, within which cash is collected from customers, sales are generated and trade creditors (suppliers) are repaid .
Cash conversion cycle and its examination are important for Apple Inc. because it reflects the amount of cash (on hand) available with this public entity, at any given time, to finance working capital needs (finance daily business operations) and meet short-term liabilities.
In all three years, Apple Inc. has negative cash conversion cycle. This becomes evident when a business takes more time to repay its suppliers or trade creditors than generating sales and making collections from customers . Same is true in case of Apple Inc where its cash management cycle was negative in 2012 because it took around twenty one business days to arrange cash and took seventy four days to repay its vendors.
Cash conversion cycle declined in 2013 because payables period remained the same whereas total inflow cycle increased by thirty business days. This position of cash management increased slightly in 2014 when payables period increased by around eleven days and total cash inflow cycle sky rocketed by thirty six days.
Negative cash conversion cycle reveals that Apple Inc. does not make payments to its suppliers until and unless it receives payments against its sales. This may seems as a competitive edge because it is able to repay its suppliers lately and can finance its working capital needs efficiently .
Conclusion and Recommendations of the Stock as an Investment Opportunity
With a careful and thorough analysis of financial performance concerning Apple Inc. for the period of three years from 2012 to 2014, on may arrive at a conclusive observation that this publicly traded U.S. Company was maintaining its liquidity strength for 2012 to 2013. This is made apparent by the liquidity and management efficiency ratios of those years. However, in 2014, the liquidity position of Apple Inc. declined sharply because much of its current assets were now locked into rising stock of un-saleable inventories.
It is also imperative to note that, for 2012 to 2014, Apple Inc. suffered from numerous problems due to which it found it difficult to collect cash from customers and generate sales into timely manner to finance immediate working capital needs. Due to a sharp decline in liquidity strength, Apple Inc. has become more vulnerable to financial distress. This is so because the safety margin for short-term creditors decline dramatically which will make them less confident to extend financial capital to Apple Inc.
In the same manner, substantial increase in liquidity management issues has also raised default or counterparty risk for Apple Inc. for 2014. It has been found that Apple Inc. will find it difficult to raise short-term capital from its trade creditors with relaxed credit terms. Despite these negativities, it is also clear that the cash conversion cycle for Apple Inc. is negative. This is because Apple Inc. has managed to obtain extended trade credit from its suppliers or vendors with favorable credit terms. It does not repay suppliers until Apple Inc. receives payments from customers against credit and cash sales.
In the end, based on research findings, it is important to note that Apple Inc. is not a good for any investor wishing to extend a financial capital to it with short-term investment objectivity in mind due to liquidity management issues.
Therefore, in light of these happenings, it is recommended for the management of Apple Inc. to examine the supply chain and distribution as well as advertising campaign of this public entity. The management should also conduct the market oriented survey which may prove to be fruitful because Apple Inc. is consuming more days to generate sales reflecting that the demand for its products and services is declining in the face of intense competitive pressures.
Similarly, the management of Apple Inc. should also make arrangements to provide an extended credit to only high profile business clients and must make extra efforts to collect more quickly than before to manage business operations efficiently.
For enhancing the liquidity management, Apple Inc. should periodically review its accounts receivable while making sure that business clients receive and pay their bills in a timely manner. It is highly recommended that no time should be delayed in sending bills to customers without any billing schedule which can damage liquidity by deteriorating cash flow management.
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