Apple Evaluation Report

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Evaluation of the financial performance of Apple Inc. from 31 Dec 2006 to 31 Dec 2010

1.0 Terms of Reference:
This research report, addressed to the Board of Directors is a method of offering clear perception over the financial evolution of Apple Inc. (APPL) from 2006-10. APPL is a designer, manufacturer and marketer in a range of personal computers, media devices, mobile communication and portable digital music players. It also sells a range of related software, services and applications. Apple Inc. a total of 317 stores, from which 233 stores in United States and 84 stores internationally. The aim of this report is to analyse the company’s financial position regarding liquidity, efficiency and profitability. 2.0 Findings

The following research findings have been extracted from Apple’s balance sheet and income statement from 31 Dec 2006 to 31 Dec 2010. 2.1 Liquidity
The ability to meet short term debts has been reviewed using liquidity ratios (The Current Ratio and the Acid Test Ratio). The Liquidity ratios show the extent to which the company’s assets can be turned into cash. The current ratio consists of the calculation; current assets/current liabilities. While the Acid test ratio is calculated using the formula Current Assets-(minus) Inventories/Current Liabilities. By using 2010 financial figures we worked out that Apple have a Current Ratio of 2:1 which interprets that for every $1 of liabilities Apple has $2 of assets to pay them, this is considered a high ratio as some accountants propose the ‘ideal’ Current Ratio to be approximately 1.5:1. Apple is in a clearly comfortable position, but assets are still not as high as previous years, i.e. compared to 2006 when the current ratio was 2.3:1. This indicates that for every $1 of debt the company had $2.3 of assets; so in the unlikely event that sales rapidly decline then we are confident that Apple can resist bankruptcy unlike many other companies that have gone into liquidation earlier this year. Acid Test Ratio results for 2010 were 1.9:1 which indicates that these figures have slowly decreased compared to the previous years in the table below. The ideal Acid Test Ratio figures would be around 1:1. As previously stated we are in a comfortable position. However, we may be criticised for not utilising finances efficiently, i.e. major re-investments. A reason why would not include stock (Acid Test Ratio), is because stock is more difficult to turn into cash as quickly. Keeping Current Assets and Acid Test Ratio results around 1.5:1/1:1 could benefit the company as the capital could be used for re-investments which would explain are ratio decline, constantly updating our products is costly and a lot of money is spent on research and development. Ratio

(formula) 2010
($m) 2009
($m) 2008
($m) 2007
($m) 2006
($m)
Current Ratio
(Current Assets/Current liabilities)41,678 /
20,722

= 2:131,555/ 11,506

= 2.7:134,690/
14,092

= 2.5:121,956/
9,299

= 2.4:114,509/
6,471

= 2.2:1
Acid Test Ratio
(Current Assets- Inventory’s/Current Liabilities)41,678 - 1,051/ 20,722

= 1.9:131,555-
455/
11,506

= 2.7:134,690
509/
14,092

= 2.4:121,956
346/
9,299

= 2.3:114,509
370/
6,471

= 2.2:1
(Source: Thomson One)

2.2 Efficiency
Efficiency ratios measure the quality of using and controlling assets. Asset Turnover demonstrates the amount of sales generated for every dollar’s worth of assets. In the table below the efficiency of Apple Inc. has differed in the last five years. In 2006 Apple’s Asset Turnover was as high as 1.33, but over the next two years it decreased to 0.93. After 2008 there was a significant increase of the Apple’s Asset Turnover, and in 2010 it peaked to 1.56. Thus, the Apple’s Asset Turnover enhanced over the five-year period. Inventory Turnover ratio shows how frequently a business sells and replaces its inventory. The figures in the...
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