Financial Ratio Analysis
TABLE OF CONTENTS Executive Summary Introduction Liquidity i. ii. iii. Working Capital Current Ratio Current Cash Debt Coverage Ratio pg. 7 pg. 3 pg. 5 pg. 6
Asset Management i.
Days in Inventory
iii. iv. Solvency i. ii. iii. iv.
Accounts Receivable Turnover Receivable Collection Period pg. 9 Debt to Total Assets Ratio Cash Debt Coverage Ratio Times Interest Earned Ratio Free Cash Flow pg. 11
Profitability Ratios i. ii. iii. iv. v. vi. vii. viii. Earnings Per Share Price Earnings Ratio Gross Profit Rate Profit Margin Ratio Return on Assets Ratio Total Asset Turnover Payout Ratio Return on Common Stockholder’s Equity Ratio
End Notes & References Appendix A – Apple Inc.’s Financials Appendix B – Hewlett Packard’s Financials
pg. 15 pg. 16 pg. 21
Group 5 will analyze the efficiency and profitability of Apple Inc. by conducting a thorough review of a series of financial ratios. This analysis will include a comparison to Hewlett Packard (HP), a direct competitor to Apple Inc., as a way to provide fair balance to our analysis. Group 5’s evaluation of the financial performance and financial benefit to stakeholders of both companies will be accomplished by analyzing the liquidity ratios that measures the ability of both companies to meet their short term obligations; asset management ratios which determine the efficient use of assets, such as inventory and accounts receivable; the solvency ratios that would help determine the ability of the company over a long period of time with either debt or equity; and, finally profitability ratios that measures the company ability to obtain debt and equity financing and its ability to grow.
Apple’s ability to meet its short-term obligations by leveraging its most liquid assets remains strong as it carries a substantial amount in Working Capital, $17 Billion in 2011. Although Apple’s Working Capital has decreased over the last three years it still provides Apple with an exceptional ability to meet any maturing obligations or tap into cash in order to address any immediate needs. Also, Apple’s Current Ratio, at 1.6 in 2011, remains at a reasonable level. HP’s Working Capital and Current Ratio of 1.0 is of concern signaling potential problems with liquidity. Finally, Apple’s Current Cash Flow to Debt Ratio shows improvement for the past three years in their ability to provide cash flow from operations demonstrating excellent liquidity, as opposed to HP’s.
Asset Management Ratios:
Rapid technological advances and innovations characterize the computer and software industry. The threat of assets becoming obsolete is an ongoing concern in this industry. Apple’s leadership clearly demonstrates their ability to effectively utilize their assets, such as inventory and accounts receivables, resulting in increases in revenue, increased inventory turnover measures, reductions in days in inventory, and efficient collection of their receivables. Apple’s capital investments have resulted in a significant 150% increase in sales in the period 2009 through 2011. Apple’s ability to quickly turnover their inventory up to 71 times far exceeds HP’s ability to efficiently manage their assets. Apple’s component outsourcing strategy improves their supply chain efficiencies resulting in a reduction in days in inventory. In addition, Apple’s Receivable Collection Period has significantly decreased from 25 days in 2009 to 18 days in 2011. Apple’s wholesaler agreements, retail stores, re-sellers, online store, and their arrangements with third party financers exemplify their efficient receivable’s collection methods. In contrast, HP’s distributors face low product margin challenges, HP’s online customer base is low and a lack of retail stores is reflected in low accounts receivable turnover ratio of 5.94 and a long receivables collection period of 61 days.