1.
Introduction
One of the major recent developments in the international financial
environment that appears to have affected Apple's development, and
performance is trade uncertainty. When new tariffs on steel and aluminum
were announced in March 2018 by the then President of the U.S. Donald
Trump, high-tech products from China were significantly affected. By the
end of 2018, 25% of import duties had already been imposed on goods from
China. The new industrial policies significantly affected the stock value of
most U.S. companies. The announcement of such tariffs decreased the U.S.
aggregate equity prices by $1.7, which affected the performance of large
American companies such as Apple Inc. As the trade war between the U.S.
and China ensued, supply and demand issues in China became inevitable,
and iPhone sales, which account for almost 50 percent of Apple’s sales had
already reduced from $31.05 billion to $28.96 billion because Apple
maintains huge manufacturing facilities in China. Apple attempted to
improve the situation by improving investor relations, which among others
included announcing a 7 percent rise in dividends, with a 0.7 percent yield
in the beginning of the second quarter of 2021. According to statistics,
Apple’s continued investments in research and innovation have had a
significant positive influence on the growth of its market value, which is
now more than $1 trillion. This is indicative of the company’s credentials as
a great industry leader in the high-tech industry.
This report provides analyses o f Apple' s f i n a n c i a l p e r f o r m a n c e
f r o m 2 0 2 1 t o 2 0 2 2 , a m i d s t recent developments in the international
financial industry that appear to have had adverse effects on its
development, and financial performance. To conduct these analyses, Apple’s
financial information including the balance sheet, income statement, and
cash flow for the years 2020 to 2021 was downloaded from Yahoo Finance.
Yahoo Finance database contains the financial information of numerous
companies listed on various stock markets. The report aims to uncover key
areas of strengths and weaknesses of Apple’s financial performance using
key performance metrics such as profitability ratios, efficiency ratios,
liquidity ratios, gearing ratios, and investment ratios. The current report
will provide insights into the strengths and shortcomings of ratio analysis,
and analyze the differences between varied financial analysis approaches,
such as vertical and horizontal analyses, including their advantages and
disadvantages. Upon analyzing the company's performance,
recommendations for financial performance improvement and financial risk
mitigation strategies will be suggested based on the findings.
Horizontal Analysis
In financial statement analysis, horizontal analysis is used to compare a
company’s historical data, such as line items, or ratios over two or more
accounting periods. With horizontal analysis, an analyst can either use
percentage comparisons or absolute comparisons. With percentage
comparisons, the figures in each succeeding period are expressed as a
percentage of the amount in the baseline year. In this case, the amount in
the baseline year is listed as 100%, which is why this type of analysis is
sometimes called the base year analysis. Horizontal analysis provides
analysts and investors with the opportunity to identify the factors that have
driven a company’s financial performance over a given period. It also allows
them to spot growth patterns and trends. This analysis enables investors to
identify the comparative differences in various line items over a given
period and project them into the future. Therefore, analyzing the cash flow
statement, the income statement and the balance sheet over time provides a
comprehensive insight into a company's operational results and reveals the
factors influencing its financial performance. It also reveals whether the
company is operating profitably or efficiently. In light of this, the emerging
strengths and problems of a company can be detected through an analysis
of critical measures of business performance such as inventory turnover,
return on equity, and profit margins. For example, a rise in earnings per
share may directly result from a steady growth in sales or falling costs of
goods sold (COGS). Thus, horizontal analysis allows analysts to easily
compare profitability and growth rates among several companies operating
within the same industry.
Differences between Horizontal Analysis and Vertical Analysis
Vertical analysis mainly considers the relationships between the figures in a
single reporting period, and it is this that distinguishes it from horizontal
analysis. It's vital to note that the terms vertical analysis and common-size
financial analysis can be used interchangeably. For example, when an
income statement is vertically analyzed, the resulting income statement
amount is restated as a percentage of net sales i.e. if a firm’s net sales were
$3 million, they would be divided by $3 million and then presented as 100%.
Horizontal analysis, on the other hand, considers the figures from the
financial statements recorded over several years, and that is why horizontal
analysis is also known as trend analysis. With horizontal analysis, all the
figures on the income statements and balance sheet would be expressed as
a percentage of the base year amounts if the base for analysis was years
earlier. Since the figures obtained from three years earlier are expressed as
100 percent, the figures from the most recent years are divided by base
year figures.
Shortcomings of Horizontal Analysis
With horizontal analysis, the current period may appear abnormally bad or
good, depending on the accounting periods chosen and the accounting
period an analyst chooses to begin with. For example, the current period’s
profits can be quite poor if compared to results from the same quarter in
preceding years but may appear excellent when only compared with those
of the previous quarter. To maintain the principle of consistency, situations
such as the occurrence of a one-time event or a change in accounting policy
should be included in the footnotes of financial statements because they can
significantly impact horizontal analysis. One of the commonest
shortcomings associated with horizontal analysis is that revenues, assets,
expenses, or liabilities may shift between various accounts because the
aggregate information in the financial statements may have changed over
time. Owing to this, horizontal analysis may appear to cause variations,
especially when account balances from a given period are compared to
those of the next period. Certainly, it may be difficult to detect profitability
trends and analyze growth using horizontal analysis, especially when
companies change the way they break down their business segments.
Ratio Analysis
In the context of finance, ratios are a correlation between two accounts or
two numbers. Therefore, the two numbers are obtained from a company's
financial statement and compared to provide an insight into what they
exactly mean. However, it’s vital to note that ratio analysis can only be used
to compare numbers that provide a better understanding of the financial
statement, which suggests that random comparison of accounts is not a
good idea. The objective of ratio analysis is to support the interpretation of
financial statements and additional financial data, which makes ratio
analysis an important tool for analyzing and managing a firm's financials
and performance. Ratio analysis measures profitability. Since every firm
aims to earn profits, determining whether the profit is a good or bad figure
necessitates context, which can be provided through ratio analysis. Return
on Assets, operating margin, etc. can measure a firm's profitability.
Additionally, ratio analysis helps investors and analysts evaluate the
operational efficiencies of a firm, which is critical to determining how well a
firm is managing its assets, including other vital resources. Efficiency and
turnover ratios will highlight any possible asset mismanagement. In case a
firm requires cash immediately, it must ensure some of its assets are liquid.
Ratios such as the quick ratio and the current ratio can be used to
determine a firm’s liquidity, which can help it maintain the recommended
short-term solvency levels. Although ratio analysis provides insights into a
firm’s financial performance, there are several limitations associated with
its considerations. Ratios tend to ignore the effect of inflation on price
levels. Since ratios are computed using historical costs, they ignore the
price changes that occur between periods, which may result in an incorrect
interpretation of a company's financial situation. Additionally, ratios lack
standard definitions, which means that different formulas for the ratios may
be used by different firms. For instance, some firms ignore bank drafts from
current liabilities when computing the current ratio, while some firms
consider all current liabilities.
Apple Inc. is an American high-tech multinational company that
designs develops and manufactures mobile communication, media devices,
and personal computers. Apple maintains its headquarters in Cupertino,
California. Apple was founded in 1976 by Steve Jobs and his business
partners and their business goal was to develop modern high-tech products
and services. Since its founding, the company has grown to become a global
leader in the design, development, and manufacture of high-quality
technological products. Some of the company's products include
professional software applications such as iOS, and MacOS operating
systems, and devices such as Mac, iPhone, iPod, iPad, and Apple TV, and
accessories. Apple uses independent innovation and research that is
transforming mobile devices around the world. Apple's soul and corporate
culture are built on innovation. Given the exponential growth in the
popularity of its products in the past decade, in 2018, the company made
history when it became the first publicly traded company to attain a market
capitalization worth $1 trillion. However, there are recent developments in
the international financial environment that appear to have had adverse
impacts on the financial performance and development of several
multinational companies including Apple. The subsequent section will
determine areas of strengths and weaknesses in Apple’s financial
performance using key performance metrics such as profitability ratios,
efficiency ratios, liquidity ratios, gearing ratios, and investment ratios.
Analysis of Apple’s financials performance using ratios
Profitability Ratios
Operating Margin
The operating margin is the measure of profits a company earns for each
dollar of sales after paying for all variable costs of production such as
wages and raw materials, but before paying interests or taxes. A company's
operating margin can be computed by dividing its operating income by
Earnings before interests and tax (EBIT) by its total revenue shown in the
formula below:
2022 2021
Operating Margin EBIT EBIT 122,034,000 111,852,000
x 100
Total Revenue
Total Revenue 394,328,000 365,817,000
30.95% 30.58%
According to the results shown in the table above, Apple's operating
margin for the years ending 9/29/2021, and 9/29/2022 is 30.58% and 30.95%
respectively. Since the operating margin is indicative of the company’s high
performance. These ratios show a slight improvement in the company’s
performance between 2021, and 2022.
Return on Assets (ROA)
The return on assets is the measure of a business's ability to
efficiently generate revenue using its assets. The Return on Assets shows
how much a business is gaining from a combination of its assets (Atrill,
2017). The ROA can be calculated by dividing its Net income by the total
assets multiplied by 100 as shown below:
2022 2021
RETURN ON ASSETS Net Income Net 99,803,000 94,680,000
x 100
Total Assets
Income
Total 352,755,000 351,002,000
Assets
28.29% 26.97%
As seen from the results above, Apple’s Return on Assets increased from
26.97% in 2021 to 28.29% in 2022, which is a 1.32% increase. The relatively
high ratios are of great importance to investors because they show that
Apple’s effectiveness in converting capital invested into net income has
increased, which could be attributable to improvements in current assets
efficiency.
Liquidity Ratios
As a class of financial metrics, liquidity ratios measure the capacity of
debtors to meet their short-term obligations without raising external
capital. The quick and current ratios will be used for this analysis.
The Quick Ratio
The primary focus of the Quick ratio is liquid assets, and because of
this, the ratio doesn’t include inventory and current assets that are difficult
to convert into cash. The formula for computing the quick ratio is shown in
the table below:
2022 2021
Quick Ratio Current Assets−Inventory Current Assets 135,405,000 134,836,000
Current Liabilities
Inventory 4,946,000 6,580,000
Current 153,982,000 125,481,000
Liabilities
0.84 1.0
According to the computed quick ratios, there is a slight decrease in
Apple’s quick from 1.0 in 2021 to 0.8 in 2022. This shows that Apple met its
short-term obligations using the current assets in 2021 but accumulated
more debt in 2022 than in 2021, implying that the company was riskier in
2022 than it was in 2021.
Efficiency Ratios
An efficiency ratio is the measure of a firm’s capacity to efficiently use
its assets and liabilities. The analysis of Apple’s efficiency will include the
asset turnover ratio.
Asset Turnover Ratio
The asset turnover ratio is a measure of a firm’s sales value in relation
to the asset value. The asset turnover ratio is useful in the sense that it
helps business managers and analysts determine a company's capacity to
use its assets to generate revenue efficiently (Alexander & Nobes, 2016).
The asset turnover ratio can be computed by dividing the net sales by the
average total sales as shown in the table below:
2022 2021
Asset Turnover Ratio Net sales Net Sales 99,803,000 94,680,000
average Total Assets
Average Total 352,755,000 351,002,000
Assets
0.28 0.26
As presented in the above table, Apple’s Asset Turnover Ratio shows a
slight increase from $0.26 for every dollar of assets in 2021 to $0.28 for
every dollar of assets in 2022. In general, a higher asset turnover ratio
suggests a better performance and vice versa.
Investment ratios
Price Earnings Ratio
As one of the investment ratios, the price-earnings ratio measures the gains
realized from a given share relative to the cost of owning that share in a
given company. This ratio illustrates the relationship between earnings per
share and the share price. The Price earnings ratio can be computed by
dividing the share price by earnings per share as shown in the table below:
2022 2021
P Share price Share price $ 179.61 $ 182.13
Ratio
E −earnings Per Share
Earnings Per Share 6.11 5.61
29.39 32.46
As seen from the above computations, there is a slight decline in the
company’s price-earnings ratio. The company’s stock traded 32.46 times its
annual earnings in 2021, and 29.39 times its annual earnings in 2022. The
above price-earnings ratios are relatively high, suggesting that investors
were more attracted to Apple’s stock in 2021 than in 2022.
Dividend Cover
The dividend cover is the measure of the length of time a firm takes to
pay dividends to its shareholders. Owing to this, a dividend cover can be
determined by comparing a company's net income to the dividend paid out
to its shareholders (Atrill & Mc Laney, 2017). The dividend cover is
computed as shown below:
2022 2021
Dividen Total Dividends Total Dividends −14,841,000,000 −14,460,000,000
x 100
Net Income
d Cover Net Income 99,803,000,000 94,680,000,000
−14.87 % −15.27 %
The dividend cover ratios computed in the above table are negative.
The dividend cover ratios are -15.27% for 2021, and -14.87% for 2022. The
company used existing cash to pay dividends in both 2021 and 2022. The
dividend cover ratio reveals the cash dividends over the company’s net
sales.
Gearing Ratios
2022 2021 2020
Non−current liabilities $ 49,142 $ 53,325 $ 54,490
x 100 x 100 x 100 x1
Non−current liabilities +total Equity 49,142+50,672 53,325+63,090 $ 54,490+ $ 65,339
49.23 % 45.80 % 45.47 %
The above gearing ratios show that Apple has recorded the highest in
2022. The company’s debt has slightly increased in the last three years from
45.47% in 2020 to 45.80% in 2021, to 49.23% in 2022. Liabilities account
for about 86.7% of Apple’s capital structures, which shows that the
company is heavily leveraged.
Discussion of results
To explain the future risks and success factors of technology
companies, the current report has used financial ratio analysis to examine
the financial health of Apple Inc., which is a credible representative of the
leaders in the high-tech industry. The findings of this report indicate that
Apple’s stock attracted fewer investors in 2022 than in 2021, owing to the
trade uncertainties that characterized the US economy at the time. The
indicator of this decrease in financial performance is the fall in the
company's price-earnings ratios in 2022. Apple retained much of its
dividend earnings, suggesting that the company held more cash while
reducing dividends available for investors. On the other hand, there was a
slight improvement in the company’s performance indicated by a slight
increase in its asset turnover ratio from 0.26 in 2021 to 0.28 in 2022.
Furthermore, Apple maintained sufficiently high profitability because it
continued to sell its products and services at prices that were significantly
higher than its production costs, which is evidenced by operating margins
of 30.58% in 2021, and 30.95% in 2022. From 2021 to 2022, Apple Inc.'s quick ratio
deteriorated from 1.0 to 0.84 respectively. Furthermore, it suggests that the company had
enough liquid cash that enable it to cover short-term liabilities in 2021 but experienced liquidity
issues in 2022.
Conclusions and Recommendations
According to the ratio analyses conducted in the previous section, Apple
Inc. will in the meantime maintain its current approach to financing its
business activities. The company is fully aware of the growth opportunities
that equity financing can offer, which is why it spends close to $100 billion
in debt servicing and financing other operational activities. Nevertheless,
the volatility of stock prices due to trade uncertainty remains a major
problem in the intranational financial market. Borrowing loans from
credible financial institutions is an alternative source of financing that
Apple could consider. Loans could help ease interest payments while
enabling the company to sustain steady cash flows. However, the recent
collapse of major global financial institutions in the US and Switzerland
presents serious challenges to this idea.
Given a weak solvency and liabilities accounting for 86.7% of its capital
structure, the company is heavily leveraged, which reveals a decreased
financial strength. The company made a slight improvement in its
profitability over the two years despite deteriorating liquidity. Owing to this,
the company’s managers could avert financial distress or insolvency by
manipulating its finances to its advantage. They could use the company’s
retained earnings to meet its obligations as they are all due.
In their pursuit of guaranteed investment returns, investors are mostly
interested in more profitable but less risky firms. Given these demands,
Apple Inc. must raise the necessary income to meet both its short-term and
long-term obligations. Apple's sufficiently high profitability is a strong force
that not only attracts new investors but also sustains the confidence of the
existing ones. Apple’s financial position can be considered good, given the
proportion of its assets to its liabilities. The company can afford the huge
amount of debt it currently owes its lenders and shareholders.
Nevertheless, other large high-tech companies such as Huawei, Microsoft,
Google, and Samsung are much more adaptable and are increasingly
presenting serious challenges for Apple. Therefore, the company should
monitor its competitors’ strategies and decisions and adjust according to
emerging market conditions and competitors’ strategic decisions.
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