Financial Statements Analysis
Name
Institutional affiliation
Date
Company Overview
Apple designs, manufactures and sells mobile, computing and software, music playing devices, accessories, networking solutions, and third-party applications and digital content. Apple’s products include iPad, iPod, iPhone Apple TV, Apple Watch, and Mac. Watch OS, OS X, and iOS rank among its most traded software. The service offerings produced by Apple also include Apple Pay and iCloud. The company markets and distributes internet services through iTunes Store, Apple Store, Mac App Store, and iBook’s Store. The company has numerous retail stores across the world to sell and distribute its products to most of its esteemed customer base.
Additionally, the company operates an online store that facilitates sells and delivery for free pf items purchased exceeding $50. The company targets mid-sized companies, individuals as well as government agencies. The corporation is very much committed to providing the best user experience through innovation and creative design of its products. In 2015 September the company announced unveiling of iPhone 7. Apple’s major competitors include Samsung, Techno, Microsoft, Palm and Sony.
Horizontal Balance Sheet Analysis
Horizontal analysis is also referred to as trend analysis because one period is taken as the base trend and then its values subtracted from the comparison period. The values obtained can get expressed in percentage or dollar value (Weil, Schipper & Francis, 2013). Therefore, the proceeding section conducts a trend analysis of the financial statements of Apple for three years.
Horizontal Income Statement Analysis
Horizontal analysis of financial statements presents a better method of understanding the deviation sin expenses, revenue and other items of the financial statements as well as their behavior over a period of time (Maaloul & Zéghal, 2015). The method is significant for measuring the performance of a company over a period of time. It can be conducted over a period of two accounting or more accounting periods (Cantoni, 2012). The above table has conducted a horizontal analysis of the statement of financial income for Apple Inc. over a period of three years. Net sales in 2015 compared to the base year of 2013 rose by 37%. The gross margin also went up 36% in 2015. Whereas most of the income statement items were showing positive increment, other income in 2014 registered a negative value of 15.22%.
Financial Ratios Analysis
Current Ratio
The current ratio is calculated through dividing the total current assets by the total current liabilities. The ratio illustrates the liquidity position of the organization. Additionally, the healthy current ratio is identified to be 2:1. This means that for every dollar owed, there are two dollars available to offset it when it becomes due. In 2015, the current ratio for Apple was 1.11 while that for 2014 was 1.08. The ratio could produce misleading results especially if a corporation consists of slow moving current assets (Maaloul & Zéghal, 2015). Despite the ratio falling below the required safe bar, Apple’s current assets comprise of quickly moving inventories, marketable securities and other short-term assets. As such, the company is able to meet its current liabilities in the short-run despite the fact that its current ratio is below 2:1. Additionally, the ratio is improving from the 1.08 in 2014 to 1.11 in 2015 demonstrating a rising capacity to pay for short-term obligations (Cantoni, 2012).
Quick Ratio
The quick ratio is similar to the current ratio but it provides an in-depth insight into the liquidity position of the organization. It further measures the ability and capacity of a firm to pay its short term liabilities with precision. In the calculation of the ratio, inventory is usually omitted due to its inability to be converted to cash and often sale on credit (Cantoni, 2012). Essentially, the ratio only considers the most liquid assets of the company whereby cash and convertible securities form a primary basis. In the year 2015 for every dollar borrowed, 75 cents are available in cash to pay up while in 2014, for every dollar of liability Apple has 0.67 dollars in cash to pay. The ratio is quickly growing illustrating how strong and solid the company the growth is. Moreover, the increase demonstrates that Apple is converting its accounts receivables into cash faster than in 2014. In the short, it means that the company was able to meet its financial obligations in 2015 better than 2014.
However, Apple’s ability to offset its liabilities depends on the cash flows timing which the ratio does not provide for hence its main drawback. The accounts receivable may not be ready for collection as the ratio assumes therefore, to some extent the ratio might not be sufficient to illustrate the company’s ability to meet its short-term liabilities when they fall due (Weil, Schipper & Francis, 2013).
Cash To Current Ratio
Cash to current ratio us calculated by dividing cash with current liabilities. The ratio illustrates the amount of liquid cash available to offset the short-term obligations by the company. Just like the other liquidity ratios, it can produce misleading results as the liquidity of any company depends on the number of times it converts its inventory. Also the agency with which the company can collect receivables and the number of marketable securities in the possession of the company determine the position.
Recommendations
From the financial statements analysis above, Apple inclusion shows a strong ability to offset its short-term obligations despite the fact that its current ratio shows otherwise. The liquidity ratios calculated illustrate that the company is in a poor liquidity position. However, most of the firm’s current assets are in the form quickly and easily convertible into cash. In several occasions that the liquidity ratios show a company in a position of not able to pay its financial obligations. The ability of accompany to pay the near-term debts is not entirely dependent on the current assets alone. As such, if the corporation is able to convert its stock and cash equivalents, it can amicably finance the debts. Therefore, from the financial ratios analysis, I would strongly recommend an investor to purchase the stocks of Apple.
Looking at the horizontal analysis, Apple declared a cash dividend of 20.73% in 2015. This is a clear illustration of how the income and profitability of the company keeps improving in the future. Additionally, the operating income went up 36% in 2015 when comparted to the base year. The growth in the operating income indicates an improvement in the company employee efficiency and favorable economic conditions. The financial year 2015 produced positive results compared to 2014 and the base year. Therefore, it would be appropriate to recommend for investors to buy the stocks of Apple for they present a worthwhile investment.
References
Cantoni, E. (2012). Financial statement analysis and insolvency forecast models: a proposal for ` local firms. Economia Aziendale Online, (4), 1-17.
Maaloul, A., & Zéghal, D. (2015). Financial statement informativeness and intellectual capital disclosure: An empirical analysis. Journal of Financial Reporting and Accounting, 13(1), 66-90.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.