Apple’s Financial Ratios Analysis
Financial ratio analysis is a method for assessing firm performance based on comparative data included in financial statements such as balance sheets, income statements, and cash flows for a given period (The Finance Storyteller, 2019). Financial ratio analysis is used to determine whether a firm is healthy enough to get investment or loan capital to run. Profitability, short-term liquidity, long-term solvency, and market valuation are all measured using four measures (Heisinger & Hoyle, n.d.).
In this discussion forum, I would like to use the company that I’ve discussed in unit 2 that is, Apple Inc.
Profitability Ratio
Profitability ratios are a type of financial indicator that is used to evaluate a company’s capacity to make profits. They include profit margins, return on assets (ROA), and return on equity (ROE), among others (Hayes, 2022). In this discussion forum analysis, I would like to analyze the Profit Margin Ratio for Apple based on its 2021 financial statement. The profit margin ratio on the income statement is used to gauge profitability since they reflect the company’s capacity to create profits (Heisinger & Hoyle n.d.).
According to Heisinger & Hoyle (n.d.), the profit margin ratio displays the profit made per dollar of net sales.” It is computed as net income divided by net sales. Hence, the calculation would be:
Profit margin ratio = Net income / Net sales
Profit Margin Ratio Apple Inc. (2021) = $94,680,000,000/$365,817,000,000 = 25.88%
According to the profit margin ratio, Apple Inc. produced 25.88% of net income for every dollar of net sales. Apple has made significant investments in research, development, and quick expansion. Apple has been profitable in recent years, as we all know. Profit is steadily increasing, and market sentiment is overwhelmingly optimistic. Even though in this recent years, the market has been occupied by one of its biggest competitors, Google, by their Android products, Apple still has its faithful customers.
Liquidity Ratio
Liquidity ratios are a type of financial indicator that assesses a debtor’s capacity to repay existing debt commitments without raising external cash. The Current and Quick Ratios are mainly used to compute this (Heisinger & Hoyle, n.d.). I would like to analyze Apple current ratio based on its 2021 Balance Sheet.
The current ratio determines if a corporation has enough current assets to meet its current liabilities. The higher the current asset to current liability ratio, the stronger the company’s capacity to meet its short-term liabilities (Heisinger & Hoyle, n.d.).
Current Ratio = Current Assets / Current Liabilities
Current Ratio Apple Inc. (2021) = $134,836,000,000/$125,481,000,000 = 1.07 to 1
According to the current ratio, in 2021, Apple Inc has $1.07 in current assets for every dollar in current liabilities. In general, a current ratio greater than one to one is better, indicating that the firm has enough current assets to meet current obligations. Therefore, Apple Inc has a healthy current ratio.
Solvency Ratio
A solvency ratio is a crucial indicator used by potential business lenders to assess an enterprise’s capacity to satisfy its long-term debt commitments. The interest coverage ratio, debt-to-asset ratio, equity ratio, and debt/equity ratio are some examples (Heisinger & Hoyle, n.d.). In this discussion, I would like to analyze the debt to asset ratio of Apple Inc.
The debt-to-equity ratio is a variant of the debt-to-assets ratio that analyzes the balance of obligations and shareholders’ equity used to fund assets (Heisinger & Hoyle, n.d.).
Debt to Equity Ratio = Total Liabilities / Total Stockholders Equity
Debt to Equity Ratio Apple Inc. (2021) = $287,912,000,000/$63,090,000,000 = 4.56
According to the debt to equity ratio, Apple Inc has $4.56 in liabilities for every dollar in shareholders’ equity in 2021.
Market Valuation Ratio
Market value ratios are used to assess the current stock price of a publicly traded firm. Current and future investors use these measures to judge if a company’s shares are overpriced or underpriced. Because there is no precise way to assign a market value to privately owned entities’ shares, market value ratios are not applied to them (Accounting Tools, 2022). In this discussion, I would like to analyze the EPS of Apple Inc. Earnings per share (EPS) are determined by dividing a company’s earnings by the number of outstanding shares of common stock (Fernando, 2022).
Earning per Share (EPS) = Net Income / Share Issued
Earning per Share Apple Inc. (2021) = $99,633,000,000 / 16,426,786,000 = $6.07
Based on the calculation, we know that the EPS of Apple Inc is $6.07 for every share issued. Earnings per share is one of the most important indicators used to determine a company’s absolute profitability. Because ordinary shareholders do not have direct access to earnings, comparing EPS in absolute terms may be meaningless to investors. Instead, investors will compare EPS to the stock’s share price to evaluate the worth of profits and how investors see future growth (Fernando, 2022).
Conclusion
Before investing in Apple, it is critical to evaluate all financial facts on the company’s performance, including previous numbers and expert forecasts for the future. In an ideal world, an investor would compare a company’s financial ratio to that of its competition. How is the nearest competitor faring in comparison to previous trends? And how do the future market predictions compare to Apple’s? What additional elements are influencing the market?
In conclusion, Apple was a huge success story in the electronic sector, and its financials are rather stable. Their excellent branding, ongoing innovation, and growth into new markets are valuable assets.
References
Accounting Tools. (2022, May 19). Market value ratios — AccountingTools. AccountingTools. Retrieved August 7, 2022, from https://www.accountingtools.com/articles/market-value-ratios.html
Fernando, J. (2022, June 19). Earnings per share (EPS). Investopedia. Retrieved August 7, 2022, from https://www.investopedia.com/terms/e/eps.asp
Hayes, A. (2022, July 11). The importance of profitability ratios. Investopedia. Retrieved August 7, 2022, from https://www.investopedia.com/terms/p/profitabilityratios.asp
Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html
Note:
This article is written based on University of The People Managerial Accounting (BUS 5110) written assignment by Fristy Tania in August 2022
