Financial Analysis of Apple Company Paper Example

Paper Type:  Case study
Pages:  7
Wordcount:  1807 Words
Date:  2022-12-10


Financial analysis refers to the systematic evaluation of economic data in an organization, to assess its stability, viability, liquidity, and profitability in the current and future state. Examining these aspects of the business enhances decision-making at the top level management to boost the long-term objectives of the enterprise. The rise in market competition has increased the demand for regular financial evaluations as modern companies seek to provide credible economic data to investors, clients and other interested business stakeholders (Haslam, Tsitsianis, Ya, & Andersson, 2013). Companies that observe the outlined guidelines on financial assessment create an excellent public image which is essential to promote brand preference in capital and product markets. This paper utilizes the case example of Apple Inc. to expound on the critical techniques of financial analysis used in the organization and its influence on the company's success. The discussion covers efficiency ratios, cash flow, a vertical and horizontal scan of the company to provide the necessary recommendations to the company and other users of the financial data.

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Overview of the Company

Apple Inc. is an American technology company which was founded in 1977. Since its formation, Apple has continued to generate in the global technology market by capturing the market through unique products and business strategies. Apple's co-founder, Steve Jobs, created a culture of focus on design and value creation approaches which has positioned Apple as a cult brand in the modern market (Market Watch, 2019). As of 2018, Apple was reported as the most valuable brand and company in the world. Apple offers a wide range of products and services such as the iPhone, iTunes, Apple Music, Apple TV, Apple Watch, Mac Computers, and iPods. The wide range of product lines has ensured steady profitability in Apple, and as of 2019, the company was named as the first US company to hit $1 trillion in stock capitalization. To gain an in-depth analysis of Apple's financial situation, this paper will use ratio analysis, cash-flow analysis and efficiency ratios.

Efficiency ratios

Evaluating the financial aspects of a business such as profitability, solvency, and liquidity is not a matter of the number of assets, liabilities or revenue sources that the company has. The assessment requires the use of proportions to compare and contrast the past, present and future state of the business. Efficiency ratio is an economic function used to assess the capacity of a company to utilize resources at its disposal for profitability growth of the market. The financial metrics help to develop the relationship between seemingly unrelated business activities. The ratios are also easy to calculate and present and thus can be improved on short notice based on the size and structure of an organization (Business Intelligence Insider, 2017).

One of the key financial ratios that Apple has primarily utilized in its economic structure is the total asset turnover ratio. The metric shows the number of sales generated for every asset in the business and thus indicates the ability of a company to use its resources to develop a substantial competitive advantage in the market. Apple's total asset turnover ratio rose from 0.65 in 2017 to 0.72 in the last quarter of 2018; a factor that indicates increasing effectiveness in the management of the organization's resource. Unlike the fixed asset analysis, this ration allows for evaluation of all assets owned by the company. The element is critical especially for a company operating in a volatile global environment such as Apple Inc. Apple's leadership uses the information drawn from the total asset turnover rate to assess the lines of product that are doing well in the market and the once that are flopping. The assessment also assists in evaluating the performance of Apple products in specific regional markets that the company serves. For instance, in 2019, Apple CEO announced decreasing sales of iPhone in China as indicated by a declining turnover rate in the market. This information has been crucial to identifying the contributing factors to declining profitability in the economy to help construct the relevant risk mitigation strategies (Chen & Ann, 2016). Based on market findings declining sales of the iPhone in China has mainly resulted from increased competition in the region. China is a fast-growing consumer market with viable indicators of success, and thus most technology companies have turned to the demand for investment. As a result, consumers enjoy a wide range of electronic products which greatly influence changing preferences and attitudes towards different commodities. Based on market research findings, Chinese customers who use Apple products are mainly motivated by the social status associated with the premium brand. However, typical consumers choose to buy moderately priced products from domestic companies since they execute quite similar functions and fit in their budget. Therefore, for Apple to realize maximum profitability in the market, the company will need to create approaches that increase the attractiveness of the brand to Chinese consumers. Such actions will help to boost Apple's turnover rate in the regional market and overall in the global consumer electronics market (Ximenez & Sanz, 2014).

Apple company also regularly engages in market research and development activities to develop new products and entry strategies into an emerging market. R&D processes aid in the integration of business strategies and objectives to promote continued survival and productivity in the market. The total asset ratio is a fundamental metric to evaluate the suitability of such investments to the company. The measurement assesses the ability of the assets acquired to promote the profitability of the business within the specified period. Investment in significant R&D activities has enhanced Apple's position in leading the market through innovation in new product designs and features (Haslam et al., 2013). Historically, Apple spent about 2-4 percent of its revenue in formulating and implementing market strategies that enhance profitability. However, in the past five years, the company's R&D takes up at least 4 to 6 percent of the total revenue of the organization. In explaining the rising cost to investors, CEO Tim Cook noted that Apple is focused on enhancing the product portfolio by prioritizing depth over breadth in market outputs. This means that although Apple manufactures more iPhones and iPods as of now, the company has retained its policy to focus on few but useful product lines. In 2016, Apple ranked behind powerful brands such as Google, Amazon, Alphabet, and Intel to become the ninth largest R&D spender at approximated $10 billion. The company is expected to record the most massive spending in 2019 having hit $14 billion at the end of the 2018 fiscal year (Market Watch, 2019). Apple's CFO Luca Maestri explained that this deliberate strategy would help to position the brand as a market trend and pacesetter to reduce the level of competition from other brands such as Samsung by increasing the financial efficiency ratios for Apple.

Cash flow analysis

Cash flow analysis is a useful tool in financial assessment which evaluates the cash payments and receipts that a company has received over a particular accounting period. The ending balances in the cash flow statement outline the usage of financial resources from the beginning of the fiscal year to indicate any discrepancies or causes of alarm to the business leadership. The processes mainly utilize financial information on expenditure in operating and investment activities and sources of capital financing for the entity. Unlike profit and loss statements which only indicate the differences in profitability, cash flows give a systematic review on the expenses that a company has incurred over time. This information is critical to support the future growth strategies of companies such as Apple by indicating the necessary changes in financial decision making (Larkin, 2018).

Based on stock analysis data, Apple reported $266 million in sales, $70 million in operating profit and $ 59 million in net incomes in 2018. At the end of the fiscal year, Apple indicated 20.79% and 26.69% in net and operating margins respectively. At the first quarter of 2019, Apple has earned $255 million in sales, $63 million operating income and $53 million in net income. The net margin was 20.79%, with 24.59 percent in operating margins of the company (Market Watch, 2019). These figures indicate an increasing expenditure and declining profitability for Apple in the global industry that it serves. In his public announcement, Tim expressed Apple's disappointment in decreasing sales especially in essential products like the iPhone which has continuously enhanced the profitability agendas of the business. However, Cook also noted that the figures show the strength of the brand to withstand challenging conditions in the volatile technology industry. He also reported that for once, Apple had hit 1.4 billion revenues in geographically segmented markets which indicates the growing market presence in overseas economies. The factor also shows the suitability of the company's marketing mix and R&D approaches in raising the desired level of consumer satisfaction. Although Apple still maintains a premium pricing approach to its products, the company enjoys great consumer loyalty. The company continues to grow its global clientele through massive investment in market promotions and value creation to give the buyers value for their money (Max, 2019).

Cash flow statements have also been critical in identifying the key areas of growth and progress that Apple needs to focus on enhancing. Despite the decline in iPhone sales, Apple earned at least 19% revenue in the services segment during the first quarter of 2019, indicating 2% increment from 2017. Apple services that have helped the company hit $1 trillion market cap in the evaluation include Apple Pay, Apple Store, the Mac Store, Apple Care, iTunes and Apple Music. These services have revolutionized the global entertainment industry resulting in over 330 million Apple and third-party subscribers to the services (Market Watch, 2019). The booming Apple service business has also increased the attractiveness of the brand to third-party subscribers. As of 2019, the company reported connections with at least 40, 000 subscribers who sell through the App Store. These subscriptions have helped to diversify the income sources of the company while reducing the number of business risks involved to earn. Apple has also signed several licensing agreements for the use of its services, an aspect that has generated cash inflow in the organization (Haslam, Tsitsianis, Ya& Andersson, 2013). For instance, Google pays Apple for the use of its search engine for Safari and Siri browsers in various Apple products. At the end of the financial year 2018, Google's paid at least $9 billion to Apple as traffic compensation fees. On its own, the agreement contributed to the total earnings in the service industry by at least 25%. These revenues almost translate to direct revenue to Apple since the company spends nearly zero costs to allow Google's operations and those of other third parties (Larkin, 2018).

Vertical and Horizontal financial analysis

Vertical analysis refers to a financial methodology in which each item in the financial statement is represented as a percentage of another item. This means that every component of the income statement is expressed as a ratio of gross sales while balance sheet items are compared against the total assets of a company. Vertical analysis is useful in communicating the...

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