Corporate Performance Evaluation

Evaluating the performance of the corporate sector of a company offers the right information with regards to whether to buy the company’s shares or not. People who invested in Amazon.com through bought its shares worth $ 1000 in 1977 at $ 2.5 each and are currently valued at over $ 31, 000 (Brechner, 2012). This is stock-picking appeal whereby investing in the right company was the most important consideration. On the other hand, stock trading is one of the most volatile sectors of the economy, and a bad decision is likely to result in massive losses. For instance, another investor who bought Amazon shares in 1999, at $ 105 per share can currently sell them at $ 78 per share. The underlying notion is that the stock market is a tricky venture. Mathematically, it is almost impossible for investors to beat the market collectively. The balance sheet is a vital point of analysis for buying a company’s shares because it reflects what it owns and owes others. According to this report, it is notable that Apple is a high performing stock and should be considered as one of the best stocks to invest on.

Apple Company was established in 1976 by Steve Jobs and Wozniak Steve as a computer manufacturing company (Brechner, 2012). In the past four decades, approximately, the firm has undergone rapid growth that has expanded it into a very complicated organization dealing in a variety of gadgets. For instance, in 2001, it launched the iPod that recorded massive sales. According to market analysts, the invention took the company to another corporate level. Other products that it designed and created include the iPhone, iTunes, desktop computers, the Mac laptop, and their own operating system called the OS X. Over the years, it grew to become one of the most notable technology brands thanks to its centric (design) approach to software and hardware. The desktop computers and Mac laptops attract a huge popularity, just as the mobile phones. The iPhone, the iPod, and the iPad are all influential market leaders in their respective domains (Brechner, 2012). The organization also has an online shop known as the iTunes Store. It is acclaimed as the world’s greatest music retailer aside from availing a wide variety of apps and videos. Other online openings include the iWork and iLife (Rich, 2012). They contain a dozen applications that provide useful tools, such as drivers, for consumers of the OS X.

Financial Statement Review

Income Statement

The income statement and statement of financial position are crucial in understanding the current financial position of Apple. While the former provides investors, creditors, and analysts with information concerning an organization’s resources, the latter captures information pertaining to the fiscal results of an organization’s business activities over a specific period, as well as the expenditure it incurred in the process of acquiring the revenue. According to the various financial statements of the company, Apple is considered one of the most profitable companies in the current world of technological advancements. Over the years, it has grown its revenues from $ 170.9 billion to $ 182.8 billion. Most notably, the firm reduced the portion of sales meant for cost of goods availed to the market from  62.38% to 61.41%. The driver led to a line expansion from $ 37.0 billion to $ 39.5 billion (Rich, 2012).

According to the previous income statements of Apple, the net sales steadily grew within 5 years. In 2010, net sales reached $ 65, 225 million, $ 108, 249 million in 2011, $ 156, 508 million in 2012, $ 170, 910 million in 2013, and $ 182, 795 million in the last financial year. The cost of sales also rose from $ 39, 541 million in the year 2010 to $ 112, 258 million in 2014. Consequently, the company’s net income reflected the good performance of the company. In 2010, the figure fell at $ 14, 013 million, $ 25, 992 million in 2011, $ 41, 733 million in 2012, $ 37, 037 million in 2013, and $ 39, 510 million in 2012. The slight fall in the last two years is attributed to the rising cost of doing business because of unpredictable international oil prices and increased regulations by the government.

Going by the above analysis, the next fiscal year is expected to bring good tidings for the investors of Apple Inc. The executive board intends to experience a 10% growth rate in sales and Cost of Goods sold, and this is likely to present a significant impact in the firm’s income statement and balance sheet. The move is likely to lead in revenue growth because of increased sales as a result of the additional products (10% rise in sales). On the other hand, consumers are likely to encounter price increases because of the rise in the cost of goods released to the market, because of the corresponding rise in total operating expenditure

Statement of Financial Position

Through a look at the statement of financial position investors are able to analyze the stockholders’ equity, and liabilities, thus judge for themselves how the organization is currently performing (Rich, 2012). According to such data, the future earning capacity of Apple Inc. is lucrative as showed by the consistent growth of the company’s current assets. Assets are considered resources that are under the direct control of the business centered on past events and actions, and from which there are future benefits on the offing. In 2011, the value of the current assets was $ 44, 988 million, in 2012 it was $ 57, 653 million, in 2013 it fell at $ 73, 286 million, and in 2014, and the current assets were valued at $68, 531 million.

Financial Leverage Ratio

            The financial leverage ratio model can be used to examine how organizations employ a combination of debt and owner’s equity to finance their activities (Lumsden, 2012). A leverage ratio measures the capacity of debt inflows into an organization, as well as its ability to meet its financial responsibilities. Through the analysis of Apple Company’s debt structure, the value of the company’s equity can be determined. The shareholders relative to the creditors control the comparison of the debt structure and equity or asset System comprises an analytical framework that focuses on the three main critical elements. When the majority of the assets are under the influence of creditors, then the company is highly leveraged. The most common form of leverage ratio is the debt ratio.

Debt ratio= total debts ÷ total assets

In the last fiscal year, Apple Company’s balance sheet reveals that it had a total debt of $ 120, 292, 000 and total assets of $ 231, 839, 000. Consequently the debt ratio is calculated as

120, 292, 000 ÷ 231, 839, 000 = 0.5

The leverage ratio for Apple firm in the last fiscal year was 0.5 or 50%. A ratio that is above the 1 suggests that the organization’s assets are in the direct control of creditors. In other words, the worth of the company’s total liabilities exceeds the value of the total assets. The outcome suggests that for every unit dollar of Apple Company’s assets, it had $ 0.5 of debt. As such, it is financially stable because the majority of the influence comes from the proprietors of the organization and not the creditors (Rich, 2012).

The Interest Coverage ratio is another crucial leverage ratio that is used to assess the financial stability of a company, both in the short term and long term. If Apple borrowed some funds from an external source, it is most likely that it there were some interest charges tied to it. It is because loans are not free, since they attract some opportunity cost to the loaned party (Lumsden, 2012). The model of interest coverage assesses the ability of a firm to meet its interest payments from the income earned during its investment activities. A higher interest coverage means that Apple is able to meet its financial commitments,  whereas interest coverages that are equal to or less that one suggests that the company is experiencing serious obstacles that prevent it from financing its debts.

Interest coverage = Operating Income ÷ Interest Expense

According to Apple Inc. income statement for the fiscal year 2014, the operating income was recorded at $ 52, 503, 000 while the interest expenditure was recorded at $ 0, meaning that the company did not borrow funds from an external source during the fiscal year. In this sense, the interest coverage falls at 0, showing that the organization is sound enough to meet its obligations (Rich, 2012).

Profitability Ratios

Profitability ratios show how good a business is at running its businesses.  It helps to suggest whether the company is making progress or getting worse. The most commonly used profitability ratio is the Gross Margin. It is the difference between an organization’s sales of products and services and what is obligated to pay to provide them. It is calculated as

Gross Margin = Gross Profit ÷ Sales

$ 93.11 billion ÷ $ 182.9 billion = 0.5.

A higher gross margin suggests that the company charges a higher premium for its products and services (Lumsden, 2012). Apple Company’s gross margin is not so high, and it means that it does not charge relatively high prices for its technological products (Rich, 2012). However, it should be noted that the company charges the highest prices in most of its product categories. It is probable that the cost of the company’s operations is very high and hence lowering the gross margin.

The operating margin is also another profitability ratio used to assess the soundness of a company. It captures the extent of a company’s gains and losses with respect to its day to day activities. It is calculated as

Operating Margin = Operating Income ÷ Sales

Apple’s operating income for the year 2014 was recorded as at $ 52, 503, 000 while its sales for the same year fell at $ 182.9 billion. Thus, the operating margin is 0.2.

Return on Equity

The return on equity refers to one of the firm’s most important indicators with regards to its profitability and growth. A high return on equity for a specific firm with a low debt level have the potential to expand its production capacity without encountering high expenditures, such that the management can withdraw funds and re-invest it elsewhere. When using the Dupont Model, there are three elements in the determining of the return on equity (Brechner, 2012). They include the net margin of profit, the equity multiplier, and the asset turnover.

Net Profit Margin

            This is the after-tax revenue generated for each dollar revenue.

The net profit margin = Net Income ÷ Revenue

According to Apple’s 2014 financial statement, the net income was $ 14.1 billion and total revenue $182. 9 billion, consequently, the net profit margin is calculated as 0.07. A higher net profit margin is to be preferred, but the management should maintain a lower profit margin to increase the sales levels of the company’s goods and services. The gross margin for Apple is relatively higher, and it presents financial risks for the organization.

The second phase is asset turnover, which analyzes how effectively an organization coverts sales into assets. It is calculated as

Asset Turnover = Revenue ÷ Assets

$ 182.9 ÷ 231.84 = 0.7

It is inversely proportional to the net profit margin, such that when one parameter is high, the other is low.

Equity Multiplier

Equity Multiplier is the third level of the Dupost approach. It measures the portion os equity that is resulted by the marginal investment sourced from external sources. In other words, the value is used to determine the effectiveness of loans (Brechner, 2012).

Equity Multiplier = Assets ÷ Shareholders’ Equity.

$231.84 billion ÷ 111.5 billion = 2.08.

In order to determine the Return on Equity, the three elements of the DuPont model are multiplied.

0.7 * 0.07 *2.08 = 0.102 or 10. 2%

A 10.2 % return on equity is relatively good, considering the highly competitive environment that Apple is operating in. since it is a debt free organization, its Return on Equity is likely to increase. As such, the company is lucrative in terms of investing capital. For fiscal year 2015, the 10.2% return on equity was because of sales and profit margins.

Economic Value Added

To determine the worthiness of Apple’s stocks, it is vital to calculate its EVA through deducting capital cost (COC) from operating profits after taxes (NOPAT) using the formulae

EVA = NOPAT – COC, which is $ 43, 492, 000 – 39, 961, 000 = 3, 531, 000. It means that the capital invested attracted a profit of $ 3, 351, 000 in the last financial year.

Conclusion

According to the above quantitative analysis of the corporate performance of Apple, investors should consider purchasing the company’s stocks because of its superior financial structure.  Going by its steady growth over the years, coupled by a positive ROE (in the last financial year), the board intends to deal with the increasing cost of goods in order to maximize on the EVA, because of its potential of helping the firm expand  its investments (Rich, 2012). In this light, it is rational to state that Apple Company’s stock is lucrative because its capital shows a great potential of creating positive value even in turbulent economic times.

References

Top of Form

Bottom of Form

Top of Form

Bottom of Form

Top of Form

Bottom of Form

Top of Form

Bottom of Form

Top of Form

Brechner, R. A. (2012). Contemporary mathematics for business and consumers. Australia: South-Westen/Cengage Learning.

CompleNet (Workshop), & Costa, L. F. (2011). Complex Networks: Second International Workshop, Complenet 2010, Rio De Janeiro, Brazil, October 13-15, 2010, Revised Selected Papers. Heidelberg: Springer.

Karsnitz, J. R., O’Brien, S., & Hutchinson, J. P. (2013). Engineering Design: An introduction. Clifton Park, N.Y: Delmar.

Lumsden, J. (2012). Social And Organizational Impacts Of Emerging Mobile Devices: Evaluating use. Hershey, PA: Information Science Reference.

Rich, J. S. (2012). Cornerstones of Financial & Managerial Accounting. Mason, OH: South-Western/Cengage Learning.

Bottom of Form