Financial Ratio of Apple and Samsung

Introduction

In this report, two competitor firms have been selected for review and analysis of their financial performance in the last three years (2015, 2016, and 2017). These companies are Apple Inc. (Apple) and Samsung Electronics Co. Ltd. (Samsung). Both companies hold a significant share of the electronics market specializing in computer and multimedia devices. Apple is a US-based company, whereas Samsung is Korea-based. Both companies compete in the highly competitive electronics industry. Both Apple and Samsung face significant risks of a substantial investment in research and development. The primary factor for the growth of these companies is the rising demand for hand-held electronic products, including smartphones.

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The current report carries out a financial ratio analysis of both Apple and Samsung to evaluate and compare their financial performance in the last three years. It includes the calculation of financial ratios under four categories, including liquidity, efficiency, financial leverage, and profitability ratios. The weakness of this analysis is that the fiscal year-end of both companies does not match.

Company Profile of Apple and Samsung

Apple

Apple is a leading US-based company which has its headquarter in Cupertino, CA. Steve Jobs set up this company in 1976. The company mainly sells consumer electronic items, including smartphones, computers, and tablets, etc. Furthermore, it has a well-established division involved in software development. The company enjoys strong brand recognition and loyalty and is listed among the top companies globally based on its market capitalization. The total revenue of Apple was $229.23 billion in 2017 (Apple Inc.). The financial statements of Apple for the last three years are provided in Appendix A.

Samsung

Samsung is a direct competitor of Apple and is located in Seoul, South Korea. It was established in 1938 by Lee Byung-Chul. The company not only manufactures products that are similar to Apple but also produces chemicals, automotive, and home appliances. Its total revenue was $211.81 billion in 2017 (Samsung). The financial statements of Samsung for the last three years are provided in Appendix B.

Trend Analysis

Appendix C provides key performance indicators of both Apple and Samsung. It is noted that Samsung’s financial performance excelled as its operating cash flow grew by 31.18% in 2017 (Samsung) as opposed to Apple, which reported negative growth of 3.38% (Apple Inc.). Although the cash position of Apple remained strong, Samsung surpassed its competitor. However, it did not manage its inventory efficiently as compared to Apple.

The primary reason for the increase in its inventory was the failure of one of its smartphone models in 2017, which resulted in the product recall. Both companies invested significantly in research and development in the last three years. Moreover, it could be noted that Samsung almost doubled its investment in the previous year as competitive forces played a crucial role, and less popular brands gained a higher market share in developing countries. On the other hand, Apple faced challenges relating to the increasing costs of developing new and improved technologies for its products in 2017 and also its inability to meet customer expectations resulted in negative growth of sales in 2016 (Apple Inc.).

Liquidity

It is crucial for a business to maintain sufficient liquidity to keep its business operating and fulfil its current obligations. In this report, three critical ratios, including current, quick, and cash ratios, are calculated, and their values are provided in table 2 (see fig. 1).

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Table 2. Liquidity Ratios of Apple and Samsung.

Liquidity Ratios Samsung Apple
2017 2016 2015 2017 2016 2015
Current Ratio Current Assets / Current Liabilities 2.19 2.59 2.47 1.28 1.35 1.11
Current Assets 129,949,219 125,039,948 107,614,287 128,645 106,869 89,378
Current Liabilities 59,390,443 48,364,643 43,543,216 100,814 79,006 80,610
Quick Ratio Current Assets-Inventories / Current Liabilities 1.82 2.25 2.10 1.23 1.33 1.08
Current Assets 129,949,219 125,039,948 107,614,287 128,645 106,869 89,378
Inventories 22,088,128 16,226,585 16,219,383 4,855 2,132 2,349
Current Liabilities 59,390,443 48,364,643 43,543,216 100,814 79,006 80,610
Cash Ratio Cash / Current Liabilities 0.45 0.59 0.45 0.20 0.26 0.26
Cash 27,005,370 28,390,168 19,517,225 20,289 20,484 21,120
Current Liabilities 59,390,443 48,364,643 43,543,216 100,814 79,006 80,610
Liquidity ratios.
Figure 1. Liquidity ratios.

Current Ratio

It could be noted that the values of the current ratio of both companies declined in the last year. Moreover, its value remained more than one, which is the benchmark value. It is observed that the current liabilities of Apple increased in the previous three years due to high short-term borrowing and an increase in its current liabilities (Apple Inc.). On the other hand, Samsung reported current assets, which were more than two times its current liabilities. However, the increase in its current liabilities, including trade payables, was more than current assets (Samsung).

Quick Ratio

The values of the quick ratio also followed a similar declining trend. However, the quick ratio values of both companies were also above one in the last three years. Furthermore, it is clear that Samsung held more inventories than Apple. It could be stated that the company’s short-term strategies to increase sales and control its inventory did not work effectively (Samsung). On the other hand, Apple’s inventory almost doubled in the last three years, but its proportion to the current assets remained low (Apple Inc.). It was reported that increasing inventory was a major concern for the management.

Cash Ratio

The cash ratio values of Samsung were higher than Apple. The analysis shows that both companies had a strong cash position and were unlikely to face any financial problem, which is a crucial aspect of business efficiency. The reason was that Samsung’s cash position improved significantly in the last three years due to its strong position in the developing markets (Burris). The company benefited from the low cost of sales. On the other hand, Apple reported a decline in its operating cash flow.

Efficiency

It is crucial for all businesses to achieve operational efficiency by managing their working capital and other assets efficiently. It helps them to control their costs and expenses and attain a competitive advantage. Seven efficiency ratios are calculated in this report, and their values are provided in table 3 (see fig. 2).

Table 3. Efficiency Ratios of Apple and Samsung.

Efficiency Ratios Samsung Apple
2017 2016 2015 2017 2016 2015
Asset Turnover Sales / Assets 0.79 0.77 0.83 0.61 0.67 0.80
Sales 211,811,887 178,473,168 173,001,874 229,234 215,639 233,715
Assets 266,783,176 231,791,928 208,805,303 375,319 321,686 290,345
Inventory Turnover Cost of Sales / Inventory 5.18 6.55 6.56 29.05 61.62 59.64
Cost of Sales 114,307,653 106,339,183 106,465,323 141,048 131,376 140,089
Inventory 22,088,128 16,226,585 16,219,383 4,855 2,132 2,349
Inventory Days 365 / Inventory Turnover 70.5 55.7 55.6 12.6 5.9 6.1
Inventory Turnover 5.18 6.55 6.56 29.05 61.62 59.64
Accounts Payable Turnover Cost of Sales / Accounts Payable 14.23 18.55 19.96 2.88 3.52 3.95
Cost of Sales 114,307,653 106,339,183 106,465,323 141,048 131,376 140,089
Accounts Payable 8,031,207 5,733,512 5,334,634 49,049 37,294 35,490
Payable Days 365 / Accounts Payable Turnover 25.6 19.7 18.3 126.9 103.6 92.5
Accounts Payable Turnover 14.23 18.55 19.96 2.88 3.52 3.95
Accounts Receivable Turnover Sales / Accounts Receivable 8.65 8.31 7.97 12.82 13.69 13.87
Sales 211,811,887 178,473,168 173,001,874 229,234 215,639 233,715
Accounts Receivable 24,486,410 21,465,585 21,699,677 17,874 15,754 16,849
Receivable Days 365 / Accounts Receivable Turnover 42.2 43.9 45.8 28.5 26.7 26.3
Accounts Receivable Turnover 8.65 8.31 7.97 12.82 13.69 13.87
Efficiency ratios.
Figure 2. Efficiency ratios.

Asset Turnover

The asset turnover of Apple declined in the last three years. The main reason for this change was the company’s substantial investments in acquiring other businesses and assets to achieve greater control and efficiency across its supply chain (Apple Inc.). On the other, Samsung sold its non-performing assets and acquired new assets that were expected to generate a higher return in the coming periods. The management decided to invest in both current and non-current assets to enhance its research and development and develop new technologies (Samsung).

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Inventory Turnover and Days in Inventory

Apple was highly efficient in terms of its inventory management during the last three years as it was able to convert its inventory into sales quickly. It is noted that its inventory turnover declined significantly in that period as it faced the rising cost of sales and slow inventory movement (Apple Inc.). On the other hand, it is observed that the inventory turnover of Samsung remained low in the last three years. It was due to its inability to make quick sales. Moreover, the company’s strategy was to buy large quantities of supplies to keep its product prices low. It faced significant business problems in 2017 as one of its smartphone models had battery issues, and all sales were recalled (Samsung). The company took almost 70 days to convert its inventory into sales, which was a much more extended period than Apple.

Accounts Receivable Turnover and Days Receivable Outstanding

When both companies are compared, it could be indicated that Apple had higher accounts receivable turnover and a low number of days receivable outstanding (Apple Inc.). However, it is noted that the values of these ratios of Samsung improved in the last three years. The primary reason for the improvement in the company’s sales was its effective sales and marketing strategies. The customers were able to take advantage of pre-launch sales at low prices by paying for its products in cash (Samsung).

Accounts Payable Turnover and Days Payable Outstanding

The value of the accounts payable turnover of Samsung was higher than Apple. Although both companies reported a decline in the value of this ratio during the last three years, it is noted that Apple had a significant increase in its accounts payable. The reason was its effective working capital management strategies as the company maintained its strong cash position. Apple took 126 days to settle its supplier accounts (Apple Inc.), whereas Samsung only took 26 days (Samsung). It also implied that Apple had better-negotiated contracts with its suppliers, who gave it a more extended credit facility.

Financial Leverage

Companies manage their capital structure according to their needs for funding different business operations and investments. It is crucial for them to ensure long-term solvency to safeguard shareholders’ interest. In this report, three solvency ratios, including debt ratio, interest coverage ratio, and cash coverage ratio given in table 4 (see fig. 3).

Table 4. Financial Leverage Ratios of Samsung and Apple.

Financial LeverageRatios Samsung Apple
2017 2016 2015 2017 2016 2015
Debt Ratio Total Liabilities / Total Assets 0.29 0.26 0.26 0.64 0.60 0.59
Total Liabilities 77,148,352 61,190,655 54,421,329 241,272 193,437 170,990
Total Assets 266,783,176 231,791,928 208,805,303 375,319 321,686 290,345
Interest Coverage Ratio EBIT/Interest Expense 6.17 2.67 0.49 26.41 44.53 55.43
EBIT 49,013,047 25,251,740 4,251,674 61,344 60,024 71,230
Interest Expense 7,938,380 9,465,864 8,649,315 2,323 1,348 1,285
Cash Coverage Ratio EBIT + Depreciation / Interest Expense 8.77 4.71 2.76 30.93 52.32 64.19
EBIT + Depreciation 69,606,663 44,564,260 23,914,215 71,849 70,529 82,487
Interest Expense 7,938,380 9,465,864 8,649,315 2,323 1,348 1,285
Financial leverage ratios.
Figure 3. Financial leverage ratios.

Debt Ratio

The values of the debt to equity ratio of Apple remained high in the last three years. It implied that the management took advantage of high debt to receive a tax benefit from the interest payment deduction. The high debt ratio of Apple means that the shareholders’ interest was diluted as the company faced a higher risk associated with the external debt. The management report of Samsung indicated that the company financed its new projects by borrowing externally. These projects were aimed at increasing its profitability and sustainability (Samsung).

Cash Coverage Ratio

The values of the cash coverage ratio of Apple were much higher than Samsung. It is also noted that its value declined significantly in 2017. The main reason is the high borrowing by Apple, which results in high interest expense. Furthermore, it is noted that the company’s earnings before interest and tax declined by almost 13% since 2015 (Apple). On the other hand, the value of the cash coverage ratio of Samsung improved during the last three years. The company managed to secure borrowing at low-interest rates. Moreover, its operating income increased by almost 300% as opposed to Apple.

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Interest Coverage Ratio

The interest coverage of Apple reduced during the last three years, whereas Samsung considerably improved its position. In 2015, Samsung did not generate low operating income but had improved its earnings significantly in the previous two years. On the other hand, Apple did not have any problems, but its declining operating profit suggests that shareholders should be concerned about the company’s strategy and increasing product prices.

Profitability

The primary objective of a company is to generate income for distribution to its shareholders. In this report, three key profitability ratios, including net profit margin, return on equity, and return on assets, have been calculated, and their values are provided in table 5 (see fig. 4).

Table 5. Profitability Ratios of Apple and Samsung.

Profitability Ratios Samsung Apple
2017 2016 2015 2017 2016 2015
Return on Equity Net Profit / Total Equity * 100 19.7% 11.8% 10.6% 36.1% 35.6% 44.7%
Net Profit 37,297,884 20,092,451 16,433,508 48,351 45,687 53,394
Total Equity 189,634,824 170,601,273 154,383,974 134,047 128,249 119,355
Net Profit Margin Net Profit/Total Sales * 100 17.6% 11.3% 9.5% 21.1% 21.2% 22.8%
Net Profit 37,297,884 20,092,451 16,433,508 48,351 45,687 53,394
Total Sales 211,811,887 178,473,168 173,001,874 229,234 215,639 233,715
Return on Assets Net Profit / Total Assets * 100 14.0% 8.7% 7.9% 12.9% 14.2% 18.4%
Net Profit 37,297,884 20,092,451 16,433,508 48,351 45,687 53,394
Total Assets 266,783,176 231,791,928 208,805,303 375,319 321,686 290,345
Profitability ratios.
Figure 4. Profitability ratios.

Return on Equity

Apple generated a higher return on shareholders’ equity in the last three years as compared to Samsung. However, its net profit declined by 9.44% in the previous three years. There was a significant improvement in the net profit of Samsung in that period, and its total equity increased because of the increase in its retained earnings. It raises a concern whether the company was using its internal capital effectively or not. The cost-effective strategies of the company contributed to the growth in its earnings (Samsung).

Net Profit Margin Ratio

The net profit margin for Samsung increased from 9.5% in 2015 to 17.6% in 2017. On the other hand, the ratio value of Apple slightly reduced in the same period. The increase in revenue of Samsung and its low-cost strategy helped it to earn a higher profit margin (Samsung).

Return on Assets

The Return on Assets of Apple declined in 2017, whereas Samsung reported an increase in its value. It means that Samsung was more efficient to use its assets for generating higher income as compared to Apple.

Conclusion and Recommendations

It could be concluded that Apple excelled in the last three years. There were areas of concern indicated in this report as the company suffers from a decline in the demand for its expensive products. However, its financials remained strong, and it is expected to grow in 2018 with its new products. On the other hand, Samsung continues to control the majority of the electronics market. Its profitability has improved significantly over the last three years. It is concluded that the company needs to work on its business management and product strategies to challenge Apple in the developed markets. Based on the analysis provided in this report, it is recommended that investors should buy shares of Apple to receive regular dividends and achieve a capital gain.

Appendix A – Samsung Financial Statements

Samsung Financial Statements

Samsung Financial Statements

Samsung Financial Statements

Samsung Financial Statements

Samsung Financial Statements

Samsung Financial Statements

Samsung Financial Statements

Appendix B – Apple Financial Statements

Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except the number of shares which are reflected in thousands and per
share amounts)
Years ended
September 29, September 30, September 24,
2018 2017 2016
Net sales $265,595 $229,234 $215,639
Cost of sales 163,756 141,048 131,376
Gross margin 101,839 88,186 84,263
Operating expenses:
Research and development 14,236 11,581 10,045
Selling, general and administrative 16,705 15,261 14,194
Total operating expenses 30,941 26,842 24,239
Operating income 70,898 61,344 60,024
Other income/(expense), net 2,005 2,745 1,348
Income before provision for income taxes 72,903 64,089 61,372
Provision for income taxes 13,372 15,738 15,685
Net income $59,531 $48,351 $45,687
Earnings per share:
Basic $12.01 $9.27 $8.35
Diluted $11.91 $9.21 $8.31
Shares used in computing earnings per share:
Basic 4,955,377 5,217,242 5,470,820
Diluted 5,000,109 5,251,692 5,500,281
Apple Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except the number of shares which are reflected in thousands and par
value)
September 29, September 30,
2018 2017
ASSETS:
Current assets:
Cash and cash equivalents $25,913 $20,289
Marketable securities 40,388 53,892
Accounts receivable, net 23,186 17,874
Inventories 3,956 4,855
Vendor non-trade receivables 25,809 17,799
Other current assets 12,087 13,936
Total current assets 131,339 128,645
Non-current assets:
Marketable securities 170,799 194,714
Property, plant and equipment, net 41,304 33,783
Other non-current assets 22,283 18,177
Total non-current assets 234,386 246,674
Total assets $365,725 $375,319
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable $55,888 $44,242
Other current liabilities 32,687 30,551
Deferred revenue 7,543 7,548
Commercial paper 11,964 11,977
Term debt 8,784 6,496
Total current liabilities 116,866 100,814
Non-current liabilities:
Deferred revenue 2,797 2,836
Term debt 93,735 97,207
Other non-current liabilities 45,180 40,415
Total non-current liabilities 141,712 140,458
Total liabilities 258,578 241,272
Commitments and contingencies
Shareholders’ equity:
Common stock and additional paid-in capital, $0.00001
par value: 12,600,000 shares authorized; 4,754,986 and
5,126,201 shares issued and outstanding, respectively 40,201 35,867
Retained earnings 70,400 98,330
Accumulated other comprehensive income/(loss) (3,454) (150)
Total shareholders’ equity 107,147 134,047
Total liabilities and shareholders’ equity $365,725 $375,319
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except the number of shares which are reflected in thousands and per
share amounts)
Common Stock and Accumulated Other
Additional Paid-In Capital Retained Comprehensive Total Shareholders’
Shares Amount Earnings Income/(Loss) Equity
Balances as of September 26,
2015 5,578,753 $27,416 $92,284 $(345) $119,355
Net income 45,687 45,687
Other comprehensive
income/(loss) 979 979
Dividends and dividend
equivalents declared at
$2.18 per share or RSU (12,188) (12,188)
Repurchase of common stock (279,609) (29,000) (29,000)
Share-based compensation 4,262 4,262
Common stock issued, net of
shares withheld for employee
taxes 37,022 (806) (419) (1,225)
Tax benefit from equity
awards, including transfer
pricing adjustments 379 379
Balances as of September 24,
2016 5,336,166 31,251 96,364 634 128,249
Net income 48,351 48,351
Other comprehensive
income/(loss) (784) (784)
Dividends and dividend
equivalents declared at
$2.40 per share or RSU (12,803) (12,803)
Repurchase of common stock (246,496) (33,001) (33,001)
Share-based compensation 4,909 4,909
Common stock issued, net of
shares withheld for employee
taxes 36,531 (913) (581) (1,494)
Tax benefit from equity
awards, including transfer
pricing adjustments 620 620
Balances as of September 30,
2017 5,126,201 35,867 98,330 (150) 134,047
Cumulative effect of change
in accounting principle 278 (278)
Net income 59,531 59,531
Other comprehensive
income/(loss) (3,026) (3,026)
Dividends and dividend
equivalents declared at
$2.72 per share or RSU (13,735) (13,735)
Repurchase of common stock (405,549) (73,056) (73,056)
Share-based compensation 5,443 5,443
Common stock issued, net of
shares withheld for employee
taxes 34,334 (1,109) (948) (2,057)
Balances as of September 29,
2018 4,754,986 $40,201 $70,400 $(3,454) $107,147
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years ended
September 29, September 30, September 24,
2018 2017 2016
Cash and cash equivalents, beginning of the
year $20,289 $20,484 $21,120
Operating activities:
Net income 59,531 48,351 45,687
Adjustments to reconcile net income to cash
generated by operating activities:
Depreciation and amortization 10,903 10,157 10,505
Share-based compensation expense 5,340 4,840 4,210
Deferred income tax expense/(benefit) (32,590) 5,966 4,938
Other (444) (166) 486
Changes in operating assets and liabilities:
Accounts receivable, net (5,322) (2,093) 527
Inventories 828 (2,723) 217
Vendor non-trade receivables (8,010) (4,254) (51)
Other current and non-current assets (423) (5,318) 1,055
Accounts payable 9,175 8,966 2,117
Deferred revenue (44) (626) (1,554)
Other current and non-current liabilities 38,490 1,125 (1,906)
Cash generated by operating activities 77,434 64,225 66,231
Investing activities:
Purchases of marketable securities (71,356) (159,486) (142,428)
Proceeds from maturities of marketable
securities 55,881 31,775 21,258
Proceeds from sales of marketable securities 47,838 94,564 90,536
Payments for acquisition of property, plant and
equipment (13,313) (12,451) (12,734)
Payments made in connection with business
acquisitions, net (721) (329) (297)
Purchases of non-marketable securities (1,871) (521) (1,388)
Proceeds from non-marketable securities 353 126
Other (745) (124) (924)
Cash generated by/ (used in) investing
activities 16,066 (46,446) (45,977)
Financing activities:
Proceeds from issuance of common stock 669 555 495
Payments for taxes related to net share
settlement of equity awards (2,527) (1,874) (1,570)
Payments for dividends and dividend equivalents (13,712) (12,769) (12,150)
Repurchases of common stock (72,738) (32,900) (29,722)
Proceeds from issuance of term debt, net 6,969 28,662 24,954
Repayments of term debt (6,500) (3,500) (2,500)
Change in commercial paper, net (37) 3,852 (397)
Cash used in financing activities (87,876) (17,974) (20,890)
Increase/(Decrease) in cash and cash
equivalents 5,624 (195) (636)
Cash and cash equivalents, end of the year $25,913 $20,289 $20,484
Supplemental cash flow disclosure:
Cash paid for income taxes, net $10,417 $11,591 $10,444
Cash paid for interest $3,022 $2,092 $1,316

Appendix C – Key Performance Indicators

Samsung Apple Inc.
2017 Change % 2016 Change % 2015 2017 Change % 2016 Change % 2015
Current Assets 129,949,219 3.93% 125,039,948 16.19% 107,614,287 128,645 20.38% 106,869 19.57% 89,378
Total Assets 266,783,176 15.10% 231,791,928 11.01% 208,805,303 375,319 16.67% 321,686 10.79% 290,345
Current Liabilities 59,390,443 22.80% 48,364,643 11.07% 43,543,216 100,814 27.60% 79,006 -1.99% 80,610
Total Liabilities 77,148,352 26.08% 61,190,655 12.44% 54,421,329 241,272 24.73% 193,437 13.13% 170,990
Total Equity 189,634,824 11.16% 170,601,273 10.50% 154,383,974 134,047 4.52% 128,249 7.45% 119,355
Sales 211,811,887 18.68% 178,473,168 3.16% 173,001,874 229,234 6.30% 215,639 -7.73% 233,715
Operating Income 47,428,316 88.12% 25,211,080 10.70% 22,773,465 61,344 2.20% 60,024 -15.73% 71,230
Net Income 37,297,884 85.63% 20,092,451 22.27% 16,433,508 48,351 5.83% 45,687 -14.43% 53,394
Operating Cash Flow 54,958,316 31.18% 41,894,300 21.29% 34,540,939 63,598 -3.38% 65,824 -19.00% 81,266
Investing Cash Flow (43,662,149) 66.51% (26,221,643) 11.94% (23,423,855) (46,446) 1.02% (45,977) -18.30% (56,274)
Financing Cash Flow (11,105,235) 44.89% (7,664,837) 35.24% (5,667,628) (17,347) -15.31% (20,483) 15.62% (17,716)

Works Cited

Apple Inc. “Apple Inc. Annual 10K Report 2017.” Apple. Web.

Burris, Matthew. “The History of Samsung (1938-Present).LifeWire, 2018. Web.

Samsung. “Samsung Annual Report 2017.” Samsung, 2017. Web.

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