The purpose of this financial research report is to evaluate financial records of a given company for investment purposes. Credit analysts and investors must evaluate financial statements and general sentiments about the company to determine its financial health. Consequently, the decision to invest or lend can therefore be made wisely. The report will cover the profile of investors, any five financial ratios, the risk level of the company from an investor’s point of view and then provide recommendations on investment decisions. The company chosen for this financial research report is Apple, Inc.
Apple, Inc. designs, makes and markets mobile communication devices, computers, digital music players and sells other various related software and peripheral pieces of hardware components, services and networking solutions alongside third party products and services (Apple, Inc., 2013). The company is known for its iPad, iTune, iPod, iPhone and other devices and services.
A rationale for the U.S. publicly traded company selected and the significant factors driving the decision
Apple, Inc. was selected as the US publicly traded company for several reasons. First, the company was recently declared the most valuable and largest company globally based on its market capitalization. It is therefore important for investors to understand what such a declaration means. Second, the company’s ability to create wealth has been evident since it embarked on a release of revolutionary products. In addition, the technology industry has continued to grow rapidly with fierce competition driving innovation and competitive abilities.
As previously mentioned, Apple, Inc. is the largest company by market capitalization and the most valuable technology company. As a result, many analysts have noted that such a capitalization is larger than economies (based on gross domestic product) of several countries globally. These suggestions show that the company is enormously valuable. As one performs critical financial analysis of the company’s figures, investors may become interested when they gain deeper insights about the company ratios.
In terms of revenues, the company achieved a record high of $182,795 million dollars in net sales in the fiscal year 2014. The company’s net profits have risen steadily in the recent past. For the fiscal year 2014, for instance, the company had over $44.5 billion in net profits, while its cash reverses increased to $178 billion during the same fiscal year. The company’s cash balance could be good for future investments and acquisition to strengthen its market position.
The company’s new products such as the iWatch, software and other existing products, accessories and services are expected to generate more revenues and returns for investors.
These factors work together to create huge revenues and profits for the company, and it is most likely to continue on the bullish trend on the stock for several coming years.
The profile of the investor for which this company may be a fit, relative to that potential investor’s investment strategy
The investor profile is based on personality evaluation that was developed to assist investors to comprehend their natural internal traits, which can both enhance and inhibit financial investment. Generally, investors should be motivated, committed, confident, self-driven, reasonable and emotional. These qualities influence investment decision and therefore success.
In this regard, Apple, Inc. investors should be growth investors. These investors should possess extensive knowledge about the company, various investment options and should display a modest to high-risk investment appetite. Apple, Inc. investors should invest with the long-term objectives in order to get consistently high growth returns on their investments. These investors must understand the need to build a reliable financial portfolio based on diversification. In addition, a risk-return ratio should support their risk appetite.
For instance, in 2013, the CEO, Tim Cook noted that that the company was not going to release a new product until the fall of that year. To some investors, this was a small negative sentiment that was followed by immediate fall in stocks. Investors had lost faith and believed that rival firms were overtaking Apple, Inc. This implies that such investors were too focused on short-term returns because they feared that the company would not introduce any new products. Consequently, they believed that the company would disappoint them.
Contrary to this, Tim Cook believed that such investors had failed to consider the “big picture”. The company executives had faith in future performance, growth and buy back capabilities. Such investors may not be suitable for Apple, Inc. because they need immediate returns within the shortest time possible.
From observable trends, the company has become the most valuable technology company and the most valuable company by market capitalization of $740.21 billion globally (Chauhan, 2015). Generally, the company will derive maximum benefits when its market value of share maximizes. This is a good sign for potential investors. It can maximize their returns and indicates that Apple, Inc. will continue to grow.
Low risks accompanied by high returns are the goals of any investors. For individuals who may wish to invest, several options exist for them. However, investors should evaluate their profiles effectively. Investment matters can be more complex, particularly in aggressive, growth-oriented industries. Hence, Apple, Inc. investor profiles should have adequate financial resources at their disposal to prevent them from shying away from long-term investment decisions.
Investors are therefore advised to explore their investment profiles before making investment decisions. Understanding risk exposure helps investors to identify investment abilities effectively.
Any five (5) financial ratios based on the analysis of the past three (3) years of the company’s financial data and the company’s financial health
- Gross Profit Margin
= Gross Profit / Net Sales = ____2011
43,818 /108,249 = 0.4047 = 40.47%___2012
68,662 /156,508 = 0.4387 = 43.89%____2013
64,304 /170,910 = 0.3762 = 37.62%
- Gross Margin
The company’s gross margin for the last three fiscal years (in millions, apart from percentages)
|Net sales||$ 182,795||$170,910||$156,508|
|Cost of sales||$ 112,258||106,606||87,846|
|Gross margin||$ 70,537||$ 64,304||$ 68,662|
|Gross margin percentage||38.6%||37.6%||43.9%|
The gross profit margins for the last three financial years were 43.89%, 37.62 % and 38.6% for the year 2012 2013 and 2014 respectively. Although the margin for the year 2012 was slightly high, Apple, Inc. has recorded year-over-year decline in its gross profit margins. These fluctuations could have been occasioned by several factors.
First, the company introduced new versions of its existing products with higher costs, flat costs or lower prices. Second, consumers chose products with lower costs. Third, changes in the company’s service structures and warranty policies. Fourth, foreign exchange fluctuations from overseas markets could have affected the margins. Finally, higher mix of products’ sales and improved net sales were responsible for the increased profit margin in the year 2012. At the same time, the US dollar became stable and stronger against other foreign currencies.
The gross profit margins for Apple, Inc. show that the company has effective ways of managing its costs of inventory and controlling other related costs. Hence, it can pass low costs to customers.
- Net Profit Margin
= Net Income/Net Sales = _____
2012____41,733 /156,508 = 0.267 = 26.7 %
2013____37,037 /170,910 = 0.217 = 21.7 %
2014____39,510 /182,795 = 0.216 = 21.6%
Apple, Inc. makes profits from every dollar after paying all its expenses. The margin ranges from 26.7%, 21.7 % to 21.6%. This represents profits that Apple, Inc. makes from a dollar in terms of cents. However, the company’s profitability fluctuates because of several factors.
Apple, Inc. has increased and decreased prices of some of its iPhone and iPad products when it launched the new versions. These changes influenced the number of quantities sold, which have affected the firm’s profitability. Getting the perfect price for products is a major challenge for many entities. Consumers consider Apple pricing strategy as premium. This is a challenge for the company because the mobile and electronic market has become highly competitive. Overall, Apple’s pricing strategy can either increase or decrease its net profit margin.
Apple, Inc. “inventory affected its net profit margin” (Apple, Inc., 2013). Apple may not be able to record the sales of its inventory until it realizes the actual sales. Changes in the market affect the prices of inventory. The devaluation of some of the products have decreased the company’s net profit margin while “moving inventory, particularly the pre-orders have greatly increased the company’s sales” (Apple, Inc., 2013).
Variable costs also influence net profit margin of the company. These are costs associated with labor costs, taxes, costs of raw materials and changes in foreign exchange markets. At the same time, fixed costs of running the business also affect the company’s net profit margins. While these costs may not change, they have significant impacts on the net profit margin of Apple, Inc.
Operating Margin = Operating Earnings / Revenue
|35.30 %||28.67 %||29.25%|
Higher operating margins indicate that Apple, Inc. is a highly profitable and efficient company, particularly in its flagship products and services. However, over the years several factors have influenced operating margins of the company.
Apple, Inc. pricing strategies, raw materials and labor costs have increased. At the same time, the company has reduced some prices of its products. These high percentages show that Apple, Inc. has highly flexible and competent management team that can manage rough economic times and downturns.
Labor costs and raw materials are particularly critical consideration for the company in this context. The company must evaluate these margins against its competitors in the industry.
Specifically, Apple, Inc. has increased spending on research and development (R&D). The company attributed such increments to an increase in “the number of employees and other related expenses to support expanded R&D activities” (Apple, Inc., 2013). Apple, Inc. increased expenses in R&D from 32% in 2012 to 39 % in 2013. While there was an increment, it was consistent with the net sales percentage. Apple, Inc. believes that a focused approach to R&D activities is highly important for its future growth and for creating competitive advantage in the industry. In addition, R&D activities directly support the development of its “core business strategy and product development in a timely manner and therefore, the company focuses on increasing investment in R&D over the years to remain competitive” (Apple, Inc., 2013).
Apple, Inc. also noted increased expenses from “selling, general and administrative (SG&A) costs” (Apple, Inc., 2013). The increment in these expenses during the fiscal year 2013 was mainly attributed to the firm’s continued expansion of its retail outlets and additional employees and other associated expenses. However, the company decreased expenses related to professional services. The increment in SG&A in the fiscal year 2012 was occasioned by the “continued expansion of the retail segment, increased number of employees, higher costs of professional services, increased marketing and advertisement activities and increments in variable costs related to overall company’s growth of the net sales” (Apple, Inc., 2013).
The Cash Flow Margin Ratio
= Cash flow from operating cash flows/Net sales = _____
2012___50,856 /156,508 = 0.325 = 32.5 %
2013___53,666 /170,910 = 0.314 = 31.4 %
2014___53,483 /182,795 = 0.2925 = 29.3%
From the results, investors can locate how Apple Inc. has managed to generate revenues from its customers and other partners through product and service sales. These are significantly high ratios, which show that Apple, Inc. has good cash flows from its core business activities. Therefore, Apple, Inc. does not face any risks from its suppliers and investors or any solvency challenges.
The Return on Assets Ratio
Net Income/Total Assets = _____
2012___41,733 /176,064 = 0.237 = 23.7 %
2013___37,037 /207,000 = 0.179 = 18 %
2014___39,510 / 231,839 = 0.17 = 17%
The ROA shows profitability of Apple, Inc. relative to its assets. From the ratios, investors can conclude that the company can effectively use its assets to generate revenues and profits.
At the same time, Apple, Inc. can leverage on its assets to control debts in order to maximize returns for its shareholders. However, Apple, Inc. has experienced continued declines in ROA. The declines in ROA year-over-year show lesser profitability for the company. Apple, Inc. should improve ROA by increasing net incomes without acquiring expensive new assets. Alternatively, the company can enhance efficiency of its current assets. Declining net incomes and increasing acquisition of new assets or poor activities on accounts receivable are responsible for the declines in ROA.
The Return on Equity Ratio
= Net Income/Stockholder’s Equity = _____
2012___41,733 /118,210 = 0.35 = 35 %
2013___37,037 /123,549 = 0.299 = 30%
2014___39,510 / 111,547 = 0.354 = 35%
Between the year 2011 and 2013, Apple, Inc. had a good ROE of up to 35 % and thus, good returns for shareholders, but this has changed. Between 2012 and 2013 financial period, the company’s ROE declined from 35 %, 30 % and then to 35% because of the increase in total shareholders’ equity and a decline in net income. This situation has affected shareholders’ returns.
It is advisable to invest in companies with good ROE over time. The current state of Apple, Inc. is therefore good for potential investors. This shows that the company has managed to maintain its profitability and rarely relies on shareholders’ equity for its growth.
Cash Return on Assets
= Cash flow from operating activities/Total Assets = _____
2012___50,856 /176,064 = 0.29 = 29 %
2013___53,666 /207,000 = 0.26 = 26 %
2014___53,483 / 231,839 = 0.2307 = 23.1%
Cash Return on Assets Ratio is significant in evaluating how Apple, Inc. has maximized its investments to generate income from its assets. From the recent figures of the last three years, analysts can observe that Apple’s performance has started to decline. Nevertheless, it has significantly higher Cash Return on Assets Ratios.
Shareholder Equity Ratio
= Total Shareholder Equity/Total Assets
2012___118,210 /176,064 = 0.67 = 67 %
2013___123,549 /207,000 = 0.599 = 60 %
2014___111,547 / 231,839 = 0.481 = 48 %
Between the years 2012 and 2014, shareholders’ equity continued to decline steadily as the company reduces dependence on shareholders’ contributions to fund its operations. Therefore, in case of a company-wide liquidation, investors would get good returns from their investments. These are high ratios, which suggest that the company operates with investments from shareholders. However, Apple, Inc. has started to rely on its own internal sources of funds to drive its investment activities.
= current assets/current liabilities
2012____57,653 / 38,542 = 1.49
2013____73,286 / 43,658 = 1.678
2014____111,547 / 63,448 = 1.758
Low liquidity ratios (less than one) demonstrate that the company may not easily fulfill its short-term obligations. Apple, Inc. has high liquidity ratios and thus, it can meet its near-term obligations. The company can meet its obligations through its current assets (current ratio) or its available total cash. This is important because Apple, Inc. can change its short-term assets into cash in order to clear its debt easily. Hence, it may not face bankruptcy. Apple, Inc. is stronger as a going concern.
Efficiency Ratio = Expenses / Revenue * 100
2012___13,421 / 156,508 * 100 = 8.58 %
2013___15,305 / 170,910 * 100 = 8.96 %
2014___18,034 / 182,795 * 100 = 9.87 %
The efficiency rations show how fast Apple, Inc. can generate revenues from its resources. Low ratios are good. Most accountants have considered 50% as the best ratio for efficiency. Apple, Inc., therefore, has some lowest ratios as indicated for the last three consecutive years. These ratios fluctuate due to changes in operation costs and net sales.
It is necessary for the company to maintain its operating expenses and enhance revenue generation in order to operate at optimal level.
Capital Structure Ratio
Debt to Total Assets Ratio = Total debts/Total Assets = Debt to total assets ratio
The analysis of capital structure in this case used debt to total assets ratio.
2012___57,854 / 176,064 = 0.328
2013___83,451 / 207,000 = 0.4
2014___120,292 / 231,839 = 0.519
These ratios show that Apple, Inc. does not heavily rely on debts to fund its operations. A good company should not exceed 50% of the capital structure because it may exceed its borrowing limit (usually 65%).
The risk level of the company from investor’s point of view and key strategies that could be used in order to minimize these perceived risks
From financial analysis of the company’s annual performances, Apple, Inc. appears to be extremely healthy and therefore safe for investment, particularly a long-term one. Nevertheless, Apple, Inc., like any other company, faces uncertain future, and investors therefore must understand potential risks.
Negative sentiments remain major challenges for many near term investors. For instance, in 2013, Apple, Inc. announced that new products were not expected until fall, many investors rushed to sell their stocks because they did not believe in the company’s ability to innovate and produce new products in a fierce competitive industry. According to Chan and Lakonishok (2004), value investing generates “superior returns to growth investing, particularly for small-capitalization stocks” (p. 71). As previously established, Apple, Inc. is suitable for growth investors. That is, an approach of investing “on high-growth stocks even if they have high price-to-earnings ratios” (Chan & Lakonishok, 2004, p. 71). Therefore, value investors should avoid Apple, Inc. given that it has high market cap and may only be suitable for investors looking for the ‘big picture’. The company has always acknowledged that its ability to remain competitive in the global market depends on its abilities to “introduce new innovative solutions continuously” (Apple, Inc., 2013). Apple, Inc. believes in its uniqueness. Its products and services are uniquely designed. It also introduces new solutions to support existing products. Consequently, Apple, Inc. aims to enhance its investment in R&D. Nevertheless, there is no assurance that Apple, Inc. will continue to “deliver quality products and services to its customers and compete effectively” (Apple, Inc., 2013).
Investor sentiment (formation of expectation of future returns) is critical for any potential investors (Barberis, Shleifer, & Vishny, 1998). Such sentiments could lead to “underreaction of stock prices to short-term news, such as earnings announcements, and with the overreaction of stock prices to a series of announcements of good or bad news” (Barberis, Shleifer, & Vishny, 1998). Baker and Wurgler (2007) noted that there are two assumptions confirmed by stock market bubbles and crashes. These include unjustified sentiment or beliefs that touch on cash flows or investment risks and investors believe that they cannot bet against such sentiments because they are risky and costly (Baker & Wurgler, 2007).
Previously, Apple, Inc. was not paying dividend and therefore could not attract dividend-focused investors. The company may not be suitable for overconfidence, particularly aggressive investors who trade actively and speculatively (Barber & Odean, 2002). Such activities are known to affect performance adversely. Self-attribution bias bordering hubris of investors does not rise from the company. Instead, it is a risk, which investors must control by not relying much on personal abilities, maintaining analytics approach and observing illusion of knowledge and control. Barber and Odean (2002) conclude that a “slow-trading, buy-and-hold strategy is actually superior to rapid, “trigger-happy” trading” (p. 455). This statement by Barber and Odean (2002) should actually solve many problems that near term investors experience with Apple, Inc.
In addition, Apple, Inc. understands that cash paid out as dividends cannot facilitate its growth strategies and the company is still obviously growing. In this regard, it has focused on buy back of shares for long-term wealth creation rather than pay dividends (Ro, 2012). This approach could explain why the company could not initially pay dividends for several years.
The company also warns that no specific historical data or patterns could be used to predict or provide reliable indicators for its future production, sales or financial performances (Apple, Inc., 2014).
Overall, limited risks appear to be present at the company for potential investors because financial ratios indicate healthy financial positions. Hence, the focus turns to individual investors’ attributes and their influences on investment decisions.
Other potential risks appear to be external and generally relate to the company’s operating environments. For instance, competition, laws and regulation, changes in macroeconomic environment, and product development and release. The company, however, is optimistic because of its innovative capabilities to counter various forms of challenges that emanate from competition.
Analysis of Apple, Inc. major financial reports has shown that the company is financially stable. Apple, Inc. will continue to record higher net sales year-over-year. On the other hand, its gross and operation margins have continued to decline, and the company has attributed such declines to several factors, including competition and increased costs of operations and labor. The analysis shows that Apple, Inc. finally approved payment of dividends to stakeholders in the fiscal year 2012, nearly after two decades.
Recommendations of this stock as an investment opportunity
It is imperative for financial managers to invest wisely. In this regard, understanding profitability and financial health of the company can guide decision-making. Every company faces uncertain future and so is Apple, Inc and therefore it is difficult to determine the expected returns on investments. It is recommended that finance managers should evaluate all potential risk factors when making investment decisions. Risk factors have critical influences in determining the potential returns from the prospective investment decisions. Therefore, a financial manager must consider both returns and risks.
Financial decisions for potential investors for Apple, Inc. are based on the evaluated critical ratios. Financial managers must carefully evaluate all financial ratios to determine fiscal health of Apple, Inc. In this case, the company ratios show favorable financial performance, which is ideal for investors. It has a good capital structure. This implies that Apple, Inc. will benefit long-term shareholders as it continues to grow. It does not heavily rely on debts for expansion and therefore, shareholders’ returns are not negatively affected. On this note, it is recommended to invest in the company. Moreover, Apple, Inc. still maintains good ROE and thus there is not significant risk.
Overall, the company displays a sound financial structure, which can only maximize long-term shareholders’ returns at low risks. One expects the market value of Apple, Inc. to continue to maximize and therefore it would achieve the best capital structure and investors can only expect more returns.
Potential investors also need to understand the dividend decision of Apple, Inc. The company aims for positive returns. In this case, the financial manager must recommend whether the company’s dividend policy will meet investors’ expectation. Previously, Apple, Inc. had a tendency to retain earnings for future investments. Today, however, Apple, Inc. has continued to pay dividends, and it intends to increase its dividend on an annual basis. In this regard, potential investors are encouraged to take advantage of such opportunities. It is also imperative to note that Apple, Inc. continues to reinvest part of its profits to maximize market value. Further, the financial manager should determine if the company’s dividend payout ratio offers an optimum return to shareholders.
Apple, Inc. has maintained a favorable liquidity position to inhibit possibilities of insolvency. The company’s financial position on liquidity, profitability and potential risks may influence investors’ decisions. On this note, it was determined that the company has invested wisely on current assets in order to maintain favorable liquidity and profitability. It is therefore recommended to invest in the company.
Overall, the financial ratios depict Apple, Inc. as an extremely healthy company. Thus, by considering such ratios, it is advisable to invest. Moreover, the current dividend policy that favors annual increment is perfect. Nevertheless, there are always risks, specifically external factors that could influence the company’s profitability and affect returns on investments. Apple, Inc. recognizes that its stock price has experienced significant price fluctuations in the past and may continue to do so in the future. In addition, it has noted that the stock price may continue to rise and the cash dividend will grow. Any failure to achieve these future goals could adversely affect the “shareholders’ returns, investor confidence, and attraction and retention of talented workforce” (Apple, Inc., 2014). Investors, therefore, must be cognizant of these facts when making investment decisions.
Apple, Inc. (2013). 10-K Annual Reports 2013. Web.
Apple, Inc. (2014). Form 10-K For the Fiscal Year Ended September 27, 2014. Cupertino, CA: Apple, Inc.
Baker, M., & Wurgler, J. (2007). Investor Sentiment in the Stock Market. The Journal of Economic Perspectives, 21(2), 129–51.
Barber, B. M., & Odean, T. (2002). Online Investors: Do the Slow Die First? Review of Financial Studies, 15(2), 455–87.
Barberis, N., Shleifer, A., & Vishny, R. (1998). A Model of Investor Sentiment. Journal of Financial Economics, 49(3), 307–43.
Chan, L., & Lakonishok, J. (2004). Value and Growth Investing: Review and Update. Financial Analysts Journal, 60(1), 71–86.
Chauhan, V. S. (2015). Just How Big is Apple? Web.
Ro, S. (2012). Why Apple Investors All Need To Stop Whining About Not Getting A Dividend. Yahoo! Finance. Web.