The presentation of financial information is a crucial exercise for business enterprises. It enables the business managers to understand the financial performance of their enterprises and make important decisions regarding their operations. It is also used by the other stakeholders to determine their future engagement with the companies based on the current financial performance (Revsine, Collins and Johnson 113; Graham, Harvey and Rajgopal 41).
This essay will analyze two US companies in the computer hardware and software industry. The companies are the Hewlett Packard Company and Apple Inc. The analysis will be based on the companiesâ latest quarterly financial results. The companiesâ capital structures will be discussed, as well as the computation of several financial ratios. An appraisal will then be done of the more suitable company to invest in. Information will be drawn mainly from secondary sources, including journal articles and books.
Apple Inc
Apple Inc. is a California-based multinational information technology company and the largest in its category. It is involved in the design, manufacture, and sale of computer hardware, software, and online sales services. The company was founded in the year 1976 and has been operational since then.
Hewlett Packard Company
The Hewlett Packard Company is headquartered in Palo Alto, California. It is an international computer software and hardware company that was founded in 1984. It markets its products to individuals, households, businesses, and also sells its products online.
The reason for choosing Apple Inc. and Hewlett Packard companies is because the two companies are reputable and have a high market capitalization. The two are listed companies in the New York Stock Exchange, thus it is easy to obtain their financial information from secondary sources.
Capital structures of Apple Inc. and Hewlett Packard Company
The capital structure of companies is a crucial aspect of their operations. It defines the companyâs financing in terms of debt and equity utilization. A balance of the capital structure is crucial to attaining the optimum benefits of using both sources of capital (Faulkender and Petersen 26; Lemmon, Roberts, and Zender). Both Apple Inc. and the Hewlett Packard Company have used debt and equity finances in different proportions. As of 31st July 2015, the long-term debt of Hewlett Packard Company was $14,468 million while its equity was $27,443 million. The proportion of debt in the capital structure was 34.5%. On the other hand, Apple Inc.âs capital structure as of 27th June 2015 was composed of $47,419 million in debt and $125,677 million in equity. Debt is composed of 27.4% of the companyâs capital. Hence, the Hewlett Packard Company was financed by debt to a larger extent than Apple Inc.
Ratio Analysis
The preparation of financial statements fails to provide sufficient information to assist in decision-making. Hence, ratio analysis becomes necessary at this point to derive information that can be used to make important operational and investment decisions. Ratios are divided into various categories depending on what they are used to measure (Peterson and Fabozzi 158; Vandyck 96). The table below illustrates three financial ratios for the Hewlett-Packard Company and Apple Inc. The three ratios include the return on equity ratio, debt-to-equity ratio, and the current ratio.
Apple Inc. was more profitable than the Hewlett-Packard Company as shown by the return on equity ratio. It is also slightly more liquid than the Hewlett-Packard Company as shown by the current ratio. However, it is less solvent than the Hewlett-Packard Company as shown by the debt-to-equity ratio.
According to the financial statements of Hewlett-Packard and Apple Inc., one of the accounting policies used in their preparation is the accrual basis of accounting, where revenues and expenses are recognized when services are offered and received, respectively.
Based on the financial analysis of the two companies, I would prefer to invest in Apple Inc. The reason behind my choice of the company is that the company is more profitable as reflected by its higher return on investment of 8.5% during the quarter ended 27th June, 2015. In addition, Apple Inc. is less risky to invest in as it has a lesser proportion of debt in its capital structure (27.4%) than the Hewlett Packard Company (34.5%).
Conclusion
Financial statement analysis is crucial for companies as it helps their stakeholders to make decisions relating to their engagement with the company. Apple Inc. and the Hewlett-Packard companies are in the computer hardware and software industries and are traded in the New York Stock Exchange. Both Companies are situated in California. Their capital structures are composed of varied proportions of debt and equity finance.
The accrual concept is one of the accounting policies adopted by both Hewlett-Packard Company and Apple Inc in their preparation of financial statements. One would prefer investing in Apple Inc. than in Hewlett-Packard Company because it recorded a higher return on investment and it has a lesser proportion of debt in its capital structure.
Works Cited
Faulkender, Michael and Mitchell A. Petersen. “Does the source of capital affect capital structure?” Review of financial studies 19.1 (2006): 45-79. Print.
Graham, John R., Campbell R. Harvey and Shiva Rajgopal. “The economic implications of corporate financial reporting.” Journal of accounting and economics 40.1 (2005): 3-73. Print.
Lemmon, Michael L., Michael R. Roberts and Jaime F. Zender. “Back to the beginning: persistence and the crossâsection of corporate capital structure.” The Journal of Finance 63.4 (2008): 1575-1608. Print.
Peterson, Pamela P and Frank J Fabozzi. Analysis of Financial Statements. Hoboken: John Wiley & Sons, 2012. Print.
Revsine, Lawrence, Daniel W. Collins and W. Bruce Johnson. Financial reporting and analysis. New York: Pearson/Prentice Hall, 2005. Print.
Vandyck, Charles K. Financial ratio analysis : a handy guidebook. Victoria: Trafford, 2006. Print.