APPLE REPORT: RATIO ANALYSIS/ PART TWO
Analysis and comparison financial ratios
The horizontal analysis will help us in making estimates for the companies future prospects based on the firm's historical performance. However, the comparison with the past does not afford any basis for evaluation in absolute terms. Hence we have chosen some other standards of performance as a yardstick against which to measure their record. The comparable company we picked is IBM because they are a major competitor of Apple in the computer manufacturing and software development business. Comparison and analysis of Apple's financial ratios with IBM and the industry average will aid in accurately evaluating its 1995 performance.
Profitability ratio analysis
Return on sales:
Since 1994 Apples return on sales has risen from .03 to .04. This increase is below industry averages but is a good sign for a company in a highly competitive industry. For every dollar Apple generated in sales they increased their earnings from 1 cent to 5 cents per dollar from 1993 to 1995. The ratio of Apple is 0.04 while IBM is 0.06. This means that IBM made 2 more cents on each dollar of net sales than Apple did. Therefore, Apple's ability to generate profit margin was comparatively lower than that of IBM in 1995. But according to the industry average, 0.025 was the mean performance, so Apple is doing an above average job.
Return on equity:
Apples ROE has risen from.13 in 1994 to.15 in 1995. This means that for every dollar of stockholders equity Apple is now generating 15 cents profit. This is .04 below IBM's which is 0.19. Hence, IBM earned 4 more cents for every dollar invested by the stockholders than Apple did. Apple has a much lower capability to generate return on equity than IBM in 1995. Furthermore, Apple did not use stockholder's investment to generate net income as efficiently as IBM did in 1995. Apple's performance is above industry performance standards because its result was higher than the mean which was 0.134
Market Ratio Analysis
Dividend yield
Apple's dividend yield is 1.5% in 1995 and 1.4% in 1994. This is a positive sign for potential investors because the dividend yield is creasing. The ratio of Apple is 1.5% while IBM is 1.1%. Since both companies' dividend had no significant change when compared with the previous year, the market price of Apple's stock decreased. Therefore, Apple's market strength was weaker than that of IBM in 1995 although Apple's dividend yield is higher than that of IBM.
Dividend payout
Apple's dividend payout is 13.93% in 1995 and was 18.5% in 1994. This means that Apple paid out less dividends in 1995 than in 1994. The ratio of Apple is 13.93% while IBM is 49.62%. This indicates that Apple declared little dividend than IBM did in 1995. Therefore, both Apple's profitability and its stock's market strength was lower than those of IBM in 1995.
Short-term liquidity ratio analysis
Current ratio
Apple's current ratio in 1995 is 2.25 and in 1994. This means that Apple has 53 cents more in assets compared to each dollar of liabilities from 1993 to 1995. The ratio of Apple is 2.25 while IBM is 1.29. Thus Apple had 96 more cents for each 1 dollar for current liabilities than IBM did. Therefore, Apple's short-term debt-paying ability was better than that of IBM. In fact, Apple was using its assets less effectively than IBM. When compared with the industry average, Apple merely passed in doing an average job in its solvency level for it was running 15 cents below the mean.
Receivable turnover
The amount of time it takes Apple to collect its account receivable is averaging 5.77 times per year. The ratio has not changed significantly in three years and thus signals stability in their accounts receivable department. The ratio of Apple is 5.73 while IBM is 4.37. This means that Apple turned its receivable 5.73 times during 1995 while IBM turned 4.37 times. Apple's average matches the 1995 industry mean of 5.7.
Average days' sales uncollected
In 1994 and 1995 the average day's sales were practically the same, 63 and 64 day's respectively Apple took 20 less days to collect accounts receivable than IBM which had an average of 84 days. The industry average is 64 which matches Apple's performance.
Inventory turnover
Apple's rate of inventory turnover dropped from 8.45 times in 1994 to 6.23 times in 1995. This ratio is directly tied to the companies product line and its ability to meet consumer preferences in a highly competitive market. Apple had to write down old inventory in 1995 (Performa's) because the competition was offering better products. In the computer industry old inventory is a large liability because the market changes rapidly so Apple must ensure that its inventory turnover ration improves. The ratio of Apple is 6.23 while IBM's is 11.78. This means that Apple turned its average inventory 6.23 times in 1995 while IBM turned its average inventory 11.78 times in 1995. The industry average shows that the mean figure was 4.5, and Apple is performing well above the mean and nearly reaching the upper quartile of turning the inventory 7.5 times.
Average days' inventory on hand
Apples average day's inventory on hand increased by 15 days from 1994 to 1995, from 44 days to 54 days. It took Apple an average of 59 days compared to IBM's 32 day average to sell its average amount of inventory. So, it took Apple 27 more days to sell its average inventory than it took IBM. IBM, in this case, managed its inventory more efficiently than Apple in 1995. In fact, the industry average expects a mean of 81 days for a company to sell their inventory. The top 25% performers required 48 days, so Apple's performance is in the second quartile of the entire industry.. This ratio trend is not a good sign for Apple since it operates in a rapidly changing market where inventory can become outdated very quickly.
Long-term solvency ratio analysis
Long -term debt-to-equity
In 1994 Apple's long-term debt -to-equity was.13 times and it was .1 times in 1995. Comparing this to IBM's, which is 0.45 in 1995, tells us that less than one-tenth of the assets are financed by the creditors, whereas IBM's creditors financed almost three-tenth of its assets. The industry has an mean of 0.2 in the ratio, which indicates on the average that almost one-sixth of the assets should be financed by the creditors.
Time interest earned
Apple's time-interest earned was 13.5 in 1994 and 15.04 in 1995. Comparing this to IBM's 11.78 reflects that Apple was able to provide creditors with interest better than IBM. The industry average has a mean of 1.9 with the upper quartile being 16.5 which Apple almost accomplished, thus Apple has performed quite well in this aspect. This puts Apple in a good position to pay their interest expenses. |
