Finance.

Apple Inc. Financial Analysis

Grantham University

Introduction

Apple Inc. reports financial statements on an annual basis as well as every quarter. A lot of information can be obtained from the financial statement of Apple Incorporated. The financial statement that are important in obtaining information are the balance sheet, the income statement and the cash flow statement. There are many people who make use of the financial statements. These are the creditors, investors, shareholders, the government and the management. There are various financial ratios that are used to help the users of financial statements to determine the financial health of the company. Some of the financial ratios that are used in the analysis include liquidity ratios, profitability ratios and solvency ratios.

Financial Analysis	Financial Ratio	2016	2015	2014	Industry Average
Liquidity Ratio	Current Ratio	1.35	1.11	1.08	1.77
	Quick Ratio	1.22	0.89	0.89	1.68
Profitability Ratio	Net Profit Margin	21.19%	22.85%	21.61%	12.96%
	Gross Margin	39.08%	40.06%	38.59%	44.36%
Solvency Ratios	Debt to Equity Ratio	1.51	1.43	1.08	1.89
	Debt Ratio	0.60	0.59	0.52	0.74

Profitability Ratios

Profitability ratios are ratios that are used to determine the ability of the company to create wealth. This is the best ratio analysis of the success of the company. it is used to determine the ability of the company to generate income taking into consideration the expenses and costs that were incurred. There are various ratios that can be used in this case which include return on equity, return on assets, net margin and gross margin ratios.

The first ratio used in this analysis is the gross margin. The gross margin is a ratio of gross profit to total revenues (Bodie, 2013). Gross profit is determined by subtracting cost of goods sold from the total revenues. This is used to determine the proportion of the company’s revenue that is used in the production of the goods. The company in the financial year that ended in 2016 had a gross margin ratio of 39.08%. The net margin ratio on the other hand is the ratio of net income to total revenues. The company however has a net margin ratio of 21.19%. The company according to the previous 2 years has had a downward profitability in the year 2016. The company however has a higher profitability than the other companies in the industry. The company has reduced its profitability since last year but the company is however able to attain higher profitability than most of the companies in the industry.

Liquidity Ratios

The liquidity ratios are meant to determine the ability of the company to meet its short-term obligations (Wahlen, Baginski & Bradshaw, 2014). The liquidity ratios include quick ratio, cash ratio, working capital and current ratio. The ratios used in this analysis are the current ratio and the quick ratio. The current ratio is the ratio of current assets to current liabilities. Quick ratio on the other hand is the ratio of the most liquid assets to the current liabilities. The most liquid assets are cash and cash equivalents.

Apple Inc. in the financial year ended 2016 had a current ratio of 1.35 and a quick ratio of 1.22. The two ratios show that the company has good liquidity. A ratio above 1 shows that a company is able to pay for its short-term obligations using the company’s liquid assets. The company can be well able to pay for all of its current liabilities in a comfortable way. The company’s liquidity is however lower than the average ratio in the industry. The company is however beyond the risky levels of liquidity but has the room to improve.

Solvency Ratios

Solvency ratio is used to determine the ability of a company to meet its debt obligations. These include the ability to both the short-term and long-term obligations. Ratios used to determine the solvency of the company include the debt to equity ratio, equity ratio and the debt ratio. The ratio used in this analysis are the debt to equity ratio and debt ratio. The debt to equity ratio is a ratio that is used to determine the proportion of the company that is financed through debt in comparison to equity. The debt ratio is the ratio of the proportion of the company that is financed through debt (Jordan, 2014). 

The company in 2016 had a debt ratio of 0.60 and equity to debt ratio of 1.51. The high debt to equity ratio shows that the company is heavily funded through debt than equity. This ratio would show investors and creditors that the shareholders have not contributed enough into the company making the company risky. The debt ratio of 0.60 shows that the company financed 60% through debt. This ratio also shows that the company is heavily financed through debt which makes the company very risky to invest in or issue loans. The company however has a better liquidity in comparison to the industry average.

References

Bodie, Z. (2013). Investments. McGraw-Hill.

Jordan, B. (2014). Fundamentals of investments. McGraw-Hill Higher Education.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.