Week 3 & 4 Discussion 1 & 2

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Running Head: CURRENT RATIO AND PROFIT MARGIN; APPLE Inc. 1

CURRENT RATIO AND PROFIT MARGIN; APPLE Inc. 4

Current Ratio and Profit Margin

Current ratio compares a firm’s current net assets to current net liabilities. It’s calculated by dividing firm’s current assets by its current liabilities (Porter, & Norton, 2018). The current ratio is used to determine whether or not a firm has adequate liquid assets or cash to pay its current liabilities over the coming fiscal year. Firms having high current ratios are prepared by short-term creditors as they have low risk, but investors would rather a low current ratio because they would prefer a firm growing by its own assets (Porter, & Norton, 2018). Even though current ratio may vary across different sectors, its generally accepted as benchmark to have current assets twice exceeding the current liabilities; current ratio of 2 (Zhang, 2019).

Based on 2018 financial report, Apple Inc. had a current ratio of 1.54, a ratio which is 45.58% lower than the IT industry average ratio. Apple Inc. has been operating on a median current ratio of 1.3 from 2015-2019; its 2019 current ratio was at 1.5 indicating its ability to meet all financial obligations.

2019 current Ratio-Current Assets (143.8B) divided by Average inventory in 2019 (96.094B= 1.5, similarly, Apples 2019 current liabilities were 105.7B while its Current assets were 162.8B thus the current ratio would still be 1.5.

In 2018, Current Assets were 131.3B while Current liabilities stood at 115.9B making its current ratio to be 1.1

Current ratio usually varies across industries and is also influenced by various factors. A profitable firm should have their current ratio at 1.3 to 3. Apple’s current ratio is slightly above 1 but don’t exceeding the industry’s average of 2.3 thus its efficient in meeting its day-day financial obligations (Li, 2016). Having a high current ratio exposes firms to inefficiencies while using short term finance (Porter, & Norton, 2018). Having a low current ratio below I may also indicate difficulties meeting current obligations. Firm should thus maintain ratios above 1 but not exceeding 3 (Li, 2016).

The gross profit margin is used to determine the percentage of revenue needed to cover operating expenses. Apples gross profit margin ratio declined from 2017 through 2019. 2019 Gross profit margin- net sales of 260, 174M divided by Gross margin (98, 393M)*100= 37.87% And in 2018, the net sales were 265, 595M while the Gross margin was 101, 839 making the Gross profit margin of 38.34%

According to 2019 auditor’s report of the financial data submitted to SEC, the auditors made analysis of Apple Inc. financial position and made the following observations; Apple’s 2019 financial position is same as the financial reports of any firm engaged the Electronic Computers (Zhang, 2019). The IT industry average ratio is higher compared to all industries, thus in comparison with other firms, Apple Inc.’s financial reports looks better than most of the listed firms in the U.S. SEC (Zhang, 2019).

The management report indicates contentment with the overall financial performance. However, the management feels the firm is exposed to various risks due to its way of operation. Apple highly depends on performance of carriers, retailers and wholesalers thus should adopt other distribution channels (Zhang, 2019). According to management, the firm is also exposed to risks due to write-downs on the value of its assets; specifically inventory, and is also experiencing a high cancellation which affects its bottom line (Li, 2016).

References

Li, H. (2016).Profitability Assessment of Apple Company.

Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from https:www.cengage.com

Zhang, Z. (2019, December). Investment Decision Based on Value Factor and Financial Criteria-Taking Apple Inc. as Analysis Sample. In 2019 International Conference on Economic Management and Cultural Industry (ICEMCI 2019) (pp. 872-880). Atlantis Press.