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Renita Wickes

Professor Perez

Financial Statement Analysis

Unit 4 Project

Introduction

Apple is an organization that creates computing devices, digital media devices, and mobile phones among others. It is an organization that started its operations in the year 1976 with specialization in making personal computers. The company was created by two individuals, that is, Steve Wozniak and Steve Jobs. This company has managed to stay at the top of its market through its innovation and performance. It good financial performance has enabled it to continue competing with big competitors operating its market. It will be important to perform financial analysis of this company over the past three years through the use of sustainable growth rate.

Sustainable growth rate

The sustainable growth rate of a company is a product of the percentage of profits plowed back into the company and return on equity (Galpin, 1997). The calculation of sustainable return on equity makes the assumption that an organization is after maintaining a target capital structure of equity and debt, accelerate sales as fast as the company allows, and keep a dividend payout ratio that is static. The rate shows the speed at which a company can grow through the use of its own revenue while at the same time remaining self-sustaining. Attaining a sustainable growth rate is the goal of all companies. But there are some obstacles that may hinder an organization from attaining optimal sustainable growth rate. Below is a calculation for Apple’s sustainable growth rate for periods 2015, 2014, and 2013:

SGR = ROE x (1 - dividend-payout ratio)

SGR 2015 = 0.45 x (1 – 0.159) = 0.378

SGR 2014 = 0.35 x (1 – 0.153) = 0.296

SGR 2014 = 0.30 x (1 – 0.26) = 0.222

The sustainable growth rate for Apple has been increasing from the period 2013 to 2015. In the previous year, the organization had a sustainable growth rate of 3.78 percent. This is optimal growth rate. It is an indication that the company can safely grow at a rate of 3.78 percent. This growth is possible through the use of Apple’s own revenue. The revenue can be used for growth still enabling the organization to remain self-sustainable. If Apple has the intention of accelerating its growth above this rate, maybe to 4 percent then the use of outside funds will be an option to be considered (Costa, 1997). Among the factors that are making it possible for this company to have a good sustainable growth rate is its customers. From the analysis of customer trends of Apple, it has been evident that the customers have more disposable income. Having more disposable income is making the customers not to be conservative when it comes to spending. The customers are also not discriminating buyers. The organization has managed to keep its customers through investing a lot of cash into new products development that encourages spending of customers.

How sustainable growth compares to actual growth

The actual growth rates for years 2015, 2014, and 2013 were 2.785, 2.400, and 2.184 percent respectively. Comparing these values with the sustainable growth rates for 2015, 2014, and 2013, which were 0.378, 0.296, and 0.222, the actual growth rates are below sustainable growth rate. These figures show that the organization may be underperforming, but at least the figures are increasing as time is moving. When the figures for actual growth rate are below that of sustainable growth rate, it is said that an organization is underperforming. However, when the actual growth rate is above sustainable growth rate, then an organization may be in trouble (Sowinski, 2006).

Consequences of growth rate that is not consistent with their sustainable rate

When the actual growth rate of an organization is above the sustainable growth, then something is not right. This is because an organization may experience unrestrained growth. There are two assumptions behind sustainable growth rate strategy. The first assumption is that the sales of any organization can grow as fast as its assets. For instance, an organization cannot increase its sales by forty percent unless it ensures the receivables, fixed assets, and inventories have gone up by forty percent. The second assumption is that companies usually have a target debt-equity ratio (Sustainable Growth, 2005). Through this, lenders of the company will always be willing to continue extending credit at that maintained ratio. This means that as equity of a company goes up, debt that is provided by lenders may also go up at that same rate. This will make it possible for an organization to maintain a constant debt-equity ratio. Therefore, an organization that is growing at a rate that is above sustainable growth rate means that the aforementioned elements in assumption will be affected. For example, the debt equity ratio will be affected when actual growth rate increases above sustainable growth rate. This may make the level of debt in an organization to go beyond that of equity. It will be very hard for an organization to get additional funding from lenders or creditors when the level of debts is far beyond that of equity. This means that a sustainable growth rate strategy can be created by a management of a company, and the strategy should be followed so as to maintain a sustainable growth (Gallinger, 2000).

If a firm grew at a rate above or below the SGR

If a firm a company wants to grow above the sustainable growth rate, it can finance this additional growth through getting funds from external sources. This is because such as move will require more funds than an organization has. An example of external fund is obtaining loans from creditors. The funds gotten from creditors can be used to funds the additional growth that an organization may be requiring. Having excess cash will be possible through sustainable growth. Finding reproductive use of excess cash emerging from cash flow will be required. The management may decide to return the excess cash to shareholders of a company (Daly, 1997). Returning the money can be carried out through a number of ways, such as increasing common stock repurchase or increasing dividends for shareholders. Another form is increasing the possession of lower earning liquid assets.

References

Costa, J. (1997). “Challenging Growth: How to Keep Your Company's Rapid Expansion on

Track.” Outlook. Summer.

Daly, H. (1997). Beyond Growth: The Economics of Sustainable Development. Beacon Press,

1997.

Gallinger, G. (2000). "Tax Effects on Profitability and Sustainable Growth." Business Credi.

Galpin, T (1997). Making Strategy Work: Building Sustainable Growth Capability. New York, NY: John Wiley & Sons.

Sowinski, L. (2006). "The Trucking Industry's On a Roll—Or Is It? While demand in the

sector remains strong, the state of the nation's infrastructure is threatening to put the brakes on sustainable growth." World Trade.

"Sustainable Growth: Is There Room to Grow?" (2005). A Deloitte Research Viewpoint.

Available from http://www.deloitte.com/dtt/research/0,1015,sid%3D15582%26cid%3D100764,00.html .