To : Chief Executive Officer, Apple Inc. Date : 12 July 2020
From : Financial Analyst
Subject : Performance Report
This memo is prepared for the purpose to analyze the financial performance of Apple Inc during the time period of 2019. The reason behind this financial analysis is to compare the current company performance with the industrial average performance.
This memorandum is all about the comprehensive analysis of Apple Inc regarding financial performance in 2019. I use the average industrial financial performance as the stander for the company. This memorandum divided into various parts which included ratio analysis, Limitation regarding the usage of ratio analysis, the recommendation regarding various steps towards improving the financial performance of Apple Inc.
Ratio analysis is a technique which uses in this report for the purpose to analyze the in-depth financial performance of the company (Chalu & Lubawa, 2018). In this section, comprehensive ratio analysis has been made and compares the financial performance of Apple Inc —various ratios based— with the average industrial performance.
The current ratio is calculated for the purpose to analyze the liquidity position of the Company(Aman, 2016). The current ratio of Apple Inc is 1.54 as compared to the industrial average current ratio which is 2. It shows that the current ratio of Apple Inc is less than the average industrial ratio. It is not a good sign for Apple Inc.
The debt ratio shows the basic structure of capital in the assets of a company(Arkan, 2016). This ratio presents the portion of the debt in the total assets financing. The debt ratio of Apple Inc is 73% as compared to the industrial ratio which is 70% (SEC.gov, 2019). The ratio of Apple Inc shows that the company has 73% debt and a 27% equity portion in the capital.
Time interest earned ratio of 20.4X and EBITDA coverage ratio of 24.0X shows the ability of the Apple Inc to cover or meet-up its liability in the form of debt and lease. The idea rule is that the more the ratio, the better for the solvency position of the company. In the case of Apple Inc, both ratios are more than the average industrial ratio which means that Apple Inc performs well as compare to the industrial ratio.
As the Inventory turnover ratio shows the company’s ability to convert its inventory into a sale within a specific time period so the rule is more the ratio is good for the financial health(Anggadini, Syaroni, & Yunanto, 2020). Apple’s Turnover ratio is 39 as compared to the average industrial ratio which is 7. Day’s sales outstanding represent the time period in days to receive the cash payment after making the sale. The less the ratio is better for the company. DSO of Apple Inc is 64 while the DOS of the Industrial average is 34. It means that Apple Inc takes more time to get payments after the sale as compared to the industry average which is not good.
The asset turnover ratio of Apple Inc is 0.7686. It means that the company generates 0.7686 from the utilization of each unit of asset. The more the ratio is good for the company(Borisovna, 2020). The Asset turnover ratio of Industry is 1.3. The comparison of both ratios shows that company—Apple Inc—is not efficiently utilizing its assets as compared to the average industrial efficiency.
Profit margin—Operating Profit—of Apple Inc is 25% which means that the company earns 25% of sales as the operating profit. The average industrial profit margin ratio is 11.3% which means that Apple Inc performs well regarding operations management as compare to the industry.
Return on assets for Apple Inc. is 16% which shows the return in the form of profit against the asset’s utilization. The average industrial average is 9% which means that the company performs well in this regard.
Return on equity is 61% in the case of our company—Apple Inc— as compared to the industrial average which is 13%. It shows that Apple Inc efficiently utilizes the financial sources of its owners as compared to the industry.
Limitations of Ratio Analyses
I. The Memo uses only 1-year ratios for analyzing the financial performance of the company which means that it ignores the trends of the company’s performance.
II. These ratios do not consider various quality indicators regarding the performance of the Company.
III. Some companies use ratio analysis as the window dressing in that case the comparison of the Apple Inc ratio with the industrial ratio may not present the good results.
IV. Ratio analysis is historic in nature which means that many of these ratios use historic data for calculations. This aspect of ratio analysis ignores the impact of inflation in the price level change.
Recommended Quantitative steps for coming 3 years
(Annual Targets over the next 3 years to catch up with or surpass industry averages are identified for each ratio identified as being substandard)
I. The management of Apple Inc should consider various amendments in the working capital management for the purpose to improve the current ratio. It will increase the liquidity position of the business.
II. The company uses a high portion of the debt as compared to the equity that increases the threats of financial stress for the company. The company must try to create an optimum capital structure by increasing the portion of equity.
III. Apple must manage the receivable more effectively so that the “Days Sales Outstanding” should decrease against the current ratio.
IV. Fixed assets provide the leverage benefit to the company, so Management should try to increase the efficiency of fixed assets and improve the fixed asset and total asset turnover ratio.
V. The company also looks for control over the cost of manufacturing; it will lead towards the high operating margin profit for the company.