Financial Analysis of Apple Incorporated

This article provides a financial analysis of Apple Incorporated, including gross profit margin, net profit margin, operating profit margin, return on equity, current asset ratio, and debt-equity ratio. It also discusses decision making, modern portfolio theory, financial risk, and ethics in an international setting.

OPERATION
FINANCE
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Table of Contents
Introduction...........................................................................................................................................3
History of the Company.........................................................................................................................3
Financial Analysis of Apple Incorporated...............................................................................................3
Gross Profit Margin............................................................................................................................3
Net Profit Margin...............................................................................................................................3
Operating Profit Margin.....................................................................................................................4
Return on Equity................................................................................................................................4
Current Asset Ratio............................................................................................................................4
Debt – Equity Ratio............................................................................................................................4
Decision Making....................................................................................................................................5
Theoretical underpinning of Modern Portfolio Theory..........................................................................5
Financial Risk.........................................................................................................................................6
Assessment of risk and ethics in an international setting relative to finance and investments.............6
Conclusion.............................................................................................................................................7
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Introduction
The assignment involves analysis of public traded company specifically an Multi National Corporation
which has been trading on exchange for past 10 years and has some type of international influence.
The analysis shall encompass the following element of finance mainly financial analysis of company,
decision making, theoretical underpinning of modern portfolio theory, evaluation of financial risk
and measurements associated with it. Further, the assignment also evaluates the assessment of risk
and ethics in an international setting which is in relation to investments and finance. (Yahoo Finance,
2018)
The company that has been chosen for analysis is Apple Incorporated which is trading at USD 171.53
History of the Company
Apple Incorporated was founded by two college drop outs Mr. Steve Jobs and Mr. Steve Wozniak.
The duo brought a new revolution in the computer generation. (Angelique Richardson, 2008)
The company is a Multinational Corporation dealing in wide range of electronic products
encompassing mobiles, laptops, personal computer, tablets, i-pods etc. It became the largest traded
corporation in the world in terms of market capitalisation on 30th June 2015 and the valuation of the
company is approximately 1 trillion USD.
Financial Analysis of Apple Incorporated
For the purpose of conducting financial analysis of company, the annual report of past three years of
the company has been analysed. The details of the analysis is presented here-in-under:
Gross Profit Margin
The Gross profit margin of the company is computed by dividing the gross profits of the company by
the sales of the company. The computation has been detailed here-in-below:
Sl. No. Particulars 2018 2017 2016
1 Total Revenue 265595 229234 215639
2 Total Cost 163756 141048 131376
3 Gross Profit (1-2) 101839 88186 84263
4 Gross profit Margin (3/1) 38.34% 38.47% 39.08%
On perusal of the above, it may be inferred that the Gross profit margin of the company has been
consistent for the past three years and stands at near about 40% of revenue of the company.
Net Profit Margin
The Net profit margin of the company is computed by dividing the Net profits of the company by the
sales of the company. The computation has been detailed here-in-below:
Sl No Particulars 2018 2017 2016
1 Total Revenue 265595 229234 215639
2 Net Profit 59531 48351 45687
3 Gross profit Margin (2/1) 22.41% 21.09% 21.19%
On perusal of the above, it can be inferred that net profit of the company has increased by 1% and
has been approximately consistent over three years but represent a good return on sales.
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Operating Profit Margin
The Operating profit margin of the company is computed by dividing the operating profits of the
company by the sales of the company. The computation has been detailed here-in-below:
Sl No Particulars 2018 2017 2016
1 Total Revenue 265595 229234 215639
2 Total Cost 194697 167890 155615
3 Operating Profit (1-2) 70898 61344 60024
4 Operating profit Margin (3/1) 26.69% 26.76% 27.84%
On perusal of the above, it can be inferred that operating profit of the company has been stable over
the period but represent a good return on sales.
Return on Equity
The Return on Equity is computed by dividing the net profits of the company by the equity of the
company. The computation has been detailed here-in-below:
Sl. No Particulars 2018 2017 2016
1 Equity 107147 134047 128249
2 Net Profit 59531 48351 45687
3 Return on Equity (2/1) 55.56% 36.07% 35.62%
Note: For simplification purpose of average of equity has not been done
On perusal of the above, it can be inferred that return on equity has taken a huge leap in 2018
compared to 2017 and company is providing a very good return to its investors over the period.
Current Asset Ratio
The Current Asset Ratio is computed by using total of current asset and total of current liabilities and
dividing the former by later. It represents the working capital of the company and the ideal ratio is 2.
The computation has been detailed here-in-below:
Sl. No Particulars 2018 2017 2016
1 Total Asset 131339 128645 106869
2 Total Liabilities 116866 100814 79006
3 Current Ratio (1/2) 1.124 1.276 1.353
On perusal of the above, it can be inferred that the current ratio of the company is poor and does
not have sufficient working capital but before making a strong step in this regard one needs to look
at the industry.
Debt – Equity Ratio
The Debt to Equity ratio is computed by using total of Equity and total of long term debts and
dividing the later by former. It represents the structure of funding of the company and the ideal ratio
is 2. The computation has been detailed here-in-below:
Sl. No Particulars 2018 2017 2016
1 Debt 141712 140458 114431
2 Equity 107147 134047 128249
3 Debt -Equity Ratio (1/2) 1.32 1.05 0.89
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On perusal of the above, it can be inferred that company is increasingly relying on debt as the ratio
has seen a large increase over the period. Further, the beveefit of trading on equity is clearly
witnessed on account of increasing Return on Equity.
Decision Making
On basis of the above, it can be seen that Apple Inc. has been performing well over the years and has
been providing stable return over the years. Further, the company is also enjoying the benefit of
trading on equity and the same shall be witnessed over years to come. The company is an ideal
investment for stable investors with long term vision and believes in being the growth part of the
company.
Theoretical underpinning of Modern Portfolio Theory
Modern Portfolio Theory or in other term mean- variance analysis is a modern theory under
portfolio management whereby the return is maximised for a given level of risk. The theory relies on
the benefit of diversification and is the extension of the same. The theory believes that is better to
hold a range of asset with different risk compared to a single asset as the same results in cutting of
risk and maximisation of profit. The theory has been devised by Harry Markowitz.
In terms of Modern Portfolio Theory, it is assumed that investors are rational and risk averse and the
risk and reward moves hand in hand. Further, an efficient frontier is created by means of risk reward
combination. The frontier represents highest level of return for a given level of risk which is
presented by standard deviation of the portfolio. Portfolios with a combination below the efficient
frontier shall not be efficient and accordingly shall not be chosen and vice versa. (A Modern Portfolio
Theory Approach to Asset Management in the listed South African Property Market)
The theory is explained via an example. Supposedly, there are the following three portfolios in the
market with the following risk and return as detailed in the table:
Sl. No Particulars Risk Return
1 Portfolio A 12% 20%
2 Portfolio B 17% 20%
3 Portfolio C 18% 20%
On perusal of the above, it can be seen that that Portfolio C is representative of efficient frontier as it
provides the highest return for a given level of risk which is 20% in the given example. Further
modern portfolio theory efficient frontier has been presented via a graph here-in-below:
Financial Risks and Associated Measurement
Financial Risk
Financial Risk is the possibility of the shareholder or other investor will lose out their money when
they invest in a company in which debt is present and company is not in a position to pay out its
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financial obligations. In layman terms, the risk of default of debt and losing out of money of
shareholders is financial risks. The major type of financial risks are detailed here-in-below:
(a) Credit risk: Risk of default of debt when a company borrows money and unable to pay the same
within a stipulated time on account of cash flow crunch and other associated issues. The tools
for measuring the Credit risk include Credit Value at Risk, Expected loss. The tool analyse the
loss that can occur on account default to investor;
(b) Liquidity Risk : It is the risk on account of liquidity crunch and encompasses those asset which
cannot be easily bought and sold in the volatile market to cut losses. The risk is measured using
financial ratios; (CFA Institute, 2018)
(c) Equity Risk: The risk encompass the risk on account of Volatile price change in the shares of the
stock. It is measured by using Capital Asset Pricing Model; (Damodaran)
(d) Asset- backed risks: The risk is based on asset-backed securities and occurs mainly on account
of risk of prepayment and interest rate risk. Under this type of risk the asset backed securities
becomes volatile on account of change in the volatility of underlying securities.
(e) Exchange Rate risk: The companies executing business under various currencies are exposed to
the risk of exchange whereby the fluctuation of one currency in terms of another significantly
impacts the profitability of the company. The risk is measured by using percentage change or
standard deviation or variance.
Apple Incorporated is exposed to the following financial risks:
(a) Credit Risk;
(b) Exchange Rate Risk;
(c) Derivative Risk;
(d) Interest Rate risk.
Assessment of risk and ethics in an international setting
relative to finance and investments
When a company goes international it is exposed to a variety of risk and ethical requirement relative
to finance and investments among which some of them have been detailed here-in-below:
(a) Outsourcing;
(b) Compliance with laws and regulation of the country;
(c) Working Standard and Condition;
(d) Maintaining Diversity at work place;
(e) Trust and integrity;
(f) Maintaining rights of humans;
(g) Child labour;
(h) Oversight and supervision;
(i) Political arena;
(j) Creation of Corruption;
(k) Bribery etc
(l) Taxation avoidance
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Apple Inc has maintained highest standard of ethics through its vision, mission and objectives. Apple
Incorporated has addressed the following international ethics issue successfully encompassing the
following:
(a) Environmental;
(b) Working Conditions and providing suitable amenities to workers;
(c) Duly payment of taxes. However, there has been cases of tax avoidance against the company
especially in Ireland and Luxembourg;
(d) Maintaining Privacy;
(e) Intellectual Property Rights;
The company has been named as one of the cleanest organisation by world peace. Further, the
company has protected its intellectual property rights through American IP laws and has never been
accused of imitating or stealing innovations or technology of other companies. The company has
been socially proactive.
The company has outsourced its work to Asia through its sub-contractor Foxconn. Further, the
company has tried to maintain or reduce the environmental impact on account of production of
materials in those countries. (mallon, 2014)
The risk under an international setting has been detailed here-in-below:
(a) Risk of closure;
(b) Risk of banning and duties;
(c) Risk of export restriction;
(d) Exchange Currency risk;
(e) Risk of Taxation;
(f) Labour law and environmental regulation risk;
(g) Political risk
(h) International Competition etc.
Apple Inc. has been exposed to a range of risk with recently China imposing restrictions on Apple
and India forcing Apple to establish its plant in India to continue selling their products in India
exposes company to a wide range of risk other than those detailed herein.
Conclusion
On perusal of the above analysis on decision front to invest in Apple Inc., it can be seen that
company is earning stable return and is an ideal choice of investment for long term returns as the
company has been providing steady and good return to investor. Further, the financial risk of the
company actual figures cannot be plotted on account of non-availability of annual report of the
company for 2018 and 2017 in the public domain. Further, the company has tried to comply with
the ethical requirements under an international setting but has been subject to a variety of
litigations and constraints especially on tax avoidance front in Ireland and Luxembourg. In addition,
the company is exposed to risk in an international setting in the form of different laws of different
countries, compliance, domestic preference, domestic competition etc. Despite above the company
is an ideal investment on account of good return and increasing sales.
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CFA Institute. (2018). Liquidity Risk. Retrieved December 13, 2018, from www.wallstreetmojo.com:
https://www.wallstreetmojo.com/liquidity-risk/
Damodaran, A. (n.d.). Understanding Risk II: The risk in Stocks. Retrieved December 13, 2018, from
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