Financial Analysis

 

Introduction

 

In this competitive environment, it is essential for the companies to increase the knowledge about the financial terms with respect to evaluate the different financial activities of the business.

This knowledge helps the organization to analyze the market trend related to finance within the competitive market (Walker, 2009). In this way, the main focus of this report is to make a comparison report that can help to show the comparison between two organizations that are working in the same industry.

For accomplishing the purpose of this report, Apple Inc. as a primary company is selected that is listed in the S & P 500. In addition, for comparing performance, Intel is selected as the secondary company that helps to present the comparison with Apple Inc by using trend analysis and ratio analysis techniques.

This report starts with the introduction of both selected companies. This report also highlights the financial performance of both companies that define the company’s financial position with a historical trend within the market.

Moreover, the ratio analysis is also used in this report in context to analyze the financial performance of the companies of last five years. For conducting the comparison between both the companies, different ratios such as liquidity ratio, efficiency ratio, profitability ratio and capital structure ratio and investment ratios are used.

Financial Analysis Assignment Sample

Company Background

Apple Inc. is an American multinational technology company that is founded by Steve Jobs in 1976. Apple has it’s headquartered in Cupertino, California US that serves its users by its IT products and services.

The company works in the information technology industry and provides high quality and performance products as well as services related to IT to its users. At the same time, Apple provides its different products like computer software, computer hardware, digital distribution, consumer electronics etc in different segments.

In the concern of its financial position, the total revenue of Apple Inc. was recorded as $229.234 billion in the financial year 2017. It provides the employment of more than 123,000 employees in its different segments.

In order to compare the performance of Apple, Intel is a well-known company in the information technology industry.  It is headquartered in the same area as Apple. Further, the main source of revenue of Intel is its processors that are used in the computers.

In context to evaluate and analyze the financial performance of Apple last five years, the technique of ratio analysis is really helpful. This ratio is also helpful to make the comparison of the financial performance between Apple Inc and its market competitor Intel.

a) Historical trends in accounting statement entries

In order to determine trends in the accounting statement entries, it is required to conduct trend analysis. For Apple, the following table presents trend analysis by considering income statement, balance sheet, and cash flow statements:

Table 1: Historical Trends of Apple

Trend Analysis of Apple (Millions of USD)
      % increase or decrease
Particulars2013201420152016201720132014201520162017
Total Revenue1,70,9101,82,795233715215639229234100%106.95%136.75%126.17%134.13%
Gross profit 64,30470,53793,62684,26388,186100%109.69%145.60%131.04%137.14%
Operating income or loss48,99952,50371,23060,02461,344100%107.15%145.37%122.50%125.19%
Net Profit37,04039,51053,39445,68748,351100%106.67%144.15%123.35%130.54%
Long-term debt1696028,98753,32975,42797,207100%170.91%314.44%444.73%573.15%
Cash And Cash Equivalents1425913,84421,12020,48420,289100%97.09%148.12%143.66%142.29%
Stockholder Equity1,23,5501,11,5471,19,3551,28,2491,34,047100%90.28%96.60%103.80%108.50%
Cash Flow From Operating Activities5366659,71381,26665,82463,598100%111.27%151.43%122.65%118.51%
Dividends 1056411,12611,56112,15012,769100%105.32%109.44%115.01%120.87%

(Source: Annual Report, 2017a, Annual Report, 2017b, Yahoo Finance, 2018a & Yahoo Finance, 2018b)

Based on the above table, it can be stated that overall, there is an increasing trend in the accounting statement entries from 2014 to 2017 with respect to the base year 2013.

In addition, there is an increasing trend from 2013 to 2015 for all considered accounting statement entries like turnover, profit, long-term debt, cash and cash equivalents, equity, cash flow from operations and dividends.

But at the same time, there is a decline in revenue, gross profit, operating profit, net profit, cash and cash equivalents, and cash flow from operations in 2016 as compared to 2015 due to decline in unit sales and net sales of iPhone units and effect of weakness in foreign currencies relative to the U.S. dollar.

However, values of all these entries increased in 2017 showing an increasing trend as compared to 2016.

Table 2: Historical Trends of Intel

Trend Analysis of Intel (Millions of USD)
      % increase or decrease
Particulars2013201420152016201720132014201520162017
Total Revenue52,71055,87055,35559,38762,761100%106.00%105.02%112.67%119.07%
Gross profit 31,52135,60934,67936,57839,124100%112.97%110.02%116.04%124.12%
Operating income or loss1229115,64214,35615,14718,375100%127.26%116.80%123.24%149.50%
Net Profit9,62011,70411,42010,3169,601100%121.66%118.71%107.23%99.80%
Long-term debt1316512,10720,03620,64925,037100%91.96%152.19%156.85%190.18%
Cash And Cash Equivalents56742,56115,3085,5603,433100%45.14%269.79%97.99%60.50%
Stockholder Equity58,26055,86561,08566,22669,019100%95.89%104.85%113.67%118.47%
Cash Flow From Operating Activities2077620,41819,01821,80822,110100%98.28%91.54%104.97%106.42%
Dividends 44794,4094,5564,9255,072100%98.44%101.72%109.96%113.24%

(Source: Annual Report, 2017a, Annual Report, 2017b, Yahoo Finance, 2018a & Yahoo Finance, 2018b)

On the other hand, it can be analyzed that there is an increase in total revenue, gross profit, operating income and net profit in 2014 as compared to the base year 2013, however, these values decreased in 2015.

But at the same time, there is a decline in long-term debt, cash and cash equivalents and stakeholder equity, cash flow from operating activities and dividends in the year 2014 in comparison of the base year 2013 followed by an increase in 2015.

However, after this, there is an increasing trend in revenue, gross profit, operating profit, equity, cash flow from operations and dividends from 2015 to 2017 consistently, but a decline in net profit, cash, and cash equivalents is noticed in the year 2017 due to high investment in R&D and strategic alliances with other firms.

b) Historical trends and inter-company comparisons of relevant accounting ratios

This section presents the historical trends and inter-company comparisons of different accounting ratios of Apple and Intel.

Liquidity ratios:

Liquidity ratio provides the information related to the potential of the firm to meet the short-term obligations (Keating, 2014). The below table shows the calculated liquidity ratio of both firms:

Table 3: Liquidity Ratios

Liquidity Ratios20172016201520142013
Current ratio     
Apple Inc1.281.351.111.081.68
Intel 1.691.752.451.732.36
Quick ratio     
Apple Inc1.231.331.081.051.64
Intel Inc1.291.482.121.472.06

From the above table, it can be stated that there is a decline in the current ratio of Apple (from 1.68 to 1.28) as well as Intel (from 2.36 to 1.69) from the year 2013 to 2017 with some fluctuations. But at the same time, the current ratio of both firms is above 1 showing the ability of both firms to meet their current obligations effectively, but it is not equal to ideal ratio of 2:1.

Meanwhile, Intel current ratio is higher than Apple showing better ability of Intel as compared to Apple to meet its short-term obligations. The lower current ratio of Apple as compared to Intel might be due to sharp increase in the short term debts without significant increase in the short-term assets.

In addition, the quick ratio of both firms is more than 1 but with declining trend during this period (for Apple, from 1.64 to 1.23; for Intel, from 2.06 to 1.29).

However, it is higher for Intel in comparison of Apple showing better ability of the firm to meet its short-term obligations in contingency (Edmonds et al., 2015). It is because there might be possibility of increasing short-term debts for Apple.

It also indicates that both companies can settle their short-term debts for more than 1 time without considering the inventories.  However, there is better consistency in the liquidity of Apple due to fewer fluctuations as compared to Intel.

Profitability ratios:

These ratios provide the information related to the profitable situation of the company to generate sufficient returns for the investors (Petty et al., 2015). The below table shows the calculated profitability ratio of both firms:

Table 4: Profitability ratios

Profitability Ratios20172016201520142013
Return on capital employed     
Apple Inc22.35%24.73%33.96%31.18%29.58%
Intel 16.95%13.74%16.57%20.03%1.59%
      
Net profit margin     
Apple Inc21.09%21.19%22.85%21.61%21.68%
Intel 15.30%17.37%20.63%20.95%18.25%
      
Return on Equity     
Apple Inc47.81%47.85%60.76%47.95%40.60%
Intel 29.49%19.53%23.27%28.28%21.64%
      

Regarding these ratios, it can be interpreted that there is a decline in return on capital employed (from 29.58% to 22.35%) and net profit margin (from 21.68% to 21.09%) from 2013 to 2017 for Apple, but there is an increase in return on equity (from 40.60% to 47.81%) during this period. The increase in return on equity may be associated with finance access by Apple in procurement of assets as costs incurred on borrowing.

However, there is a significant increase in return on capital employed (from 1.59% to 16.95%) and return on equity (from 21.64% to 29.49%), but a decline in net profit margin (from 18.25% to 15.30%) is also noticed from 2013 to 2017 for Intel.

The decline in net profit for both companies was because of rising cost of operations including R&D and depreciation of assets that largely affected the net profits of the firms. So, it is crucial for the management of both firms to take measures for reducing operating expenses.

But at the same time, the values of all profitability ratios are higher for Apple as compared to Intel during this period. It suggests that Apple is capable of generating higher profits as compared to Intel for its investors (Warren et al., 2013).

Efficiency Ratios:

These ratios provide the information related to the efficiency of the management to use the available resources including inventory and assets to increase sales (McKinney, 2015). In concern of these ratios, the following table presents the efficiency of the management of both firms:

Table 5: Efficiency ratios

Efficiency Ratios20172016201520142013
Inventory turnover      
Apple Inc29.0561.6259.6453.1860.76
Intel 3.394.184.004.745.14
      
Asset turnover     
Apple Inc84%89%111%109%105%
Intel 59%64%65%74%67%
      

In relation to inventory ratio, it can be depicted that the inventory turnover ratio for Apple (from 60.76% to 29.05%) as well as Intel (from 5.14% to 3.39%) declined from the year 2013 to the year 2017.

It might be due to significant increase in sales as compared to inventories of both firms with some fluctuations. However, it is higher for Apple showing the efficiency of the management to convert inventory into sales faster in comparison to Intel due to high innovation and quality focus on production.

It also shows that Apple is a labour intensive company or it adds value to brought-in products and converts its inventory into sales in shorter period as compared to Intel.

At the same time, the asset turnover ratio for both firms how high fluctuations but overall, there is a decline in asset turnover for Apple (from 105% to 84%) and Intel (from 67% to 59%) during this period indicating declining ability of the management to utilize and convert the assets into sales (Graham and Smart, 2011).

However, the value of asset turnover is higher for Apple in comparison to Intel showing the higher efficiency of Apple’s management to convert assets into sales. It means Apple uses assets efficiently to convert them into sales in less time period as compared to Intel.

Capital Structure ratios:

Capital structure ratio is related to the ratio reflecting the fund arrangement of the firm. It shows the ability of the firm to manage the capital structure effectively (Keating, 2014). The below table shows the comparison between capital structure ratio of Apple and Intel:

Table 6: Capital Structure ratios

Capital Structure20172016201520142013
Debt to Asset Ratio     
Apple Inc0.640.60.590.520.4
Intel 0.440.420.40.390.37
      
Debt to Equity ratio     
Apple Inc1.81.511.431.080.68
Intel 0.790.710.660.650.59
      
Interest coverage ratio     
 Apple Inc26.4141.2397.18136.73355.29
 Intel28.1617.6341.2077.9529.21

From the above table, it can be stated that there is an increase in debt to asset ratio of Apple (0.4 to 0.64) and Intel (from 0.37 to 0.44) from the year 2013 to the year 2017 showing the increasing contribution of debt in capital structure as both firms have increased the investment in R&D and advanced technologies more.

However, the value of debt to asset ratio for Apple is higher than Intel reflecting higher debt portion in capital structure as compared to Intel. The same results are obtained in relation to debt to equity ratio as this ratio for Apple (from 0.68 to 1.8) and Intel (from 0.59 to 0.79) increased during this period indicating the increasing contribution of debt in the capital structure.

However, it also shows that debt to equity ratio is higher for Apple or more than 1 means company uses more debt as compared to equity in its capital structure to keep the financing cost low, protect the shareholders and make large investments in R&D and innovative projects (Droms and Wright, 2010).

But the debt to equity ratio is less than 1 for Intel as the company uses more equity in its financing to increase its creditworthiness for future contingency. The regular increase in debt ratio during this period for both companies shows that both companies appear to be improving its debt position.

 Apple Inc26.4141.2397.18136.73355.29
 Intel28.1617.6341.2077.9529.21

Interest cover ratio of Apple declined over the years from 355 to 26.41 significantly at the same time, there is slight decrease in this ratio from 29 to 28 for Intel. However, it is higher for both firms imply ability of both firms to pay their interests easily. But, in 2017, interest coverage ratio is slightly higher for Intel as compared to Apple as Intel finds it easier to meet its interest payments as compared to Apple.

Stock Market Ratio:

Investment ratios are significant to provide the information related to returns on investment by the company to the investors that help them to make investment decisions. In relation to Apple and Intel, the below table presents the calculated investment ratios:

Table 7: Stock market ratios

Investment ratios20172016201520142013
Earnings Per Share      
Apple Inc $       9.21  $       8.31  $       9.20  $       6.43  $       5.66
Intel Inc $       1.99  $       2.12  $       1.88  $       2.33  $       1.88
Dividend per share      
Apple Inc $       2.46  $       2.23  $       2.03  $       7.28  $    11.80
Intel Inc $       1.12  $       1.04  $       0.96  $       0.90  $       0.90

Based on the above table, it can be analyzed that EPS for Apple has been increasing from $5.66 in 2013 to $ 9.21 in 2017 with fluctuation in the year 2016 due to impact on revenues by the competitors showing an increasing trend and ability of the firm to provide higher stock returns.

But at the same time, the company’s dividend per share declined from $11.80 in 2013 to $ 2.03 in 2015 but after this, it increased up to $2.46 till 2017. It shows that from 2013 to 2015, company reinvested its profits in R&D and new product development more affecting the dividend per share but after this, it started to increase this return to the shareholders to remain its stock attractive for the investors.

On the other hand, EPS and DPS of Intel are less as compared to Apple showing the lower ability of the firm to generate adequate stock returns comparatively. However, EPS (from $1.88 to $1.99) and DPS (from $ 0.90 to $1.12) both increased from the year 2013 to the year 2017 indicating the increasing ability of the firm to generate stock returns on its shares for the investors (Brigham & Ehrhardt, 2013).

Conclusion

Based on the above analysis and discussion, it can be summarized that Apple is performing better than Intel but at the same time, the financial performance of Apple is declining due to increasing competition and changing customers’ preferences.

In addition, it is also concluded that historical trends showed that both companies have fluctuations in trends of accounting statement entries. At the same time, ratio analysis reflects that Apple has higher liquidity, profitability and efficiency and investment ratios as compared to Intel and uses more debt in its capital structure as compared to Intel.

References

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