Term Paper on "Apple Inc.: Financial Analysis"

Term Paper 3 pages (1116 words) Sources: 1+

[EXCERPT] . . . .

The debt-to-equity ratio would come in handy as we seek to determine the proportion of equity being utilized by Apple in the financing of its assets. Apple had a significantly higher debt to equity ratio in 2014, in caparison to 2010. This is a clear indication that the company is aggressively making use of debt to finance or fund its growth. The risk in this case is that as a result of this approach, the company could experience somewhat volatile earnings in future. This is particularly the case given that there is an additional interest expense in this case. It should, however, be noted that if Apple manages to generate a return on the debt that is higher than the cost of debt, stockholders would benefit than they would have if the company had not made use of debt in the first place.

With regard to how the firm has been utilizing its assets, it would help to take into consideration two of its asset turnover ratios: its receivables turnover ratio and average collection period. The lower receivables turnover ratio in 2014, in comparison to 2010, indicates that the company is not as efficient in the collection of accounts receivables as it was four years ago. I would recommend that the firm re-evaluates the credit policies it has in place. The average collection period ratio of Apple has also increased within the four-year period. This could mean that the company is taking longer than it did four years ago to convert its receivables to cash. This could, if not remedied, limit the company's ability to settle its own obligations in the short-term.

The ratio analysis would not be complete without measuring Apple's success in profit generation. While the company's return-on-equity for the financial year ended 2014 is impressive in comparison to its return-on-equity four years ago; the company's return on assets ratio does not return favorable results. A higher return-on-equity, as Albrecht, Stice, and Stice (2007) point out, is a good measure of the amount of profit a given entity earns for each dollar that has been invested by shareholders. If Apple is able to maintain the trend, then its shareholders will be better off going forward. The company could also retain a significant portion of the said profit and reinvest it in other promising ventures, thus raking in greater returns for shareholders going forward. The lower return on asset indicates that the firm's ability to generate earnings from its assets or invested capital has fallen within the four-year period. This could be an indication of inefficiency on the part of the management.

Some of the questions whose answers I would seek from the financial manager include: how efficiently the company is making use of borrowed money, the actual cost of the company's debt, and the term of its long-term obligations. This would help me come up with a fairly accurate risk profile of the company.

This analysis was of great relevance as far as the enhancement of my understanding of financial statement analysis is concerned. Generally, I did not encounter any significant challenge in the completion of this project. Interpretation of the results from ratio analysis was, however, slightly difficult.

References

Albrecht, W.S., Stice, E.K. & Stice, J.D. (2007). Financial Accounting (10th ed.). Mason, OH: Thomson Higher Education.

Andrew, J.D. & Gallagher, T.J.… READ MORE

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