Rationale for Selecting Apple Stock - Paper Example

Apple Inc., being an American Multinational Corporation (MNC), designs and sells computer software, consumer electronics, and personal computers. It is best known for Macintosh branded computers, iPod, iPad, and iPhone for hardware products. On the software side, it is known for OS X, iOS, and iTunes. Regarding financial performance, the company has exhibited much success in the past. Apple Inc., in the last quarter of 2014, recorded the largest net income of any public traded company in history. The company had record iPhone sales of USD74.5 million. The high returns are contributed by the exports by the numerous exports, as well as the high performance that has facilitated success in the domestic market. As such, this has increasingly bettered the price range per share of common stock. For instance, the fourth quarter of 2014 was between $92.09 and $103.74, but this improved to between $ 92 and $132.97 (Apple Inc. Annual Report, 2014 and 2015). For this reason, this signifies that the financial performance of the company has improved significantly over the years. The increase of shareholders can also represent the strong financial position. For instance. As of October 2015, the company had a record of 25,924 shareholders. The net sales, as reported from the annual financial statement rose 28%, which signifies a $50.9 billion in 2014 compared to the 2015 fiscal year, which is mainly driven by a 52% increase in iPhone net sales (Apple Inc. Annual Report, 2015). This current paper discusses the financial position of the company, with special consideration of the financial ratios.

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Besides, as Copeland (2010) asserts, the technology spending is growing compared to the overall economy. The technological sector has been growing over the last two decades, meaning that investing in Apples stock will be advantageous to the client. In essence, considering economics, the demand for technological products, especially Apples is always high, including laptop computers. Besides, every quarter, the company generates billions of dollars of excess cash flow that continues to accumulate, and thus, adds value to the valuation of the stock. The company also has quality products that the consumers prefer, especially the iPhone, which significantly drives the profits. The company has big margins, which makes it competitive compared to other stocks, such as Google.

Apple Inc.s Financial Ratios and Advice to the Client/Investor

Profitability RatiosReturn on capital employed

The Return On Capital Employed (abbreviated ROCE) ratio is mainly used to measure the proportion of the adjusted earnings to the subsequent amount of debt and capital for a corporation (Brigham and Ehrhardt, 2013). For the company to have a healthy financial performance, and for it to remain in business in the long term, the return on capital needs to be higher compared to the cost of capital (Dunbar, 2000). On the contrary, the continuing company operations will gradually reduce the earnings that are available to the shareholders. For this reason, the ROCE ratio is commonly used in making comparisons of the efficiency of the capital usage of companies within the same industry.

ROCE is calculated by adopting the following formula:

Earnings before interest and taxes/ (Total assets - Current liabilities)

In this case, for 2015 is calculated as:

$73.25 billion/($290,479 million -$171,124 million)= 0.6137= 61.37%

For 2014:$53.87 billion/($231,839 million- $120,292 million)= 0.4829= 48.29%

For 2013

$50.29 billion/ ($207,000 million - $83,451 million) = 0.4070 = 40.70%

These can be summarized in the chart below:

Year 2015 2014 2013

ROCE ratio 0.6137 0.4829 0.4070

It can be derived that the ROCE ratio increased significantly over the years, from 40.70% to 48.29%, and finally to 61.37% in 2013, 2014, and 2015 respectively, meaning that the company increased its efficient use of capital. In consequence, it indicates that the company is generating more shareholder value (Wikinvest, 2016). It is suggested that the client should spend in the company.

Operating profit margin

The operating profit margin is primarily used in measuring the pricing strategy, as well as the operating efficiency for a company. In essence, as Weygandt et al. (2015) assert, it can be referred to a measurement that determines the corporates revenue that remains, usually after the firm has paid for the variable production costs, including raw materials and wages. It is calculated by dividing the business operating income or profit by the net sales in the same period. The formula is simplified as below:

The following table shows the operating profit margin for 2013, 2014, and 2015 for the company.

Year 2015 2014 2013

Operating Profit margin 30.5% 28.7% 28.7%

The operating profit margin gives analysis and investors an idea of how much a company makes on each dollar of sales. In the case of Apple, the companys financials indicate that the ratio has increased over the years, meaning that the company is earning more per dollar sales, hence, a good indicator that the investor needs to invest in the enterprise.

Gross profit margin

As Albrecht et al. (2010) purport, the gross profit margin assesses a companys financial health by indicating the proportion of the money that is left over from revenues, which comes after accounting for the cost of goods sold within the period. It serves as a foundation for future savings and paying additional expenses. It is calculated by subtracting the cost of goods (COGS) from the revenue, and then dividing the resulting figure by the revenue. This is simplified as indicated below:

In the case of Apple, the gross profit margins have been indicated below:

Year 2015 2014 2013

Gross Profit Margin 40.1% 38.6% 37.6%

As indicated in the table, the gross profit has been increasing over the years. Therefore, Apple has been performing favourably in its pricing strategy, thereby a good financial health. Since the company has an adequate gross profit margin, it can pay its operating expenses, as well as ensure that the company has a good financial future because it is not only stable, but it has increased over the last couple of years. Good financial future warrants that the investor will expect high yields.

Liquidity RatiosCurrent ratio

According to Henry and Robinson (2015), the current ratio determines the efficiency of a company, as well as how liquid it is, thereby enabling the determination of how capable it is to pay off its short-term liabilities using its current assets. The ratio is an important measure of a firms liquidity because the short-term liabilities are usually due within the next financial year. As such, this translates to the fact that the company has a limited time to raise funds capable of paying these liabilities. It is imperative to correlate that the current assets can be converted to cash in the short term, such as marketplace securities, cash, and cash equivalents (Juma'h and Pacheco, 2008). The ration is calculated by dividing the current assets with the current liabilities. It is usually stated in numeric format. This can be simplifies into the following formula

For Apple, these can be obtained as follows:

Year 2015 2014 2013

Current Ratio 1.11 1.08 1.68

As seen from the current ratios, in 2013, the value was very high but plunged in 2014 but increased significantly in 2015. However, it is vital to know that the value always remained more than one. For this reason, it can be derived that the company has more assets than liabilities, and for this reason, the company can easily make current debt payments (Needles and Powers, 2010). Hence it is advisable to invest in the company.

Acid test ratio

As Haka et al. (2008) assert, the acid-test ratio indicates whether a company has sufficient short-term assets that can cover for the immediate liabilities. It is also frequently denoted to as the quick ratio. It is calculated adding cash, accounts receivables and short-term investments, and dividing the resultant figure with the current liabilities. The formula below simplifies the formula:

The acid-test ratio for Apple can be summarised below:

Year 2015 2014 2013

Current Ratio 0.9 0.8 1.1

Companies that have acid test ratio that is less than one should be treated with caution because it means that the company does not have liquid assets that can pay its current liabilities (Martani and Khairurizka, 2009). Further, if the ratio is lower than the current ratio for the same year, it can be derived that the company is highly dependent on inventory. However, this may not be a bad sign at all because the industry mostly relies on inventory to generate sales and profitability. It is advisable that the investor should invest in Apple.

Efficiency RatiosPayables Period

It measures the number of days that a firm takes to pay its suppliers. As such, it indicates the number of says that a company takes to pay its suppliers. A greater number shows that the company has more cash for other working capital needs. It is calculated by dividing the accounts payable by the cost of sales, and then dividing the resultant figure by 365. The formula is simplified below:

Payables Period (Days Payable) = (Accounts Payable / Cost of Sales) * 365

Year 2015 2014 2013

Payables Period 85.57 85.45 74.39

As such, from the table, it is clear that the days increased significantly since 2013, meaning that the company takes more days to pay its suppliers, and thus, it can be derived that the company has more cash to take care of the working capital needs. This is good for the company and investor (Martani and Khairurizka, 2009). It would be recommended that the investor should put his money to Apple.

Receivables Turnover Ratio

The ratio quantifies how a firm is effective in extending credit and also, in collecting debts on credit. As such, it can be considered as an activity ratio that measures how efficient a firm is in using the current assets (Hoskin, Fizzell and Cherry, 2014). It is mainly calculated by dividing the net value of credit sales in a given period, say a companys financial year, by the accounts receivables in the same period. The formula is simplified as follow:

For Apple, the ratio was calculated as:

Year 2015 2014 2013

Accounts Receivables Turnover 13.62 11.96 14.22

The high ratio indicates that the company has high-quality customers, and thus, it is a company worth of attracting more investors. High-quality customers translate to high profitability, and thus, high investor returns. The ratio indicates that the investor will have to enjoy high returns.

Stock turnover

This ratio discloses how many times a businesss stock is sold and replaced within the same period. This is usually obtained by dividing the sales by the inventory or stock. Also, it can be derived by dividing the cost of goods by the average inventory. Lower turnover indicates poor sales, and thus, the company has excess inventory. On the other hand, a high ratio shows strong sales (Naughton et al., 2008.) For Apple, these were calculated as below:

Year 2015 2014 2013

Stock Turnover 83.45 57.94 62.82

As such, the ratio is high, and this signifies a high selling capability, which increases the corporates profitability (Peress, 2010). For the investor who wants to invest 1million into the company, the company has a high selling capability. Thus, the company can generate more sales that can increase the investor and shareholder value. Therefore, the investment would be worth it.

Market RatiosEarnings Per Share

The ratio is an expression of the companys net income that is expressed on a per share basis. It is obtained by dividing the net income by the weighted average outstanding shares. The formula is simplified as follows:

For Apple, it was calculated as follo...