A Report on Apple Inc. Financial Performance using the Financial Ratio Analysis Approach
Analyzing the fiscal 2022 Second Quarter Results using Financial Ratios.
According to Wikipedia (2022), an annual report is a document that contains comprehensive details of a company’s operational activities and financial state or condition in the past year. These reports are purposely created to communicate the operational activities of the company, especially their financial performance, to their shareholders — both internally and externally. Any company listed publicly is legally required to develop an annual report, these reports help investors and shareholders evaluate the company’s financial standing and help these investors and shareholders make informed investment decisions. An annual report should contain the following information; financial statements, operational activities, business profile, letters to shareholders from the CEO, future objectives, management discussion, and analysis (Stobierski, 2021).
As noted in recent research (Hayes, 2022), annual reports became a consistent part of financial reporting after the crash of the stock market in 1929. Analysts use the data found in the annual report to understand the future path or direction of a company.
Similarly, financial statements are also documents that communicate the company’s activities and financial conditions. These financial statements are regularly audited to guarantee accuracy, they are also audited for investment purposes. A financial statement would normally include the following; an income statement, a cash flow statement, and a balance sheet.
Shareholders and analysts depend on these financial data — financial statements and annual reports, to assist them in evaluating the financial and operational performance of a company and enable them to predict the future direction of the company’s potential stock price or value (Murphy, 2022).
There are three major sections in this report; starting from the first section — the introductory section, where there is some background information about annual reports and financial statements, their purpose, and their use. The introductory section also discusses the purpose of the report. The second section is the main discussion — Apple Inc.’s financial performance using the financial ratio approach, analyzing and evaluating the details from their financial statements to check their financial performance. Then the last section is the conclusion, this section summarizes what has been discussed in the other preceding sections.
The purpose of this report is as follows;
- Give an introductory background to annual reports and financial statements, stating their several purposes and uses.
- Discuss financial ratios, their importance, and their limitations.
- Critically evaluate Apple Inc.’s financial performance using the financial ratio approach.
EVALUATING APPLE INC.’S FINANCIAL PERFORMANCE
Apple Inc is a global enterprise that deals with the design, production, and sales of digital/electronic products, this includes its wide range of hardware/software products and services. The company started out with the idea of building computers but has shifted focus to other areas of consumer electronics. Apple Inc. has 517 retail outlets globally and they have been named the “world’s second most valuable company” as of May 2022. Over the years they have been able to sustain the company’s value in the market and significantly increase revenue (Apple Store — Wikipedia, 2022).
Daniel (2022) explains that Apple is known for always coming out top on fortune’s lists, and they took the top spot yet again in 2021, emerging as the most profitable American company. The revenue was $365.8 billion, while the profit was $94.7 billion in 2021. Fortune’s list has had Apple on its most profitable list for several years now.
It has been noted in a recent report (Gala, 2022) that Apple Inc. announced its financial results for its fiscal 2022 second quarter which ended on the 26th of March, 2022. The business recorded a revenue of $97.3 billion, up to 9 percent year-on-year, and quarterly earnings per diluted share of $1.52. Their board of directors has declared a cash dividend of $0.23 per share of the Company’s common stock, which is a 5 percent increase. The dividend is payable on May 12, 2022, to shareholders of record as of the close of business on May 9, 2022.
Analyzing the fiscal 2022 Second Quarter Results using Financial Ratios
When analyzing an annual report, the sales figures for earlier years, assets available, and expenses need to be known. No appraisal of progress, effectiveness, or efficiency is possible without these figures (Alexander and Nobes (2004). Comparison is key when trying to appraise a company’s progress, and this comparison is gotten using financial ratios. As an investor or shareholder, financial ratios help you in making informed decisions when they are appropriately acknowledged and implemented. To get a more comprehensive detail of the company’s financial condition, one or more ratios can be used in the analysis. (Wilkins, 2022).
For this analysis, we will be using the values gotten from Apple’s condensed consolidated statements of operations for the second quarter of 2022, which can be referred to as their financial statements.
Please see the images containing the consolidated statement of operations below.
As earlier stated, we would be using financial ratios for our analysis of the above consolidated financial statements. There are several financial ratios such as; price-to-earnings (P/E) ratio, current or working capital ratio, earnings per share (EPS), debt-to-equity ratio, acid test ratio, net profit margin, and return on equity (ROE) ratio. We will be using these ratios listed above to critically evaluate Apple’s financial performance — The second quarter results.
The Price to earnings ratio (P/E) is a good indicator of a company’s earning potential. This ratio compares a company’s stock price with the earnings per share, it is calculated by dividing the company’s stock or share price by its earnings per share. This ratio can show if a company is being undervalued or overvalued. Investors and shareholders sometimes use this ratio to decide a stock’s growth potential. It is used to evaluate and analyze the potential value of an array of stocks (Wilkins, 2022).
The formula for Price to earnings ratio: Share Price / Earnings per Share
From the information provided in the financial statements, the earnings per share are already given as $1.20 and the closing price of the time period was $174.72, the trailing twelve months earnings per share is $6.16.
The Price to earning ratio = $174.72 / $6.16 = 28.36
Based on Apple Inc’s industry — consumer electronics software, this price-to-earnings ratio value may indicate that the company is overvalued.
Limitations of price to earnings ratio
These limitations include unstable market prices, the company’s total earnings, and earnings per share growth (Murphy, 2022).
- Unstable market prices: When the market prices are unstable and volatile, this can unsettle the price-to-earnings ratio in the short term.
- Company’s total earnings: These earnings are hard to decide because the price-to-earnings ratio is usually determined by calculating trailing earnings or historical earnings. These kinds of earnings are counterproductive and may be considered to not be of great use to investors and shareholders because they reflect inadequate information about future earnings. These future earnings are what the investors and shareholders are more concerned about.
- Earnings per share growth: The price to earnings ratio does not contain the earnings per share growth, not knowing the growth information reveals inadequate information about the potential earnings per share growth of the company. It is often challenging for an investor or shareholder to know if a high price-to-earnings ratio is a result of potential growth or if the stock is just overvalued.
Current or Working Capital ratio
The current or working capital ratio helps to measure liquidity. An investor or shareholder would normally evaluate a company’s financial state before investing and this involves evaluating its liquidity. Liquidity tells you how quickly a company can flip its assets into cash to settle immediate needs. This ratio considers the extent to which a company can pay its debts. As the current or working capital ratio increases, it becomes easier for the company to clear off debts using its current assets. It is calculated by dividing the current assets by the current liabilities (Wilkins, 2022)
The formula for current or working capital ratio: Current Assets / Current Liabilities
From the consolidated financial statements, we can see the value of the current assets is $118,180,000,000 and the value of the current liabilities is $127,508,000,000.
The current or working capital ratio = $118,180,000,000 / $127,508,000,000 = 0.93
The result gotten from our calculation shows that the current assets are not enough to cover the company’s current liabilities.
Limitations of current or working capital ratio
- This ratio is not an efficient measurement of the company’s liquidity because it gives inadequate information about its working capital. It depends on the current asset quantity instead of the current asset quality.
- Inventory is included in the breakdown and calculation of the current assets of a company, which leads to exaggerating the liquidity state. When inventory is included in the calculation of the current assets it can lead to reflecting the wrong liquidity health of the said company.
- The company can have a conflicting or unstable current ratio if the sales are not consistent. Low sales will result in low current ratios, high sales will result in a high current ratio. The variation of the current ratio will lead to a misinterpretation of the company’s liquidity.
Earnings per share (EPS)
The earnings per share ratio is a ratio that is used when evaluating future earnings. It assesses the income received for individual shares of a company’s stock. Investors and shareholders use earnings per share to understand the value of a company because it is a profitability measure. The ratio is calculated by dividing the net income by the average number of outstanding shares of the year.
Formula: Net Income / Outstanding Shares
From the consolidated statements, the Net income is $25,010,000 and the outstanding shares are 16,403,316.
Therefore the Earnings per share = $25,010,000 / 16,403,316 = $1.52
This indicates that Apple Inc. had an EPS of $1.52 per share in the second quarter of 2022. Generally, as the earnings per share of a company increase, profitability increases. Stocks with higher earnings per share have higher prices, this means Apple’s stocks gained higher prices.
Limitations of Earnings per share
- A company can influence the earnings per share value by decreasing the outstanding shares, this can happen when the company repurchases or overturns a stock split.
- The earnings per share do not expressly show the true performance of the company because it does not consider or regard the price of the share.
Debt to equity ratio
The debt to equity (D/E) ratio considers how much money a company borrows to fund its operational activities, in other words, it measures the extent to which the operations within the company are funded by debt. The ratio can determine if shareholder equity can pay back all the debts when the need arises, if the company is borrowing too much it poses a risk to its shareholders. This ratio is calculated by dividing the total liabilities by the shareholder’s equity. (Wilkins, 2022)
Formula: Total Liabilities / Shareholders Equity
From the consolidated financial statement, the value of total liabilities is $283,263 and the value of shareholder equity is $67,399.
Using the above formula we have;
Debt to Equity ratio = $283,263 / $67,399 = 4.20
The ratio is greater than one, which means Apple holds more debt and is considered sensitive to investors. This is because the ratio indicates that Apple is funding a great amount of its possible growth through debt. In a general sense, a good debt to equity ratio is around 1 to 2.0. This 4.20 ratio reflects the amount of equity and debt Apple uses to fund its assets.
Limitations of the Debt to equity ratio
Some of the limitations of the debt to equity ratio are as follows;
- The debt to equity ratio has numerous variations and this makes it difficult to compare and evaluate. Most times this information is not easily obtainable or accessible in the financial statements and may need further research.
- Volatile input is another limitation, the ratio value on the market which has a sensitive share price may be plausible, but it may require polishing, this is an estimation hence it may not be error-free.
- Debt to equity ratio differs from one company or industry to another, this is because different industries possess different capital requirements.
Acid test or Quick ratio
This ratio indicates business liquidity, it shows how quickly a company can flip its assets to cash to be able to settle immediate liabilities. To calculate the acid test or quick ratio, subtract the current inventory from current assets and then divide the value by the current liabilities.
Formula: (Current Assets — Inventory) / Current Liabilities
From Apple’s consolidated financial statement we can see the following values;
Current Assets: $118,180,000
Current Liabilities: $127,508
The Acid test or Quick ratio = ($118,180,000 — $5,460,000) / ($127,508,000) = 0.88
As seen from the result gotten from the above calculation, the value of Apple’s quick ratio for the second quarter of 2022 is less than 1. When a quick ratio is less than 1, it can mean that the liquid assets of the company are not enough to pay current or short-term liabilities. In some cases, this may be a temporary condition.
Limitations of Acid test or Quick ratio
- Acid test or Quick ratio does not consider long-term liabilities
- This ratio can exaggerate or overemphasize the actual state of invoices, bills, or accounts receivable
- The ratio can exaggerate the actual working capital and cash flow of marketable securities during economic downtimes.
Net profit margin
The net profit margin considers profitability, it is one of the basic financial ratios. It indicates how well a company manages its costs and how efficiently they convert revenue into profit. The formula for net profit margin is profit divided by revenue.
Formula: Net Profit / Total Revenue
The values for profit and revenue for Apple Inc’s second quarter of 2022 are as follows;
Profit — $25,010,000,000
Revenue — $97,278,000,000
Net Profit Margin = $25,010,000,000 / $97,278,000,000 = 0.257 (25.7%)
The value of the net profit margin from our calculation indicates that the company is efficient in turning sales into profits.
Return on Equity (ROE) ratio
The Return on Equity ratio measures your company’s profitability, it determines the amount of profit your business generates with the shareholder’s equity. The return on equity ratio is one of the most important financial ratios for calculating profit because the result tells you about a company’s overall profitability, and can also be referred to as return on net worth. This is calculated by dividing the net profit by the shareholder equity (Wilkins, 2022).
Formula: Net Income / Shareholder Equity
Net Income: $101,940,000,000
Shareholder Equity: $67,399,000,000
Return on equity ratio = $101,940,000,000 / $67,399,000,000 = 1.512 (151.2%)
The value gotten from our calculation indicates growth quarter on quarter and also year on year, which shows that the company is very profitable.
Limitations of Return on Equity ratio
Some of the limitations of the return on equity ratio are stated below:
- Return on Equity ignores cash flow. When a company focuses on return on equity, it may ignore cash flow which is also as important. This ratio uses only net income.
- The value of the Return on Equity ratio can be influenced using various accounting management policies.
- The return on equity ratio fails to measure the actual figure that a company can produce.
This report briefly introduced the purposes and uses of annual reports as well as financial statements, it explained their role and significant importance to any company. The report has also discussed in detail, the different financial ratios. These financial ratios have been defined and their purposes and uses have been stated clearly, as well as their importance and limitations. The financial ratios listed were used to critically evaluate Apple Inc’s financial performance, we used the financial statements for the second quarter of the year 2022. The different financial ratios that were calculated reflect the profits, loss, risks, debts, and other financial information that are related to Apple Inc. for that time period. This financial information, though the records are in the past, has assisted in showing the state of the company’s financial performance during that time period. This financial data can help investors or shareholders to make informed investment decisions in the future.
Furthermore, for you to know what financial statements say about your company, you must calculate these financial ratios, otherwise, you will make wrong calculations and decisions based on the wrong data. While all the financial ratios are important, you have to choose the most relevant one as per your use case to gain a better understanding of your company’s potential.
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