A Research Paper for Suitability for Apple Stocks Investment

2021-07-07 17:23:35
7 pages
1814 words
Sewanee University of the South
Type of paper: 
Research paper
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According to the Apple's 2015 Annual Report, Apple is a Multinational Corporation that is based in the U.S., and its main business niche is designing and selling personal computers, including MacBook, consumer electronics, and computer software. As such, the company 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 (Apple Inc. Annual Report, 2015). 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 (Apple Inc. Annual Report, 2015). 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.

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 (Apple Inc. Annual Report, 2015). The company has big margins, which makes it competitive compared to other stocks, such as Google.

Description of the Client

The client is an American investor, who has invested in various retailers including Walmart, Home Depot, Costco, The Kroger Company, and Target. He is aged 47 years and have completed a Bachelors Degree in Marketing from the University of Phoenix, and has a Masters degree in Business Administration (MBA) from the same university. He is married and mainly works as an investor. He has three kids, and has already pointed out that he is a great father. He has passion for American Football and Basketball, and has said that he looks forward to owning one club in America in either sports. Even though he has specialized in retail stocks, he however has expressed interest in the tech industry. In fact, the clients has proposed that he wants to invest in the tech industry, but is not experienced in the technological products. He is a loyal customer of Apple products, including the iPhone, Mac, and iPad products from Apple. The client wants to invest in a company that will have its stocks grow so that his dividends grow at a higher rate compared to the retail investment market. The client has expressed interest in investing in Apple, but wants an analysis into the propensity of the firm to fare well in the next five years, thereby guaranteeing a growth in profits. The client has clarified that the amount to invest is in the range of $200,000 to $300,000. Therefore, he wants information about the risk of investing in Apple, the financial rations, as well as an opinion into how the company has faired in the past, as well as in the future, which will enable him understand better the companys stocks, and their growth potential. The client has made it clear that he wants to place his money in a winning stock, where he will not experience losses. He has pointed out that in the past he has invested in stocks that promised huge returns only to collapse in a few months, which led to losses. As such, he has made it clear that a clear and sound analysis on the Apple stock needs to be done.

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

Profitability Ratios

Return 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)

Source: Haka, Bettner & Carcello (2008)

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:

2013 2014 2015

ROCE ratio 0.4070 0.4829 0.6137

Source: Morningstar, (2017).

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. 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, whose formula:

Source: Brigham & Ehrhardt (2013).

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

2013 2014 2015

Operating Profit margin 30.5% 28.7% 30.5%

Source: Morningstar, (2017).

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.

Liquidity RatiosAcid 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, and its formula is:

Source: Brigham & Ehrhardt (2013).

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

2013 2014 2015

Acid-test ratio 1.1 0.8 0.9

Source: Morningstar, (2017).

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. It can be derived that the company is highly dependent on inventory. However, this may not be a bad sign at all because according to Needles. and Powers (2010), 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, and its formula is: Payables Period (Days Payable) = (Accounts Payable / Cost of Sales) * 365

2015 2014 2013

Payables Period 85.57 85.45 74.39

Source: Morningstar, (2017).

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. 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. 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, and its formula is:

Source: Haka, Bettner & Carcello (2008)

For Apple, the ratio was calculated as:

2013 2014 2015

Accounts Receivables Turnover 14.22 11.96 13.62

Source: Morningstar, (2017).

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:

2013 2014 2015

Stock Turnover 62.82 57.94 83.45

Source: Morningstar, (2017).

As such, the ratio is high, and this signifies a high selling capability, which increases the corporates profitability. 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 RatiosP/E Ratio

It measures the current share price and is obtained by dividing existing per share value by the earnings per share (EPS). For Apple, the P/E ratio is given below:

2013 2014 2015

P/E ratio 11.62 14.22 17.73

Source: Morningstar, (2017).

It is observed that the ratio has been increasing over the years, thereby signifying that the investor is inclined to expect increased earnings growth in the near futures. It shows that the investors will have higher returns. For the investor who wants to invest 1million into the company, the returns the expected return swill be v...

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