Question

Last week, you performed a trend analysis for the manufacturing company you selected in week 2. For this week, please refer back to that company and assess the financial statements using the ratio tools you have acquired in the course.

Select at least one profitability, liquidity, solvency, and market valuation ratio and evaluate the results. Based on your findings, post an initial response to the following: What do the metrics tell you about the company’s performance? Support your answer by explaining the results from your assessment. If you were considering investing in the company, what other questions would you ask to gain further insight into the performance? minimum 250 words, the company was Apple Inc.

Answer 1

Answer :

Observation of company's market valuation - EPS tells us how much return a single share of the company is earnings. Having a $12,000EPS ( approx. ) tells us that for each share outstanding the company is paying it's owners a hefty amount of $12,000.

Observation of company's solvency - Apple is having an ideal debt to equity ratio i.e. 1.014 : 1. A 1 : 1 debt to equity ratio tells us that a company is having equal amount of borrowed funds as well as owner's fund which reduces the risk of more financial debt in the company. Apple must continue to maintain this ratio.

Observation of company's profitability - Apple is having a health return on equity rate i.e. it is providing a good 61% return on the investments made by the investors in the company. Having a 61% ROE which is more than their previous ROE of 55% is commendable and will definitely increase the goodwill of the company.

Observation of company's liquidity - An ideal current ratio is 2:1. Apple is close to maintaining that figure as currently they are having a 1.54:1 ratio which higher than their last year's ratio. A healthy current ratio signifies that Apple is able to pay off it's short term liabilities with it's current assets.

According to the trend analysis of Apple Inc. all the ratios are decreasing but the overall performance of the company is stable as the company is having good profitability. The existing investors must be happy with the performance of the company and the return on their investment

Calculation can be done as follows:

Ratio analysis of Apple Inc. as on 29th Sept 2018 ( all figures are in thousands ) :-

Profitability ratio

Return on equity = Net income / Shareholder's equity

= $59,531 / $107,147

= 0.55 or 55%

Liquidity ratio

Current ratio = Current assets / Current liability

= $131,339 / $116,866

= 1.12

Solvency ratio

Debt to equity ratio = Debt / Equity

= $93,735 / $107,417

= 0.87

Market valuation ratio

Earnings per share = Net income / Number of shares outstanding

= $55,256 / 4955.377

= $11.51

Ratio analysis of Apple Inc. as on 29th Sept 2019 ( all figures are in thousands ) :-

Profitability ratio

Return on equity = Net income / Shareholder's equity

= $55,256 / $90,488

= 0.61 or 61%

Liquidity ratio

Current ratio = Current assets / Current liability

= $162,819 / $105,718

= 1.54

Solvency ratio

Debt to equity ratio = Debt / Equity

= $91,807 / $90,488

= 1.014

Market valuation ratio

Earnings per share = Net income / Number of shares outstanding

= $59,531 / 4955.377

= $12.01

Overall, the company is worth investing in, and is likely to yield positive returns.

Some other questions to be asked before investing are:

a.     The market capitalization of the company

b.    Its position among its rivals in the industry

c.     Pending regulations (if any) against the company can affect its market value and share price.

d.    The past trends and performance on the stock exchange.