Question

Compute ratios and please see additional information listed below.

Apple Company
Comparative Income Statements (000's omitted)
For the Years Ended December 31, 20x6 and 20x5
	20x6	20x5
Net Sales	$          360	$          290
Cost of Goods Sold	255	172
Gross Profit	105	118
Operating Expenses	84	65
Operating Income	21	53
Interest Expense	10	12
Income Before Income Taxes	11	41
Income Taxes	4	16
Net Income	$              7	$            25
Apple Company
Comparative Balance Sheets (000's omitted)
December 31, 20x6 and 20x5
Assets:	12/31/20x6	12/31/20x5
Current Assets	$            48	$          110
Property, Plant, and Equipment (net)	285	245
Total Assets	$          333	$          355
Liabilities and Stockholders' Equity:
Current Liabilities	36	54
Long-Term Liabilities	175	123
Total Liabilities	211	177
Stockholders' Equity	122	178
Total Liabilities and Stockholders' Equity	$          333	$          355
Common Stock:	20x5	20x4
Market Price Per Share at 12/31	$      19.80	$      28.40
Cash Dividends Per Share	$         2.80	$         2.20

Additional Information:

Total Assets at 12/31 20x3 was $200.

Total Liabilities at 12/31/20x3 were $66.

Total stockholders’ equity at 12/31 20x3 was $144.

Part 1:

Ratios Summary

Current ratio

Debt to Equity Ratio

Net Profit Margin Ratio

Gross Profit Ratio

Return on Equity

Dividend Yield Ratio

Part 2: Comment on overall performance

Answer 1

Part 1 The ratios will be as under:

Part 2 Overall performance

Despite an increase in revenues profitablity of Apple went down from 20X5 to 20X6 due to an increase in cost of goods sold and operating expenses. Cost of goods sold increased with an increase in revenues bringing the gross profit down from 40.69% in 20X5 to 29.17% in 20X6. The drop in gross margin combined with an increase in operating expenses resulted in operating income dropping by more than 50% from $53,000 in 20X5 to $21,000 in 20X6. This eventually led to a decline in net income and a steep drop in net profit margin from 8.62% in 20X5 to 1.94% in 20X6. The drop in net income also bought the Return on Equity down from 15.53% in 20X6 to 4.67% in 20X5. Thus 20x6 was not a good year for the company from profitability standpoint compared to 20X5.

Dividend yield shows how much dividend is being paid by the company as a proportion of its market price. Dividend yield for the company increased from 7.75% in 20X5 to 14.14% since the company paid more dividend in the latter year which was coupled with a decline in market price.

Current Ratio is a measure of short term liquidity which indicates if the current assets of the company are sufficient enough to meet its current liabilities. For Apple company Current Ratio was 2.04 at 20X5 and 1.33 at 20X6. This drop was mainly due to a decline in current assets which was offset by a decline in current liabilities at 20X6. From a liquidity stanpoint the company still had adequate current assets to meet its short term obligations.

Debt to equity ratio is a solvency measure which shows the proportion of total liabilities versus equity. While debt was just 0.99 of equity in 20X5 the ratio increased to 1.73 in 20X6 which shows that the company had more liablities in its financial statements compared to equity. Thus the solvency has deteriorated in the latter year.

Thus on overall basis, the performance of the company has dropped from 20X5 to 20X6 since its profitability, and liquidity ratio have gone down and its solvency ratio has increased.

Workings

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