Question

We have covered several ratios that users of financial statements can work with to evaluate a company's performance. However, not all ratios are important for or applicable to all organizations. In particular, service organizations have different business models than manufacturing organizations. Using the company Apple Inc, explain which financial ratios would be applicable to the company and which would not. State the reasons for your assertions.

As portfolio activities are to be self-reflective, please make sure to connect the portfolio assignment to:

• Your personal experiences. Reflect on how this assignment topic is applicable to and will benefit you.
• any external readings.

Please provide detailed answer

Answer 1

PART I)

The ratios used to analyze the company in the service sector, especially when it is in the technology sector, the main concentration would be towards conducting the research and development expenses, production costs of technological products, short term debts, margins and distribution of technology based services and products.

The companies is service sectors do not maintain high inventory level and the capital investments in these companies is large. The leverage ie. Issuance of short term debt instruments always in large amounts. So, ratios which are based on inventory and long-term debt is of no importance. So, the vital ratios for the company like Apple,Inc., could be:

1) Liquidity ratios: Ratios like Cash coverage ratio and Current ratio shows the liquidity maintenance of the company to tackle the current obligations.

2) Activity ratios: The high concentration on the heavy fixed asset, receivables and payables and capital involvement both short term and long term, following ratios shows the quality of management control on various activities: a) Accounts receivable turnover ratio, b) Accounts payable turnover ratio, c) Fixed asset turnover ratio, d) Sales to working capital ratio and e) Working capital turnover ratio.

3) Leverage ratios: Being highly capital intensive with high leverage ie. debt relying investment, so following ratios are important for service sector: (i) Debt to equity ratio, (ii) Debt service coverage ratio.

4) Profitability ratios: Being highly capital intensive sector, the analysis of the profitability is important under the following ratios: a) Contribution margin ratio, b) Breakeven point, c) Margin of safety, d) Gross Profit ratio, d) Net profit ratio, e) return on equity, f) return on assets & g) return on fixed assets.

PART II)

Through the studies on the ratios applicable on the service sector and mainly concentration on Apple, Inc. makes the study of “Ratios analysis by exception”. The applicable ratios will provide more accurate performance analysis of the service companies.