The selected company in this case is Apple. Apple Company is selected because it is publically traded and it has demonstrated positive trend in its revenue and net income for the last 5 years. Apple, Inc. markets, manufactures, and designs media devices, mobile communication, portable digital music players, and personal computers. It also sells a number of related network solutions, software, peripherals, services, and third-party digital applications and content. Its services and products include Apple TV, iPhone, iPod, Mac, iPad, professional software applications and consumer portfolio, iCloud, the OS X and iOS, among others. The company is highly competitive in the market. It ranks second in the world smartphone market after Samsung. Therefore, this is a potential investment for any client. It has the high ability to grow and hence it can easy pay for any investment (Finance. Yahoo, 2015). This paper focuses on establishing how suitable Apple Company is for investment.
Rationale for Selection
Apple Company is an international technology company. It provide unique products which are highly famous for new technology and highly preferred for their ability to satisfy the taste and preferences of its targeted consumers. The company has demonstrated a positive trend in its revenue for the last 5 years where the company has been experiencing increase in the revenue. Consequently, the company has demonstrated a constant increase in its net income and also in the dividend paid to the common stock for the last five years. This positive growth demonstrates the company’s ability to offer higher returns to its investors in the future. In addition, the company records a continuous increase in its earning per share. This a clear indication that the company is growing and may experience higher growth in the future. The two graphs below demonstrates a high financial health for the company. The company profit margin is quite high in the first graph as well as it operational margin. It manages to carry out all its operations with available current assets and thus, it can server for a good and well-paying investment. This is demonstrated by the two graphs below (Financials.morningstar, 2015):
The company is currently experiencing a considerable growth in its market share where it has recently manage to dominate the smartphone market with its iPhone product. According to September 2015 market share result, the company has managed to lead the market with 43.6% over its close competitor Samsung that recorded 27.6%. Therefore the company can also be said to be highly competitive and with this continuous growth in its market share, the company will manage to increase its total revenue further and subsequent increase in its dividends or earnings per share.
The company also has a large volume of assets which have been increasing in the last five years. It also has considerable amount of total liabilities which increases per year. However, the company’s total assets are considerably higher than its total liabilities with assets being almost 1.7 times more than the liabilities. Similarly, the company’s current assets were slightly higher than its current liabilities which is a clear indication that has always managed paying for its operation cost without the need for loans or external financial sources. The company have a very minimal dependence on loans and thus, demonstrating a low chance of losing to the creditors. Therefore, it can serve for good investment. The company assets and debt trends are shown in the graph below (Financials.morningstar, 2015):
My client is a small information technology company that wishes to have a medium term investment in a company that will give it a considerable returns in the future. The company which is located in Asia wish to expand its business by investing in a growing and stable company based in the United States which will enable them to earn a considerable amount of return to expand their business. The investor wishes to invest for not less than 5 years anticipating this will give a considerable return after that period as a result of considerable growth in the share value. The client mainly focus on making great return and thus, he is willing to take considerable risk at least middle level risk to get a considerable amount. The investor does not need a high liquidity investment. Instead the investor wishes to have an investment that can only be liquidated on its maturity period. If possible, the investor wishes to reinvest a considerable amount of the total earned from this investment after maturity either in the same company based on its financial health at that time or to another company which will prove to be worth during that period. The main purpose of this investment is to enhance business growth and expansion in the future. The company anticipate to expand to international level within the next six years and this is one way to enable this kind of growth. Thus, a company with a good financial history and that have a high ability of remaining stable in the next five years will be highly preferred (Sorted.org, 2015).
Apple Company has been selected in this case since it has a high ability of giving considerable returns in the next five years. The company has managed to invest in technology since its establishment in 1977 and despite Steve Jobs death, the company has managed to continue making profit and overcoming the anticipated shock. The company has also managed to obtain trusted customers who look forward to their new improved products. This makes the future of the company a bit promising since it is not anticipated to reduce its revenue greatly even during the crisis. The company has also managed to beat its closest and strong rival Samsung recently which is a good sign for dominating in the smartphone market in the future which is the company’s major product. Thus, a five year investment in this company is highly promising.
It very important to understand the company’s financial health before making a decision on whether to invest in a company or not. The best way to evaluate the company’s financial health is by evaluating the financial ratios of the company. Financial ratios serve as one way of effectively analyzing the company’s financial statements. The following section evaluates five different ratios to evaluate the financial health of Apple Inc. The section will focus on determining the company trend on the analyzed ratio for the last three years.
Current ratio measures the aptitude of an entity to pay its current responsibilities. Current normally is described as a short term evaluation. This is evaluated as current asset divided with current liabilities. The company’s current ratio for 2015, 2014 and 2013 for the company are computed below (Finance. Yahoo, 2015):
The company current ratio declined on 2014 with about 0.6. However, it has yet recovered and there is an increase in the current ratio. Nevertheless the company current ratio has always been higher than 1 which is a clear indication that the company can manage to cater for all its expenses using their current assets. Thus the company is not operating on debts and thus, it is hard to lose to creditors and debtors.
Quick ratio refers to a financial ratio employed to evaluate the liquidity of a company. It evaluated the ability of a company to handle its short-term roles. In this regard, quick ratio eliminate inventories from current assets and it is computed as current subtract inventories and then divided by liabilities (Research.uvu, n.d). The company quick ratio for the last three years is computed below (Finance. Yahoo, 2015):
The company quick ratio had declined from the amount recorded in 2013 to 2014 and later increased slightly from what was recorded in 2015. However, the company has a quick ratio of more than 1 in all cases. In this regard the company can be said to be in a fair liquidity position and the situation may be much better if the company’s liquidity would increase even further.
Earnings per Share (EPS)
Earnings per share refers to the part of the profit of the company allocated to every outstanding common stock share. EPS acts as an indicator of the firm’s profitability. It is computed by subtracting dividends on preferred stock from thenet income and the output is then divided with average outstanding shares. The company provide its EPS for the last three years in Morningstar as follows (Financials.morningstar, 2015).
|Earnings Per Share||9.22||6.45||5.68|
It is evident based on this presentation that the company EPS has been increasing from what was recorded from 2013 to what was recorded in 2015. This can therefore be interpreted that the company profitability has been increasing and thus the value of its shares has also be increasing. It is therefore evident that if the company continues with this trend, the value of its share will continue to increase and an investor considering to invest for whatever period of time will make a huge profit by selling the shares. Then the company can be considered as a good place to invest since this high level of profitability is highly likely to increase the dividend earned by investors in every year.
Debt-equity ratio refers to a financial ratio showing moderate proportion of debt and shareholder’s equity employed to finance the assets of the company. The ratio weighs the company’s leverage. It is computed by dividing the total liabilities of the company with the equity of the stockholders (Research.uvu, n.d). The debt-equity ratio for the company for the last three years is provided based on Morningstar as follows (Financials.morningstar, 2015):
The company started considering debt as part of its equity from 2013. Before then, the company was only depending on equity to finance its assets. However, since then the company level of debt has been increasing steadily and it is currently financing almost half of its operations using debts. However, the level of equity is still high than the used debt. The situation seems fair at the moment. However, the company should consider not adding more debts to its capital to reduce the risk of losing to debtors and paying high loans related interest which interferes with the company’s profitability.
Return on Equity
Return on equity refers to the part of net income which is returned as shareholders equity percentage. It weighs the profitability of a corporation by revealing the amount of profit a firm creates with the amount invested by shareholders. It is presented as a percentage and it is computed as net income divided by the shareholder’s equity. In this case, shareholder equity is exclusive of preferred stock (Research.uvu, n.d). The company has provided return on equity for the last three years as follows (Financials.morningstar, 2015):
|Return on Equity||46.25||33.61||30.64|
The company demonstrate a positive trend on its return on the equity. This demonstrates an increase in the company’s ability to utilize the shareholder’s equity into cash. With this trend the company will manage to create more earnings using stakeholder’s money. This will increase its profitability in the future. In this regard, this is a very good investment since the company demonstrates the ability use investors’ equity effectively and thus increasing the chances of earning more from the equity.
The Company’s Risk Level and Risk Management
Normally, investors make their investment anticipating more in return. However, this is not normally the case, there are so many risks that prevail which determine whether an investor make more in return or losses some money. The risk pyramid classify risks as low, middle or summit. Low risk is normally associated with government investments such as bonds and bills, the middle level risk is associated with large capital market among others while summit level refers to more collectible investments. High risk is normally associated with a high level of return (Mlc, n.d.). Apple Company experiences a number of risks which would put it more into a middle level risk investment. One of the greatest risk that face the company is the market risk. Apple is an international company which normally targets on middle to upper class consumers in the world. However, it is facing stiff competition from Samsung which creates products for all in the market including low class individuals. This makes Apple to lose a considerable part of its marketshare to Samsung in different parts of the world. The company also face competition from emerging and existing companies all over the world, an aspect that may increase its market risk. A slowdown in the company’s rate of market penetration may highly influence the company’s sales and thus its profitability. In addition, the company faces currency exchange risks especially in countries where their currency appreciate against dollar. This reduces the company’s earnings as the company incur losses during the exchange.
The growth and expansion of Apple, Inc. highly depend on new innovations. The company runs a high risk of slowing down in case the company is unable to maintain its innovation strategies. The company invest a lot in research and development and thus, any failure from this department may affect the company’s profitability extensively in the future. The company also faces other universal risks which are risks that cannot be completely eliminated among these risks is the regulatory risk which normally happen in foreign investments and business cycle risks. The company also experiences inherent risk such that it highly depend on one product to contribute a great deal of its revenue despite having so many diverse products. For instance, iPhone contributed about 75% of the total company’s revenue in 2015. This implies that iPhone has a high ability to determine the future of the company. Any slight failure of iPhone in the market can greatly affect the company and its investors badly.
Based on this analysis, investors will be taking a considerable risk investing in the company. In this regard, they need to employ different strategies to cope in this investment. The best way to cope with the universal risks is by use of portfolio diversification or by use of active trades timing. Investors should also consider making a short term investment rather than risking with a long-term investment. In this case, the investor should keep a close eye on the company market share and profitability and incase it stagnates or demonstrate some negative trends or a slowdown in the rate of growth, the investor should consider selling their shares then to avoid great losses in the future (Mlc, n.d.).
The paper has highly evaluated the financial position of the company and its possible risks. The financial analysis demonstrates good financial health. Although there is a slight decline in the company’s current ratio and quick ratio in 2014, the company seems to have quickly recovered from this small shock and it is currently on the track. Moreover, the small variation did not affect the investors earning or earnings per share. This demonstrated a positive trend all thorough. The company does not rely highly on debts and with its current capital structure, the investors do not have a high risk of losing their money to creditors. In addition, the company return on equity is considerably high and continuing to increase. In this regard, the company’s financial condition portrays it as a good place to invest in. The investor is highly probable to make considerable returns after a medium period of investment. Therefore, the client should consider making this investment.
The company seems to be facing a number of risks, however, it is important to note that there is no investments without risks and the higher the risk the greater the returns. Moreover, apart from the universal risks, the company can highly manage its other risks. For instance, the company can still manage maintaining high level of innovation to ensure that their legacy of developing new and innovative products that addresses customers taste and preferences are always available. In addition, the company can consider avoiding the nations with strict currency exchange measure especially where the government determine the floating rate of dollar, rather than the free market to avoid exchange risks. Therefore, it is not guaranteed that the company will be affected by these risks. In this regard, the investor should not be drawn off by the high number of risks perceived in the company. However, the investor should be keen on the company’s market trend and in case of any alarming situation, the investor should consider selling the shares before he incur losses.
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