Questions:
Locate a publicly traded U.S. company of your choice. Then, calculate the following ratios for the company for 2012 and 2013:
• Liquidity Ratios
o Current ratio [current assets / current liabilities]
o Quick ratio [(current assets – inventory) / current liabilities]
• Asset Turnover Ratios
o Collection period [accounts receivable / average daily sales]
o Inventory turnover [cost of goods sold / ending inventory]
o Fixed asset turnover [sales / net fixed assets]
• Financial Leverage Ratios
o Debt-to-asset ratio [total liabilities / total assets]
o Debt-to-equity ratio [total liabilities / total stockholders’ equity]
o Times-interest-earned (TIE) ratio [EBIT / interest]
• Profitability Ratios
o Net profit margin [net income / sales]
o Return on assets (ROA) [net income / total assets]
o Return on equity (ROE) [net income / total stockholders’ equity]
• Market-Based Ratios
o Price-to-earnings (P/E) ratio [stock price / earnings per share]
o Price-to-book (P/B) ratio [market value of common stock / total stockholders’ equity]
You are now ready to interpret the ratios that you have calculated. If a ratio increased from 2012 to 2013, why do you think that it increased? Is it a good or bad sign that the ratio increased? Please explain.
If a ratio decreased from 2012 to 2013, why do you think that it decreased? Is it a good or bad sign that the ratio decreased? Please explain.
If a ratio was unchanged from 2012 to 2013, why do you think that it was unchanged? Is it a good or bad sign that the ratio was unchanged? Please explain.
Answers:
Apple Inc
For the purpose of this assignment, Apple Inc is chosen for the study. It has a strong market related to design, manufacture and marketing of phones (Apple Inc, 2013). It is a publicly traded US company and has a strong distribution channel.
Liquidity Ratios
Current ratio
| Current ratio | ||
| 2013 | 2012 | |
| Current assets | 57653 | 73286 |
| Current liabilities | 38542 | 43658 |
| Current ratio | 1.495849 | 1.678639 |
Current ratio has decreased in 2013 as compared to 2012, which is not a good indication because the standard ratio is 2:1 and in 2012, the company was striving to achieve that. However, in 2013, the ratio dropped and this is due to the increment in current liabilities.
Quick ratio
| Quick ratio | ||
| 2013 | 2012 | |
| C.A – Stock | 56862 | 71522 |
| Current liabilities | 38542 | 43658 |
| Quick ratio | 1.475326 | 1.638234 |
This ratio is popularly known as the Acid test ratio. The standard ratio is 1:1. In 2012, the quick ratio was high while in 2013 it dropped and striving to achieve the standard ratio of 1:1. The ratio projects that the company has idle cash that be put to good use and returns can be extracted (Horngren, 2013).
Asset Turnover Ratios
Collection period
| Collection period | ||
| 2013 | 2012 | |
| Account receivable | 10930 | 13102 |
| Net Sales | 170910 | 156508 |
| avg sales | 468.2466 | 428.789 |
| Collection period | 23.3424 | 30.55582 |
The collection period in 2012 was 30 days while in the year 2013 it dropped to 23 days signifying that the company will be getting the money in a quick span of time. The drop in the ratio projects that the company will be able to rotate the funds quickly and hence of great advantage (Davies, 2012).
Inventory Turnover
| inventory Turnover | ||
| 2013 | 2012 | |
| COGS | 106606 | 87846 |
| inventory | 1764 | 791 |
| inventory Turnover | 60.43424 | 111.0569 |
The inventory turnover ratio dropped significantly in the year 2013 when compared to 2012. It stresses that the company will be able to convert finished goods into sales, 60 times a year as compared to 111 times in the year 2012. This implies that the inventories were managed in an improper way that led to a decline (Graham & Smart, 2012).
Fixed asset turnover
| Fixed Asset Turnover | ||
| 2013 | 2012 | |
| Sales | 170910 | 156508 |
| net Fixed Assets | 207000 | 176064 |
| Fixed Asset Turnover | 0.825652 | 0.888927 |
The fixed asset turnover ratio has declined marginally in the year 2013 that indicates the asset has not been utilized in a proper manner. The effect is marginal in nature and hence of less concern and proper focuses needs to be given so that assets are utilized properly (Brealey, et. al, 2011).
Financial Leverage Ratios
Debt-to-asset ratio
| Debt-to-asset ratio | ||
| 2013 | 2012 | |
| Total Liabilities | 83451 | 57854 |
| Total Assets | 207000 | 176064 |
| Debt-to-asset ratio | 0.403145 | 0.328596 |
The ratio has increased marginally in the year 2013 as compared to 2012 indicating that the amount of debt has increased (Apple Inc, 2013). The ratio is lower that means the level of financial risk is low and the company is not exposed to debt on a big scale.
Debt-to-equity ratio
| Debt-to-equity ratio | ||
| 2013 | 2012 | |
| Total Liabilities | 83451 | 57854 |
| Stockholder equity | 123549 | 118210 |
| Debt-to-equity ratio | 0.675449 | 0.489417 |
The debt equity increased in 2013 indicating an increase in the level of debt. It is not a good sign as the ratio shows that the debt is more than 50% that is alarming. The increment is due to indulging in more debt.
Times-interest-earned (TIE) ratio
| Times-interest-earned (TIE) ratio | ||
| 2013 | 2012 | |
| EBIT | 50155 | 55763 |
| interest | 13118 | 14030 |
| TIE ratio | 3.823372 | 3.974555 |
This ratio has dropped in a small percentage that is of not a big concern. The company is in a proper condition to meet the debt obligations. Income before interest has declined and hence the drop in the ratio.
Profitability Ratios
Net profit margin
| Net profit margin | ||
| 2013 | 2012 | |
| Net income | 37037 | 41733 |
| Sales | 170910 | 156508 |
| Net profit margin | 0.216705 | 0.266651 |
The Net profit margin has declined indicating an alert for the company. The drop in net profit margin indicates that the company has not been able to perform in an effective manner. It is of big concern to the company.
Return on assets (ROA)
| Return on assets (ROA) | ||
| 2013 | 2012 | |
| Net income | 37037 | 41733 |
| Total Assets | 207000 | 176064 |
| ROA | 0.178923
18% |
0.237033
23% |
The return on Assets has declined considerably which is a bad indicator. In 2012, it was 23% and it dropped to 18% indicating weakness. It reflects that the company is not profitable as compared to the total assets (Fields, 2011).
Return on equity
| Return on equity (ROE) | ||
| 2013 | 2012 | |
| Net income | 37037 | 41733 |
| Stockholder equity | 123549 | 118210 |
| ROE | 0.299776
30% |
0.353041
35% |
ROE of the company dropped in 2013 projecting that the profit earned from the investment of the shareholder is not proper. It is of major concern to the company as it is one of the prominent ratios.
Market-Based Ratios
Price-to-earnings (P/E) ratio
| Price-to-earnings (P/E) ratio | ||
| 2013 | 2012 | |
| stock price | 63.24 | 85.65 |
| earnings per share | 4.01 | 6.38 |
| PE ratio | 15.77057 | 13.42476 |
The PE has increased in 2013 that is a good indicator. This implies that the company is profitable and hence can be selected in the portfolio.
Price-to-book (P/B) ratio
| Price-to-book (P/B) ratio | ||
| 2013 | 2012 | |
| market value of common stock | 34.54 | 134.54 |
| stockholder equity | 123549 | 118210 |
| PB Ratio | 0.00028 | 0.001138 |
The P/B ratio has declined that means the stock is undervalued and hence the company needs to pay special emphasis as it projects a negative view for the company.
References
Apple Inc (2013). Apple INC Annual Report and accounts 2013. Retrieved December 9, 2016, from http://www.annualreportowl.com/Apple/2013/Annual%20Report
Davies, T. and Crawford, I. (2012). Financial accounting. Harlow, England: Pearson.
Fields, E. (2011). The essentials of finance and accounting for nonfinancial managers. New York: American Management Association.
Brealey, R., Myers, S. and Allen, F. (2011). Principles of corporate finance. New York: McGraw-Hill/Irwin.
Graham, J. and Smart, S. (2012). Introduction to corporate finance. Australia: South-Western Cengage Learning.
Horngren, C. (2013). Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group.
