Financial Analysis Of Apple Incorporated

History of the Company

The assignment involves analysis of public traded company specifically an Multi National Corporation which has been trading on exchange for past 10 years and has some type of international influence. The analysis shall encompass the following element of finance mainly financial analysis of company, decision making, theoretical underpinning of modern portfolio theory, evaluation of financial risk and measurements associated with it. Further, the assignment also evaluates the assessment of risk and ethics in an international setting which is in relation to investments and finance. (Yahoo Finance, 2018)

The company that has been chosen for analysis is Apple Incorporated which is trading at USD 171.53

Apple Incorporated was founded by two college drop outs Mr. Steve Jobs and Mr. Steve Wozniak. The duo brought a new revolution in the computer generation. (Angelique Richardson, 2008)

The company is a Multinational Corporation dealing in wide range of electronic products encompassing mobiles, laptops, personal computer, tablets, i-pods etc. It became the largest traded corporation in the world in terms of market capitalisation on 30^th June 2015 and the valuation of the company is approximately 1 trillion USD.

For the purpose of conducting financial analysis of company, the annual report of past three years of the company has been analysed. The details of the analysis is presented here-in-under:

The Gross profit margin of the company is computed by dividing the gross profits of the company by the sales of the company. The computation has been detailed here-in-below:

Sl. No.	Particulars	2018	2017	2016
1	Total Revenue	265595	229234	215639
2	Total Cost	163756	141048	131376
3	Gross Profit (1-2)	101839	88186	84263
4	Gross profit Margin (3/1)	38.34%	38.47%	39.08%

On perusal of the above, it may be inferred that the Gross profit margin of the company has been consistent for the past three years and stands at near about 40% of revenue of the company.

The Net profit margin of the company is computed by dividing the Net profits of the company by the sales of the company. The computation has been detailed here-in-below:

Sl No	Particulars	2018	2017	2016
1	Total Revenue	265595	229234	215639
2	Net Profit	59531	48351	45687
3	Gross profit Margin (2/1)	22.41%	21.09%	21.19%

On perusal of the above, it can be inferred that net profit of the company has increased by 1% and has been approximately consistent over three years but represent a good return on sales.

The Operating profit margin of the company is computed by dividing the operating profits of the company by the sales of the company. The computation has been detailed here-in-below:

Sl No	Particulars	2018	2017	2016
1	Total Revenue	265595	229234	215639
2	Total Cost	194697	167890	155615
3	Operating Profit (1-2)	70898	61344	60024
4	Operating profit Margin (3/1)	26.69%	26.76%	27.84%

On perusal of the above, it can be inferred that operating profit of the company has been stable over the period but represent a good return on sales.

The Return on Equity is computed by dividing the net profits of the company by the equity of the company. The computation has been detailed here-in-below:

Sl. No	Particulars	2018	2017	2016
1	Equity	107147	134047	128249
2	Net Profit	59531	48351	45687
3	Return on Equity (2/1)	55.56%	36.07%	35.62%

Note: For simplification purpose of average of equity has not been done

On perusal of the above, it can be inferred that return on equity has taken a huge leap in 2018 compared to 2017 and company is providing a very good return to its investors over the period.

The Current Asset Ratio is computed by using total of current asset and total of current liabilities and dividing the former by later. It represents the working capital of the company and the ideal ratio is 2. The computation has been detailed here-in-below:

Sl. No	Particulars	2018	2017	2016
1	Total Asset	131339	128645	106869
2	Total Liabilities	116866	100814	79006
3	Current Ratio (1/2)	1.124	1.276	1.353

Financial Analysis of Apple Incorporated

On perusal of the above, it can be inferred that the current ratio of the company is poor and does not have sufficient working capital but before making a strong step in this regard one needs to look at the industry.

The Debt to Equity ratio is computed by using total of Equity and total of long term debts and dividing the later by former. It represents the structure of funding of the company and the ideal ratio is 2. The computation has been detailed here-in-below:

Sl. No	Particulars	2018	2017	2016
1	Debt	141712	140458	114431
2	Equity	107147	134047	128249
3	Debt -Equity Ratio (1/2)	1.32	1.05	0.89

On perusal of the above, it can be inferred that company is increasingly relying on debt as the ratio has seen a large increase over the period. Further, the beveefit of trading on equity is clearly witnessed on account of increasing Return on Equity.

On basis of the above, it can be seen that Apple Inc. has been performing well over the years and has been providing stable return over the years. Further, the company is also enjoying the benefit of trading on equity and the same shall be witnessed over years to come. The company is an ideal investment for stable investors with long term vision and believes in being the growth part of the company.

Modern Portfolio Theory or in other term mean- variance analysis is a modern theory under portfolio management whereby the return is maximised for a given level of risk. The theory relies on the benefit of diversification and is the extension of the same. The theory believes that is better to hold a range of asset with different risk compared to a single asset as the same results in cutting of risk and maximisation of profit. The theory has been devised by Harry Markowitz.

In terms of Modern Portfolio Theory, it is assumed that investors are rational and risk averse and the risk and reward moves hand in hand.  Further, an efficient frontier is created by means of risk reward combination. The frontier represents highest level of return for a given level of risk which is presented by standard deviation of the portfolio. Portfolios with a combination below the efficient frontier shall not be efficient and accordingly shall not be chosen and vice versa. (A Modern Portfolio Theory Approach to Asset Management in the listed South African Property Market)

The theory is explained via an example. Supposedly, there are the following three portfolios in the market with the following risk and return as detailed in the table:

Sl. No	Particulars	Risk	Return
1	Portfolio A	12%	20%
2	Portfolio B	17%	20%
3	Portfolio C	18%	20%

On perusal of the above, it can be seen that that Portfolio C is representative of efficient frontier as it provides the highest return for a given level of risk which is 20% in the given example. Further modern portfolio theory efficient frontier has been presented via a graph here-in-below:

Financial Risk is the possibility of the shareholder or other investor will lose out their money when they invest in a company in which debt is present and company is not in a position to pay out its financial obligations. In layman terms, the risk of default of debt and losing out of money of shareholders is financial risks. The major type of financial risks are detailed here-in-below:

• Credit risk:Risk of default of debt when a company borrows money and unable to pay the same within a stipulated time on account of cash flow crunch and other associated issues. The tools for measuring the Credit risk include Credit Value at Risk, Expected loss. The tool analyse the loss that can occur on account default to investor;
• Liquidity Risk :It is the risk on account of liquidity crunch and encompasses those asset which cannot be easily bought and sold in the volatile market to cut losses. The risk is measured using financial ratios; (CFA Institute, 2018)

• Equity Risk:The risk encompass the risk on account of Volatile price change in the shares of the stock. It is measured by using Capital Asset Pricing Model; (Damodaran)
• Asset- backed risks: The risk is based on asset-backed securities and occurs mainly on account of risk of prepayment and interest rate risk. Under this type of risk the asset backed securities becomes volatile on account of change in the volatility of underlying securities.

• Exchange Rate risk:The companies executing business under various currencies are exposed to the risk of exchange whereby the fluctuation of one currency in terms of another significantly impacts the profitability of the company. The risk is measured by using percentage change or standard deviation or variance.

Apple Incorporated is exposed to the following financial risks:

• Credit Risk;
• Exchange Rate Risk;
• Derivative Risk;
• Interest Rate risk.

When a company goes international it is exposed to a variety of risk and ethical requirement relative to finance and investments among which some of them have been detailed here-in-below:

• Outsourcing;
• Compliance with laws and regulation of the country;
• Working Standard and Condition;
• Maintaining Diversity at work place;
• Trust and integrity;
• Maintaining rights of humans;
• Child labour;
• Oversight and supervision;
• Political arena;
• Creation of Corruption;
• Bribery etc
• Taxation avoidance

Apple Inc has maintained highest standard of ethics through its vision, mission and objectives. Apple Incorporated has addressed the following international ethics issue successfully encompassing the following:

• Environmental;
• Working Conditions and providing suitable amenities to workers;
• Duly payment of taxes. However, there has been cases of tax avoidance against the company especially in Ireland and Luxembourg;
• Maintaining Privacy;
• Intellectual Property Rights;

The company has been named as one of the cleanest organisation by world peace. Further, the company has protected its intellectual property rights through American IP laws and has never been accused of imitating or stealing innovations or technology of other companies. The company has been socially proactive.

The company has outsourced its work to Asia through its sub-contractor Foxconn. Further, the company has tried to maintain or reduce the environmental impact on account of production of materials in those countries. (mallon, 2014)

The risk under an international setting has been detailed here-in-below:

• Risk of closure;
• Risk of banning and duties;
• Risk of export restriction;
• Exchange Currency risk;
• Risk of Taxation;
• Labour law and environmental regulation risk;
• Political risk
• International Competition etc.

Apple Inc. has been exposed to a range of risk with recently China imposing restrictions on Apple and India forcing Apple to establish its plant in India to continue selling their products in India exposes company to a wide range of risk other than those detailed herein.

Conclusion

On perusal of the above analysis on decision front to invest in Apple Inc., it can be seen that company is earning stable return and is an ideal choice of investment for long term returns as the company has been providing steady and good return to investor. Further, the financial risk of the company actual figures cannot be plotted on account of non-availability of annual report of the company for 2018 and 2017 in the public domain. Further, the company has tried to comply with the ethical requirements under an international setting but has been subject to a variety of litigations and constraints especially on tax avoidance front in Ireland and Luxembourg. In addition, the company is exposed to risk in an international setting in the form of different laws of different countries, compliance, domestic preference, domestic competition etc. Despite above the company is an ideal investment on account of good return and increasing sales.

A Modern Portfolio Theory Approach to Asset Management in the listed South African Property Market. (n.d.). Retrieved December 13, 2018, from core.ac.uk: https://core.ac.uk/download/pdf/39667232.pdf

Angelique Richardson, I. (2008, April). Apple Computer, Inc. . Retrieved December 13, 2018, from www.loc.gov: https://www.loc.gov/rr/business/businesshistory/April/apple.html

CFA Institute. (2018). Liquidity Risk. Retrieved December 13, 2018, from www.wallstreetmojo.com: https://www.wallstreetmojo.com/liquidity-risk/

Damodaran, A. (n.d.). Understanding Risk II: The risk in Stocks. Retrieved December 13, 2018, from people.stern.nyu.edu: https://people.stern.nyu.edu/adamodar/pdfiles/invphilslides/session3.pdf

mallon, k. (2014, December 9). Apple’s Ethical Corporate Culture. Retrieved December 13, 2018, from prezi.com: https://prezi.com/edlk5uks_2vv/ethics-in-international-an-apple-inc-case-study/

Yahoo Finance. (2018, December 13). Apple Inc. (AAPL.SW). Retrieved December 13, 2018, from in.finance.yahoo.com: https://in.finance.yahoo.com/quote/AAPL.SW/history?p=AAPL.SW