Table contents
Introduction
- 1.1. Background on Apple Inc.
- 1.2. Purpose, Objectives, and Methodology
- 1.3. Report Structure
Problem Identification
- 2.1. Financial Statement Analysis
- 2.2. Uses of Financial Ratios
- 2.3. Categories of Financial Ratios
Background on Apple Inc.
- 3.1. Company Overview
- 3.2. Products, Services, and Market Position
Critical Discussion
- 4.1. Profitability Ratios (ROE, ROCE, ROS)
- 4.2. Liquidity and Solvency Ratios (Current Ratio, Debt-to-Equity Ratio)
- 4.3. Theoretical Implications (Porter’s Theory, Modigliani-Miller Theorem)
Conclusion
- 5.1. Key Findings
- 5.2. Recommendations
References
Introduction
Apple Inc. (APPL), a leading multinational technology company that has become of global significance for its innovative products and services. As one of the most valuable companies in the world, analysing Apple’s financial performance provides investors and shareholders with crucial insights about the company’s operational efficiency, their profitability, and their overall market performance. As Otola (2011) notes, a company’s financial aspects play increasingly greater role for formulation, execution and assessment of the strategies. Moreover, by conducting a thorough analysis of key financial documents—such as balance sheets, income statements, cash flow statements, or annual K-10 fillings— investors and shareholders can assess various metrics to better understand a company’s economic stability, strategic positioning, and their overall financial health.
The main objective of this report is to discuss and demonstrate the purpose and use of annual reports and financial statements. Additionally, the objective of this report is to critically appraise the linkages between financing, investment, and distribution decisions.
The methodology employed to compile this report consists of utilising primary and secondary sources. The primary sources are gathered by examining Apple’s annual K-10 report, taking note of any relevant financial disclosures. This will involve discussing and examining the financial performance of Apple Inc for the financial year ending September 28, 2024. By analysing Apple’s K-10 filling (See – Appendix), through the calculation of key financial ratios, this report will evaluate Apple’s finances in terms of liquidity, profitability, and efficiency. Additionally, the report will highlight the limitations of ratio analysis and provide recommendations for future improvements. Finally, to provide a holistic understanding of the interplay between financial reports and their linkages to financial management and distribution decisions, this report draws on secondary research from academic journals, academic books, and credible news articles.
This report is structured into three sections. The first section is the problem identification, which provides background information on Apple Inc. and discusses financial performance analysis techniques. The second section proceeds with a critical discussion, contextualised around the calculating and interpretation of key financial ratios, supported by relevant theoretical insights. Lastly, the third section is a conclusion that summarise the keys findings and provides Apple Inc with recommendations.
Problem Identification
As explained by Fridson & Alvarez (2022), the primary goal in financial reporting is the dissemination of financial statements that accurately measure the profitability and financial condition of a company. Measuring a company’s performance by solely examining a financial statement is challenging as it only provides insights into the current standing of a company ​(Graham & Meredith, 1937)​. To date, various techniques have been developed and employed by managers and financial analysts to delve deeper into financial data, for the purpose of uncovering insights into past and current performance, and, more crucially, predicting future outcomes. ​(Vance, 2002, p. 19)​. This process can be to be referred to as a ’financial statement analysis’, which is defined as the process of evaluating a company’s financial health and performance by examining its financial statements ​(Fridson & Alvarez, 2022)​.
A financial statement analysis fulfils both internal and external purposes. Internally, companies can use it as a tool to monitor and manage their finances more effectively. While externally, stakeholders and shareholders can leverage this analysis to evaluate a company’s performance, liquidity, efficiency, and profitability to determine the overall value of the business. These financial rations can be categorised into several types depending on what aspect of a company’s finances are being assessed, they are:
- Profitability Ratios:
Profitability ratios is a method used to assess a company’s ability to generate income relative to its revenue. One of the financial ratios measured is the Return on Equity (ROE), which measures the return generated on shareholders’ equity, calculated as net income divided by shareholder equity (Fridson & Alvarez, 2022; Abdelhalim et al., 2024). This can be calculated as:
| ROE | = | Net Profit |
| Equity |
This ratio reflects a company’s efficiency by showing the earnings generated for each dollar of equity capital invested. In other words, it represents the percentage return that owners receive on their investment – a higher ROE signifies effective management and profitability (McClure, 2022). This straightforward measure effectively conveys how efficiently a company generates profit from shareholder equity, yet it fails elaborate specifically why this is.
To understand the factors driving profitability, or hindering it, Return on Equity can be broken down and viewed as three distinct determinants – profitability, efficiency, and leverage – to illustrate the nuanced levers affecting overall performance. These can be expressed as:
| ROE | = | Profit | x | Asset | x | Financial |
| margin | turnover | leverage |
As explained by Higgins et al., (2022, p. 39), the profit margin reflects the income statement’s performance by indicating profit per dollar of sales. The asset turnover ratio captures how efficiently the company manages its assets in generating sales, while the financial leverage ratio shows how the liability side of the balance sheet is managed by revealing the equity used to finance assets. These levers effectively capture the key elements of a company’s financial performance.
While financial ratios, such as ROE, provide a strong connection between performance levers and a company’s financial statements, they are not without limitations. On their own, financial ratios do not provide a complete transparent picture of a company’s financial health. For instance, Otola (2011) points out that companies with low profitability might offset this by taking on higher levels of debt to boost their Return on Equity (ROE). By increasing debt, a company can enhance its ROE by expanding business activities without requiring additional equity. This same strategy can also be seen in the context of leasing agreements, which are often used to preserve capital. Leasing companies offer “100% financing,” covering the entire cost of the leased asset (Brealey et al., 2022, p. 747). As a result, leasing can impact the ROE by spreading financial obligations over time and reducing immediate cash expenditures.
These ratios help stakeholders assess different aspects of a company’s financial health, including profitability, solvency, and liquidity.
- Â Background on Apple Inc.
Apple Inc. (APPL), established in 1976, is a leading global technology company located in Cupertino, California. Apple specializes in designing, manufacturing, and marketing consumer electronics, software, and services. Its most prominent products include the iPhone, Mac, iPad, Apple Watch, and AirPods. Additionally, Apple provides a range of services such as the App Store, Apple Music, iCloud, and Apple Pay (Abdelhalim et al., 2024, p. 2).
As of 2024, Apple Inc. ranks among the most valuable companies globally, amassing a market share exceeding $2.5 trillion. Much of the company’s revenue is derived from a combination of product sales, such as flagship offerings like the iPhone and Mac, as well as services including the App Store and Apple Music. Apple is also renowned for its innovative product portfolio and its strong brand loyalty. These strengths enable the company to maintain a competitive edge in the technology sector. Conducting a financial performance analysis is crucial for Apple, as it helps identify opportunities to improve operational efficiency, while financial insights guide strategic decision-making, such as expanding the company into new markets.
Critical Discussion
financial ratios are essential tools for analyzing a company’s financial health and performance, offering insights into profitability, liquidity, solvency, and efficiency. This discussion focuses on Apple Inc.’s financial ratios, particularly profitability ratios, based on data from the 10-K filing for the fiscal year ending September 28, 2024. The analysis also examines related liquidity and solvency ratios, using financial theories to interpret the findings.
- Profitability Ratios
Return on Equity (ROE) measures the return generated through the use of shareholders’ equity. It is calculated as Net Income divided by Equity.
| ROE | = | Net Income |
| Equity |
For Apple, the net income for fiscal year of 2024 is 93,736 million, and the shareholders′ equity is 56,950 million, resulting in an ROE of 164.6%.
| ROE | = | 93,736 | = | 1.646 | or | 164.6% |
| 56,950 |
This exceptionally high ROE indicates that Apple is generating substantial returns on its equity. According to DuPont analysis, ROE can be broken down into profit margin, asset turnover, and financial leverage (Fridson & Alvarez, 2022, p. 361). Apple’s high ROE suggests efficient use of equity, strong profitability, and significant financial leverage. However, such a high ROE may also reflect aggressive financial practices, which could pose long-term risks.
Return on Capital Employed (ROCE) measures the return generated from the capital employed in the business, calculated as Operating Profit divided by Capital Employed.
| ROCE | = | Operating profit |
| Capital Employed |
For Apple, the operating profit can be roughly approximated as:
Capital Employed = Equity + Long-term Liabilities = 56,950 + 85,750 = 142,700 million
| ROCE | = | 123,216 | = | 0.863 | or | 86.3% |
| 142,700 |
This high ROCE indicates that Apple is efficiently using its capital to generate profits. This is reflective of a strong market position, operational efficiency, and competitive advantages such as brand strength, innovation, and economies of scale. However, this also indicates that Apple is over-exposed to its lenders, using more resources rather than creating them (Mongiello, 2009, p. 37).
Return on Sales (ROS) measures profitability relative to sales and is calculated as: Operating Profit divided by Sales.
| ROS | = | Operating Profit |
| Sales |
For Apple, the operating profit is 123,216 million with a total net sale of 391,035 million, resulting in an ROS of 31.5%.
| ROS | = | 123,216 | = | 0.315 | or | 31.5% |
| 391,035 |
This high ROS demonstrates Apple’s ability to maintain strong profitability relative to its sales.
- Related Ratios
Current Ratio measures a company’s ability to cover short-term liabilities with short-term assets. This is calculated as:
| Current Ratio | = | Current Assets |
| Current Liabilities |
For Apple, this is calculated as current liabilities of 152,987 million and current liabilities of 176,392 million, yielding a current ratio of 0.867.
| Current Ratio | = | 152,997 | = | 0.867 |
| 176,392 |
A ratio below 1 suggests potential difficulty in covering short-term obligations (Fridson & Alvarez, 2022; Higgins et al., 2022), but Apple’s ability to access to credit with ease can mitigate this concern.
The Debt-to-Equity Ratio measures the proportion of debt relative to equity used to finance a company’s assets. This is calculated as:
| Debt to Equity Ratio | = | Total Liabilities |
| Equity |
Apple’s total liabilities of 308,030 million and equity of 56,950 million, resulting in a debt-to-equity ratio of 5.41.
| Debt to Equity Ratio | = | 308,030 | = | 5.41 |
| 56,950 |
This high ratio indicates significant reliance on debt financing, which can enhance returns through financial leverage but also increases financial risk. However, Apple’s ability to maintain high profitability despite this leverage suggests effective risk management (Fridson & Alvarez, 2022, p. 269), though sustained profitability is crucial to managing debt obligations.
- Theoretical Implications
Apple’s high profitability ratios demonstrate effective competitive positioning and strategic decisions that utilise its key resources. This strategic alignment closely mirrors Michael Porter’s theory of competitive advantage, as Apple has successfully sustained a differentiation strategy. By offering unique, high-quality products and services that stand out in the technology sector, Apple has secured a competitive edge that drives superior profitability (Abratt & Bendixen, 2018, p. 36). This approach not only reinforces its market leadership but also ensures long-term financial success in a highly competitive industry.
Additionally, Apple’s high debt-to-equity ratio aligns with the Modigliani-Miller theorem, which suggests that capital structure does not affect firm value in a perfect market (Chen, 2024). It can be argued that high leverage increases financial risk, however, Apple’s ability to sustain high profitability despite its leverage indicates effective financial risk management.
Apple Inc.’s financial ratios reveal a highly profitable company with strong operational efficiency and a competitive advantage. However, the high debt-to-equity ratio and low current ratio highlight potential financial risks. Apple’s ability to manage these risks through strong cash flow and financial flexibility is critical for sustaining its profitability and market position. While the company’s financial performance is robust, ongoing vigilance is necessary to address the risks associated with high leverage and liquidity constraints.
Conclusion
This report has provided a comprehensive analysis of Apple Inc.’s financial performance for the fiscal year ending September 28, 2024, by leveraging key financial ratios to evaluate profitability, liquidity, and solvency. The findings showcase Apple’s exceptional profitability, which are evidenced by a Return on Equity (ROE) of 164.6%, Return on Capital Employed (ROCE) of 86.3%, and the Return on Sales (ROS) of 31.5%. These metrics demonstrate Apple’s ability to generate substantial returns on equity and capital, driven by its strong market position and operational efficiency. However, the analysis also reveals potential risks, such as a high debt-to-equity ratio of 5.41 and a current ratio of 0.867, which indicates a significant reliance on debt financing and potential liquidity constraints.
Theoretical insights, such as Michael Porter’s competitive advantage theory and the Modigliani-Miller theorem, contextualize Apple’s financial and decision-making strategies. Nevertheless, the company must remain cautious in managing its financial obligations to mitigate long-term risks.
In conclusion, while Apple’s financial performance demonstrates robustness, the company should focus on optimising its capital structure and enhancing liquidity to ensure sustained growth and stability. Therefore, the recommendations to Apple include diversifying funding sources, reducing reliance on debt, and maintaining a strong flow of cash. Implementing these measures will enhance investor confidence whilst continuing to reinforce Apple’s position as a global leader in the technology sector.
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References
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