Many investment banks employ analysts to write equity research reports on public companies to advise their clients on?their?stock

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Part 1: Overview of the company 

The Selected Company is Apple Inc. Apple Inc. is an American multinational organization which focuses on the sale of consumer electronics, software and online services. The company is a hardware and software organization which is mostly known for the series of smartphones, laptops and other devices and this is because the company stands out in the operating system for the devices and the quality of the products. The company has various branches and its headquarters are in Cupertino California, United States. The current market price per share for the company according to Nasdaq is $161.62

Part 2: Income statements 

From the income statements for the company for the past 3 years, there are various trends that can be observed. Looking at the sales of the company they have been showing a growth for the past three years. The sales growth for the year 2021 was 33% from the year 2020 and in 2020 the sales had grown by 5% from the previous year.The operating income was highest in 2021 when compared to the previous two years and this shows that despite the negative impact on the economy by the ongoing pandemic the business has been able to grow its profits (Jackson, 2021) The net income for the year 2021 was $94.68billion, 2020 was $57.41 billion and for 2019 it was at $55.26 billion.

· Summarize key trends in revenues, operating income, and net income over the last 3 years.

Part 3: Common size income statements 

The common size income statement offers a trend for the revenues of the company, operating income and the net income for the last 3 years. The common size income statement shows that the sales have been growing over the three years. In the common size statements the operating income for the year 2021 takes the larger proportion 29.78% while the lowest is in 2019 which is 24.57% and this shows that the company has been increasing the amount made on its operations. The net income also has the highest value in 2021 as it is recorded as 25.88%. The net income decreased in 2020 and later went up in the year 2021.

Part 4: Balance sheets 

The total assets for the company were at 338.52 billion in 2019, then went down to 323.89 billion and later increased to 351 billion in the year 2021. The company’s current assets however show a negative trend over the last three years; they have been decreasing as they were at 162.82 in 2019 but by 2021, they had gone down to 134.84 billion. The current liabilities increased slightly in 2020 and showed a big increase in 2021. The long-term debt has showed a positive trend over the last three years and that is not good for the businessRobinson, (2021). The company’s shareholder equity has decreased over the last 3 years.

Part 5: Common size balance sheets 

Looking at the common size statement, the current assets were 48.10 % of the total assets which was the highest in the three years. The total current liabilities were at 31.23% of the total assets for the year 2021 which was the lowest in the three years and this is good as it shows that the company’s financial obligations are decreasing. The long-term debt has also decreased over the last three years and this is a good sign as well (Jackson, 2021) The percentage of shareholders equity is higher which means that the company has more equity and that is good for the business as it lowers the financial leverage.

Part 6: Cash flow 

Simple cash flow = Cash flow from operating activities + Cash flow from investing activities + cash flow from financing activities.

= 104, 038 +(14,545) +(93,353) = (3860) million – 2021

=80,674+ (4289) +(86,820) = (10,435) million – 2020

=69,391+ 45896+(90,976) = 24,311 million- 2019

The company had positive cashflows in 2019 but in 2020 and 2021 the company had negative cashflows with 2020 being the worst year and that could be because of the impact of the pandemic on the economy. The net operating cashflow from the statement of cashflows for the past 3 years is higher compared to the simple cashflow computed.

Part 7: Financial analysis conclusion: 

Item	Strength/ weakness
Income statement	Strength
Balance sheet	Weakness
Common size income statement	Strength
Common size balance sheet	Weakness
Cashflow	Weakness

The company’s balance sheet and common size balance sheet can be categorized as a weakness and this is because the liabilities for the company increased over the last 3 years while the equity decreased and that increases the financial leverage of the company. The common size income statement and income statement are a strength and this is because the company made more sales in 2021 compared to previous year. The profit margins also showed a positive trend(Easton et al., 2018). The cashflow is a weakness because the business has negative cashflows. The company’s overall financial strength is strong because it has high volume of revenues and profits.

References

Easton, P. D., McAnally, M. L., Sommers, G. A., & Zhang, X. J. (2018). Financial statement

analysis & valuation. Boston, MA: Cambridge Business Publishers.

Jackson, A. B. (2021). Financial statement analysis: a review and current issues. China

Finance Review International.

Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.

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7

Apple Inc. Ratio Analysis

Amanda Farah

BUS 401

Part 1

Profitability Ratios

Looking at the financials for Apple Inc. for the last three years the company is doing better than it was three years ago. The company’s ROA increased from 15.74% in 2019 to 17.38% in 2020 and later increased to 28.13% in 2021 and this shows that the company has been putting its company assets into proper use. The ROE also increased over the years and this shows that the company has made use of its equity well to generate revenues. Apple Inc. also had an increase in its Return On Investment (ROI) and this shows how the business has generated earnings from its investments.

Liquidity ratios

The company’s liquidity position is not good and this is because the company’s current ratio is below two which means that the company’s current assets are less than twice the amount of current liabilities. The desired level is 2 because at 2 it means that the company will be able to meet its short-term obligations with ease. The quick ratio is also less than two, but since it is more than one it means that the business can pay off its obligations without using its long-term assets.

Debt management ratios

Looking at the total debt to equity ratio we can see that the ratio has been increasing from 2019 where it was at 1.01 to 2020 when it was 1.51 and later increased to 1.73 in 2021. This is a bad sign as it shows that the company has been taking in more debt and that will compromise its financial leverage (Dance &Imade, 2019). The company’s debt equity ratio increased as well and this shows that the company finances its activities with more debt than equity and that is putting the business at risk.

Asset management ratios

Looking at the asset management ratios of the business over the three years the business has been effective in using its assets to generate revenues. The company has been having a very high inventory turnover of more than 40 and this shows how the business has effectively used its inventory towards generating revenue(Subalakshmi et al., 2018). The receivables turnover and the accounts payable turnover have also been positive over the three years. The total asset turnover is 1 and this is not a good rate since it shows that the business is not putting its assets into maximum use.

Per share: book value per share

The book value per share has reduced over the years and this shows that the worth of the shares of the company have reduced. This is not a good thing for the business as it shows that the investors will have less confidence in the company. The company needs to work towards increasing the value of the book value to attract more investors.

Part 2

Ratio	Strength/ Weakness
ROA	Strength
ROE	Strength
ROI	Strength
Quick Ratio	Weakness
Current Ratio	Weakness
long-term debt to equity	Weakness
Total debt to equity	Weakness
Interest coverage ratio	Weakness
Total asset turnover	Strength
Receivables turnover	Strength
Inventory turnover	Strength
Accounts receivable turnover	Strength
Accounts payable turnover	Strength
Book value per share	Strength

Looking at the profitability of the company it can be considered as a strength and this is because the ROA, ROE and the ROI have been improving over the years. The liquidity of the company can be considered as a weakness and this is because the liquidity ratios; both the quick ratio and current ratio have been declining over the three years (Lee & Lee, 2018). The debt management ratios of the business have been reducing over the years as well and this means that the company is taking in more debt compared to equity and that puts the business at risk. The book value per share has been increasing.

Overall, looking at debt management and liquidity ratios; they have all been decreasing. The company’s weakness is that both the liquidity and the debt management has been weakening. A major strength of the business is that its turnover has been improving and this shows that the business has been effective in converting its assets to revenue (Dance &Imade, 2018). Overall, ratio performance of the business can be described as neural as it is doing well in some areas and underperforming in some areas.

Part 3

Looking at the profitability of the business, it performs higher compared to the industry averages. The ROA. ROE and the gross margin of Apple Inc. are way above the industry averages. The net profit is also above the industry average. The net profit margin of the company is at 25.88% while the industry average is at 5.95%. Looking at the current ratio the company is slightly below the industry average. The company has a current ratio of 1.07 while the industry average is 1.78. The quick ratio of the business is also below the industry average since it is at 0.91 while the industry average is at 1.18. Looking at the debt management ratios, the company performs worse than the industry. It has higher total debt to equity ratio and debt to equity ratio compared to the industry(Haralayya, 2021). The total asset turnover and the inventory turnover are higher compared to the industry level and this is a good indication.

Ratio	Higher/Lower
ROA	Higher
ROE	Higher
ROI	Higher
Quick Ratio	Lower
Current Ratio	Lower
long-term debt to equity	Higher
Total debt to equity	Higher
Total asset turnover	Higher
Receivables turnover	Higher
Inventory turnover	Higher
Accounts receivable turnover	Higher
Accounts payable turnover	Higher
Book value per share	Higher

Part 4

The ratios can be categorized as better than the industry. The profitability ratios are the most important ratios and this is because they show whether a business makes profits after settling its expenses. The company has a high net profit margin and gross profit margin compared to the industry average and this is a good rate for the business. The net profit margin is important since it shows the money that the business is left with to use in expanding the business and making its investments (Lee & Lee, 2018). This is because the net profit margin excludes all the expenses of the business.

References

Dance, M., &Imade, S. (2019). Financial ratio analysis in predicting financial conditions

distress in Indonesia Stock Exchange. Russian Journal of Agricultural and Socio-Economic Sciences, 86(2).

Haralayya, B. (2021). Ratio Analysis at NSSK, Bidar. Iconic Research And Engineering

Journals, 4(12), 170-182.

Lee, B. H., & Lee, S. H. (2018). A study on financial ratio and prediction of financial distress

in financial markets. The Journal of Distribution Science, 16(11), 21-27.

Subalakshmi, S., Grahalakshmi, S., & Manikandan, M. (2018). Financial Ratio Analysis of

SBI [2009-2016]. ICTACT Journal on Management studies, 4(01), 2395-1664.

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4

Part 1

The following represents the dividend per share for Apple Inc. in the last 9 years and the growth rate of the dividends over the years.

Fiscal Year Ending	Dividend/Share	Growth Rate
2021	0.85	6.25%
2020	0.8	6.67%
2019	0.75	10.29%
2018	0.68	13.33%
2017	0.6	9.09%
2016	0.55	10.00%
2015	0.5	8.70%
2014	0.46	12.20%
2013	0.41	355.56%
2012	0.09

The following shows the average growth rate of the dividend of Apple Inc. over 9 years, 5 years and 3 years:

Recent 3-year average growth Rate	7.74%
Recent 5-year average growth rate	9.13%
Recent 9-year average growth rate	48.01%

Looking at the growth rate of the dividends the growth rates have been decreasing; the growth rate in the last 10 years has been higher compared to the way in which the annual dividends have grown in the last 5 years and 3 years. The growth rate from the last 9 years was 48.01% then it decreased by 38.88% in the last five years. The growth rate further decreased by 1.39% to 7.74% in the last three years. The rates have been decreasing but at a decreasing rate and this is a good indicator for the business.

High end growth rate and low-end growth rate

Low-End Growth Rate	7%
High-end growth rate	9%

The low-end growth rate selected is 7% while the high-end growth rate that was selected for the company is 9%. The selected high-end growth rate is the growth rate for the last 5 years while the low-end growth rate is the growth rate for the most recent three years. The selection of the growth rates is based on the performance of the company which was discussed in the week 1 and week 2 assignments.

One of the financial facts about the company in the last three years is that the profitability greatly decreased. The decrease of the profits was because of the severe impacts of the ongoing pandemic which resulted into low demand for the products and low sales revenue. The company’s profits were very high in the last 5 years and hence the selected high-end growth rate was for the last 5 years(Saluy et al., 2020) Looking at the company and its ratios analyzed in the previous assignments it has had a high debt to equity ratio in the last three years which means that the company has used less equity and hence had to pay less money in dividends for the period.

Part 2: Preliminary evaluation

Constant Dividend Growth Model
Required Rate of Return, r	10%
(Since it is a large cap Company)
Last dividend, D0	0.85
Market Price per share based on low-end growth rate	=0.85(1+0.07)/0.03=$30.31667
Market Price per share based on high-end growth rate	=0.85(1+0.09)/0.01=$92.65

The current stock price for Apple Inc. is $171.95 in the market and the low-end growth rate and high-end growth rate provide a different market price per share. Based on the calculations done on the company data the market price per share based on the low-end growth rate is $30.32 when compared to the price at which the shares are being sold in the market currently, we can conclude that the shares are overvalued in the market. This is because the difference between $30.32 and $171.95 is very big and significant(Jagannathan & Liu, 2019). The market price per share based on high end growth rate is 92.65 and this is below the market price of the shares. From both the low end and the high-end values we can say that the company’s shares are overvalued.

Based on the calculations of the stock price done, the concluded stock price is 92.65 which is the high-end growth rate. The conclusion is based on different facts about the company. Apple Inc. currently sells its stock at $171.95 in the market and hence the low-end growth rate price is very low and has a huge difference with the market price. This can be explained by the decreased profits in the last two years because the company has been struggling to recover from the negative impact of the pandemic on the revenues of the business. The company has had low profit margins and hence the value of the stock has not been growing in the last 3 years(Jagannathan& Liu, 2019). This means that making a conclusion about the company based on the period will be unfair as it does not represent the true state of the company.

References

Jagannathan, R., & Liu, B. (2019). Dividend dynamics, learning, and expected stock index

returns. The Journal of Finance, 74(1), 401-448.

Saluy, A. B., Fitri, E. M., &Novawiguna, K. (2020). The Effect of Capital Structure,

Dividend Policies, and Working Capital Routing on Company Value and Profitability as Intervening Variables in Property and Real Estate Companies in Indonesia Stock Exchange 2014-2018. International Research Journal of Innovations in Engineering and Technology, 4(10), 14.

Sebastian, A., &Siauwijaya, R. (2021). The Impact of Financial Ratios on the Dividend

Payout Ratio in Coal Mining Companies. Business Economic, Communication, and Social Sciences (BECOSS) Journal, 3(2), 51-60.

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5

Week 4- Apple Inc.

Amanda Farah

Part 1

Three types of risks that affect a company including the selected company; Apple Inc. are business, compliance, and investor risk. Business risk refers to the exposure of a company to some factors that might lower the profits earned by the company and possibly even lead to the failure of a business(Risk, 2020). Another common risk is the compliance risk; where a company or business could generate losses from failure of compliance with state or federal laws. For instance, for Apple it has to comply with various laws and make sure that all customers are protected through safety of products.

Investor or investment risk happens when a company makes bad financial decisions and thus have a hard time maintaining good cashflows from the investments and also getting the money invested in a certain investment(Akan&Tevfik, 2020). For example, when a company does not conduct sufficient risk analysis of the investments there is a possibility that changes in the economy could result into them losing the money invested.

Part 2

I looked up Apple Inc’s beta from yahoo finance and found out that the company has a beta of 1.19 which is higher when compared to the beta of 1.0. This means that the price of Apple Inc’s security is more volatile when compared to the market.

When calculating the expected return using CAPM the formula is

R = rf+B(Rm)

Where R is expected return

Rf is the risk-free return

Rm is expected market return

R= 2.0%+1.19(6%)

R= 2.0%+7.14%

The expected return for Apple Inc. is thus 9.14%. In week 3 the rate of return that was computed was 10%. Thus, the specific expected return computed in week 4 is lower when compared to the expected return which was computed by incorporating the constant growth rate. The difference between the two valuations is because the CAPM method incorporates more factors than just the dividends alone(Harvey et al., 2021). It considers the systemic risk and this is why the expected return using CAPM is seen to be lower.

Part 3

The constant growth rate formula is Price= D(1+g) / (r-g) where; dividend(D), growth rate (g) and discounted rate (r). The low-end growth rate from the previous assignment was 7% while the high-end growth rate was at 9%. The next step will involve computing the price using a constant growth rate of 9% which is the high-end growth rate. The annual dividend currently for the company is 0.88 and the discount rate is 10%

Price calculations using high end growth rate:

Price = 0.88(1+0.09)/(0.1-0.09)

=$95.92

Price calculations using the low-end growth rate

Price= 0.88 (1+0.07)/ (0.1-0.07)

=$31.39

In comparison to the current market price both the high end and the low-end valuations show a lower value for the company. The company’s stock seems to be overvalued from the analysis and the forecasts done on the company show that the value of the stock will continue increasing. In conclusion, the recommendation for the company is that it should review the valuation of the company and this is because overvaluation of the company may result into the stock underperforming.

References

Akan, M., &Tevfik, A. T. (2020). Fundamentals of finance. In Fundamentals of Finance. De

Gruyter.

Harvey, C. R., Ramachandran, A., & Santoro, J. (2021). DeFi and the Future of Finance.

John Wiley & Sons.

Risk, C. R. I. I. (2020). A fundamental reshaping of finance.

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