Financial Ratio Analysis

Financial Ratio Analysis

FIN/571

Introduction

Financial Ratio Analysis.

In order for a company to stay in business in today’s economy, the financial team and management have to work together. A solid financial plan is essential to the growth of a business. Financial decision making is determined based upon the financial statements of the business. Financial ratios give an insight into the financial stability of the company and is based on the financial statements. Planning and decision making is based on what the financial ratios presents. Ratios not only helps outsiders and employees gain information about the business financial stability, it also enables an investor to make a decision about the company. Today, Apple Inc. is known as on the top financially stabled Fortune 500 Companies. For this ratio analysis, I used Apple’s 2015 annual balance sheet and income statement to calculate the following ratios: current, quick, debt equity, inventory turnover, receivable turnover, total assets, profit margin and return on assets. I will also discuss why each of these ratios are important in financial decision making.

Current Ratio

The current ratio is a solvency ratio that measure liquidity, meaning the relationship between current asserts to current liabilities. Apple’s current ratio was 1. 11 in fiscal year of 2015. This indicates that Apple have more current assets than current liabilities. Banks are more likely to offer loans to a company with a current ratio of 1-3 because this indicates that the company have broken even, and their ratio is not too high to interfere with the cash flow of the company. To compute the current ratio, the current liabilities is divided by the total assets (Taylor, 1989).

Quick Ratio

A sign how quick a business can liquidate its assets to pay off their liabilities is known as the quick ratio. Apple’s quick ratio is .89 which means that every $1 of the current liabilities is covered. A high ratio indicates that the company is in a good liquidity position. The calculation for this ratio is dividing the current liabilities by the total of the cash plus receivable accounts.

Debt Equity Ratio

This ratio reveals the proportion of the company assets that are financed by shareholders’ equity and debts. A high ratio indicates a company have borrowed too much money and there is a concern if the company are capable of paying its debts. It is very crucial for a company to pay close attention to their numbers because higher numbers are very risky, and lenders are not willing to loan to a company that are not in good financial standards. Apple’s debt equity ratio was 1. 433 which was higher than last year (Taylor, 1989).

Inventory Turnover Ratio

The inventory turnover ratio measures how fast a company can produce and sell its inventory. The success of a company is determined by the inventory turnover ratio because it give an idea of how much products are needed without over stocking. The higher the ratio, the faster the business is producing and selling its inventory. A company will not be able to purchase any more products until all the inventory is sold, therefore it is critical that management keep a track on inventory. The price of the goods that are sold is divided by the inventory using the inventory turnover ratio. In 2014, Apple’s inventory turnover ratio was 57.90 and increased to 59.64 the following year. This means that the company produced and sold more produces than the previous year (Taylor, 1989).

Receivable Turnover Ratio

Receivables turnover ratio measures how capable a company collects debts owed from customers. The difference between the receivable turnover and inventory turnover is that one is how fast a company can produce and sell a product and the other is how fast a company collects from a debt. Apple’s receivable turnover ratio has higher in 2015 than the previous year which means it maintained the money it collected from customer’s debt. It is calculated by sales divided by accounts receivable (Investopedia, 2016).

Total Assets Turnover

This ratio is sales divided by complete assets. It measures how effective the business can generate its revenue. A low asset turnover ratio indicates that the company could be overly invested in assets. A high number in ratio means the company are receiving more revenue on assets. This is also an indication that they are receiving more profit than their competitors. In 2014, Apple’s total assets turnover ratio was 0.83 and in 2015 is was 0.89, therefore Apple used their assets to generate sales better in 2015 than the previous year.

The net margin ratio is a profitability ratio that computes the company’s net income and net sales. It is the balance that left after all expenses is paid off. A high profit margin ratio indicates the company is profitable and are making wise decisions. Net income is the most important measures of a company’s profitability because it is the most critical responsibility to shareholders. Apple’s profit margin ratio for the of 2015, was 22.85% not much of a difference than the previous year’s ratio of 21.61% which means that the company’s cost-effectiveness is in good standing therefore a loan will be favorable (Taylor, 1989).

Return on Assets Ratio

A company’s net profit is divided by its total assets when using the return on assets ratio. It is a financial indicator that shows the production of a company without any liabilities. In other words, it shows how efficient a company use it assets to generate income, so all shareholders can see where and how the assets is being used. The ROA for Apple at the end of 2015 was. To compute the return of assets the formula that is used is ROA= net profit/average total assets. This result show that the company is steadily on the rise and is proven to be profitable.

Conclusion

It is vital for business owners to have all financial statements accurate and up to date because these statements show the company’s weaknesses and strengths that they can improve. Having all this information will help management make critical decisions regarding the growth of the company. All statements must be reviewed and accurate to clearly evaluate a company’s suitability to receive a loan.

References

Apple Financial Ratios (2005-2019). Retrieved from https://www.macrotrends.net/stocks/charts/AAPL/apple/financial-ratios

Investopedia (2016). Liquidity Ratios http://www.investopedia.com/terms/l/liquidityratios.asp

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate Finance (11th). New York, NY: McGraw-Hill. 

Taylor, H. (1989, March). How to analyze financial statements. Economic Development Review.