Financial Analysis Apple and Samsung Companies - Assignment Example

Apple and Samsung Companies Financial Report Analysis Name: Lecturer: Course name: Course code: Date: Executive summary Financial ratios are the company’s main financial indicators for the firm financial performance and position. They are used by investors and users in evaluating the firm’s relationship between the items of financial statement and determining the company’s financial performances. Financial ratios are classified based on the financial they provide they include profitability ratios, asset efficiency, liquidity, and capital structure and market performance ratios. Apple and Samsung companies is represented the following financial ratios in the year 2010, 2011 and 2012 financial statements. Table of contents Executive summary 1 Table of contents 3 Introduction 4 Profitability ratios 5 Return on equity 5 Return on assets 7 Gross profit margin 9 Profit margin 10 Asset efficiency ratios/ Asset Management ratios 12 Asset turnover ratio/ Total Assets Turnover 12 Days inventory turn over 14 Days debtors turn over 15 Liquidity ratios 17 Current ratio 18 Cash flow ratio 19 Capital Structure ratio 21 Equity ratio 21 Debt ratio 22 Appendix one 27 Appendix two 28 Appendix three 29 Appendix Four 30 Appendix Five 31 Appendix Six 32 Introduction Apple, Inc. Is an American Multinational company which was founded by Steven Paul Jobs, Ronald Gerald Wayne, and Steve Wozniak on April 1, 1976 and its headquartered in Cupertino California. The company deals designs, development and selling of the electronic devices, manufacturing of computer software and mobile communication devices. Apple Company is ranked as the world’s second largest information technology company after Samsung and third largest mobile phone manufacturer after Samsung and Nokia companies. Apple Company engages in designing the best hardware products such as of Mac laptops, in-line with OS X and iOS operating systems. Apple Company is positioned as the largest music retailer by offering the digital music revolution by use of its iPods and iTunes online stores. Apple Company’s products and services include Macintosh computers, iPad, iPhone, iPod, Apple TV, and support offerings. The company has retail stores worldwide which sells their products. Samsung is a South Korean multinational company whose headquarters is located in Samsung Town, Seoul. The company has many subsidiaries and rank of affiliated businesses which is united under the Samsung brand. Samsung was founded in 1938 by Lee Byung-chul as a trading company and diversified into insurance, food processing, securities, textiles, electronics industry and shipbuilding industries between1960s -1970s. Samsung diversification enriches the company’s subsequent growth thus facilitating separation into four business units.In1990s Samsung has progressively globalized its business activities, and electronics in particular mobile phones and semiconductors have befalls has the parent source of company’s income. Samsung has distinguished industrial subsidiaries such Samsung Electronics, Samsung Engineering, Samsung Heavy Industries and Samsung Life Insurance. Samsung is considered to have a powerful influence on South Korean’s economic growth, culture, politics, and media behind the Miracle on the Han River. Samsung affiliate companies generate almost one fifth of South Korea's country’s exports with revenue amounting to17% of South Korea's $1,082 billion gross domestic product. Profitability ratios Profitability ratios are ratios used to evaluating the company’s ability in generating earnings relative to the equity, assets and turnover. Profitability ratio measures the company’s ability in generating earnings and the cash flows in relative to the firm’s investment. This ratio entails returns on investment return on equity capital employed, and gross profit margin. Return on equity Return on equity ratio is used determining the company’s profitability of the in relation to shareholders equity. The prospective investors and the company stakeholders are interested in the earnings generated by the company. However this ratio evaluates the company’s efficiency in generating earnings through the shareholders investment. ROE ratio provides comparison compares the extent of net profit to the amount shareholders equity invested in the company. It is arrived at using the formula = net profit / average shareholder's equity x 100. Apple Particulars/ FY 2010 2011 2012 Net Profit 14,103 25,922 41,733 Average Shareholders’ Equity 47,791 76,615 118,210 ROE 29.51% 33.83% 35.30% Samsung Particulars/ FY 2010 2011 2012 Net Profit 14,177,298 12,845,713 22,262,426 Average Shareholders’ Equity 78,452,095 94,588,395 113,416,306 ROE 18.07% 13.58% 19.63% From the tables above, Apple’s company shows an increasing trend of 29.51%, 33.83%, and 35.30% in 2010, 2011 and 2012 financial years. This reveals that for every one dollar company shareholders invested, they earn an average of 32.35 cents. Samsung Company shows unstable profitability since in 2010 to 2012 financial the company earning per dollar invested fluctuates from 18.07%, 13.58%, and 19.63% respectively. Return on assets This ratio is used in assess the companies’ profits in relation to the average total assets used to generating profits. Return on assets ratio gives comparison between the company’s earnings generated to the total company assets. In case of higher ratios the companies operates efficiently while lower ratio’s reveals that the competitors has found strategic ways that they operates efficiently thus suppressing the companies’ profitability on the assets. It is arrived at using the formula = earnings before interest and tax / average total assets x 100 Apple Samsung From the information revealed from the table above, Apple and Samsung companies shows an increasing trend on return on every dollar invested on assets. Apples Company reveals a fluctuating trend from 2010 towards 2011 and 2012 by 14.37% to 11.03% and improves to 16.52% in 2012. Samsung shows a determine increment on the return of each dollar invested on the company’s assets from 24.67% in 2010, 29.39% in 2011 and 31.67 in 2012 financial year. Gross profit margin Gross profit margin evaluates the company's gross profit in relation to sales revenue. It shows the amount of earnings from sales without accounting of indirect cost that reduces the gross margin. Companies’ that generate revenue through selling stock will have their main expenses being cost of goods sold. Gross profit margin ration determine the companies efficiency in converting inventory into revenue through sales. It is arrived at using the formula = gross profit / sales revenue x 100 Apple Particulars/ FY 2010 2011 2012 Gross profit 25,694 43,818 68,662 Sales revenue 65,225 108,249 156,508 Gross profit margin 39.38% 40.48% 43.87% Samsung Particulars/ FY 2010 2011 2012 Gross profit 45,626,049 49,348,008 69,509,553 Sales revenue 135,771,646 154,048,895 187,754,283 Gross profit margin 33.61% 32.03% 37.02% Apple and Samsung Companies’ show their profitability in meeting their cost of goods sold by utilizing their revenue. Apple Company shows define growth in its gross profit margin from 39.38% in 2010, 40.48% in 2011, and 43.87% in 2012 while Samsung gross profit margin decrease in 2011 to 32.03% as compared to initial year 2010 with 33.61% and 2012 with 37.02% gross profit margin ratio. Profit margin Profit margin ratio is used in determining sales revenue of a company relative to the earnings before interest and tax. Profit margin is used in evaluating the average amount each dollar of sales contribute to the company's earnings before interest and tax EBIT. Profit margin ratio is considered decisive measure for investors in evaluating the comprehensive company’s profitability. It behoves the investors on the measures taken into consideration on evaluating the companies’ performance. It is arrived at using the formula = earnings before interest and tax / sales revenue x 100 Apple Particulars/ FY 2010 2011 2012 EBIT 18,540 34,205 55,763 Sales revenue 65,225 108,249 156,508 Profit Margin 28.42% 31.60% 35.63% Samsung Particulars/ FY 2010 2011 2012 EBIT 16,971,337 16,050,712 27,929,248 Sales revenue 135,771,646 154,048,895 187,754,283 Profit Margin 12.50% 10.42% 14.88% From the tables above, Apple and Samsung reveal an increasing trend of profit margin although Samsung fluctuates in the year 2011. Apple Company profit margin ratio shows that the company is profitable since it has a gradual increase in its profit margin of 28.42% in 2010, 31.60%in 2011 and 35.63% in 2012 financial year, whereas Samsung profitability decreases from 12.50% in 2010 to 10.42% in 2011 and increases to 14.88% in 2012 financial. The increase in Samsung profit margin from 2011 to 2012 is as a result of managerial efforts after realising a decrease in the preceding year. Asset efficiency ratios/ Asset Management ratios Assets efficiency ratios measure the companies’ efficiency in utilising assets to generate earnings out of sales. Assets efficiency ratios are also considered as assets management ratio. These ratios indicate the company’s efficiency in utilizing its assets to generate revenues incomes. It portrays a comparison of the company assets and its sales revenue. These ratios involves inventory asset turnover that establish the lead time of inventory stock reacquired, Asset turnover ratio which determines the general company’s efficiency of the in making profits per dollar of the total assets investment and debtors turnover that indicates the time debtors pay their financial obligation. Asset turnover ratio/ Total Assets Turnover Asset turnover ratio indicates the companies general efficiency of the in utilizing its assets to generates earnings to the business. These ratios ascertain the efficacy of the firm in generating profit that eases the companies in meeting their expenses. Thus this ratio reveals the going concern of the company and its capability making profits from assets invested. Potential investors and the shareholders utilise this ratio in making decisive responses on the viability of the companies. Apple Particulars/ FY 2010 2011 2012 Sales Revenue 65,225 108,249 156,508 Average Total Assets 75,183 116,371 176,064 Assets Turnover Ratio 0.87 0.93 0.89 Samsung Particulars/ FY 2010 2011 2012 Sales Revenue 135,771,646 154,048,895 187,754,283 Average Total Assets 117,910,918 145,458,186 169,051,975 Assets Turnover Ratio 1.51 1.10 1.11 From the tables above, Apple and Samsung Companies’ shows fluctuating trend on their its efficiency in utilising its assets to generate earnings. Apples reveal an increase in asset turnover form 0.87 in 2010 to 0.93 in 2011 and decreases in 2012 to 0.89 whereas Samsung shows a decline in asset turnover from 1.51 in 2010 to 1.10 in 2011 and 1.11 in 2012 financial year. However, the two companies’ shows inefficiency in utilizing their assets to earn revenue thus not viable for investment. Days inventory turn over Inventory turnover ratio is a fundamental ratio that evaluates the period of time a company takes to sale the inventory in a financial period. Companies will efficiently pay the short term financial obligation using revenue from sale of their inventories when inventory turnover will be higher. Firms who keep slow moving inventory have a greater of meeting its financial short term obligation. It is arrived at using the formula = average inventory / cost of goods sold x 365 Apple Particulars/ FY 2010 2011 2012 Average inventory 1,051 776 791 Cost of goods sold 39541 64,431 87,846 Days 10 days 4 days 3days Samsung Particulars/ FY 2010 2011 2012 Average inventory 11,734,590 14,673,434 16,569,333 Cost of goods sold 90,145,600 49,348,008 69,509,553 Days 48days 108days 87days The table above shows that Apple Company is efficient in converting its inventory into sales thus efficient in paying its obligations using sales revenue. The company reveals an improving conversion of inventory into sales from 10days in 2010, 4days in 2011 and 3days in 2012. Samsung Company reveals fluctuating efficiency in converting its inventory into sales thus they are not in a position of meeting its financial obligation when they fall due by using sales. Samsung takes 48days in 2010, 108days in 2011 and slightly improves in 2012 to 87days. Days debtors turn over Day’s debtors evaluate the average time range it takes for a firm to receive money for their trade receivable in a financial year. Business firms should be collecting the amount owed by its credit customers ‘in a short period of time so as to enhance its financial liquidity in meeting obligations of the firm. Efficient debtor’s collections increases cash flows hence resulting to proper realization of debt from accounts receivable that can be used in settling financial obligations. The lesser the number of days defines the more efficient the company in collecting cash from the debtors. The companies will be inefficient if the foremost debtors are not efficient in paying their company owing. Days debtors turnover = average trade debtors / sales revenue x 365 Apple Particulars/ FY 2010 2011 2012 Average trade debtors 5,510 5,369 10,930 Sales revenue 65,225 108,249 156,508 Ratios 31days 18 days 26 days Samsung Particulars/ FY 2010 2011 2012 Average trade debtors 18,710,013 22,549,741 24,903,927 Sales revenue 135,771,646 154,048,895 187,754,283 days 50 53 48 From the tables above, Apple and Samsung shows a fluctuating efficiency in collecting of cash from their trade debtors. Apple shows increasing efficiency in collection cash outstanding for its debtors from 36days in 2010 to 18days in 2011 and become inefficient in 2012 in collecting cash in 26days. Samsung Company indicates an average efficiency of 50 days in collecting cash by during 2012 the company improves its efficiency to 48days. Liquidity ratios Liquidity ratios are monetary ratios that evaluate the company’s ability in meeting its short term financial liabilities. These ratios shows the numbers of times that short term financial obligations are gathered for by liquid assets and cash. If the liquidity ratio is greater than one, then it indicates that the company’s financial health is in a good condition. The higher the liquidity ratios indicates higher margin of safety that the companies has in settling its current financial obligations. It includes current ratio, cash ratio, acid test ratio and working capital ratio. Current ratio Current ratio is a financial measure used in evaluating the ability of the firm in meeting short term financial obligation using the current assets. Firms used current assets in financing short term liabilities of the business. Current ratio reveals the dollars of current assets the firm has per dollar of current liabilities. Current ratio does not consider the timing of the cash flows thus this ratio can mislead the users. It is arrived at using the formula = current assets / current liabilities Apple Particulars/ FY 2010 2011 2012 Current assets 41,678 44,988 57,653 Current liabilities 20,722 27,970 38,542 Current ratio 2.01 1.60 1.50 Samsung Particulars/ FY 2010 2011 2012 Current assets 53,913,942 66,755,731 81,476,069 Current liabilities 35,073,071 41,377,102 43,817,619 Current ratio 1.54 1.61 1.86 From the tables above, Apples and Samsung company reveals their liquidity in meeting their short term financial obligation in using their current assets. Apple Company shows a decreasing trend in meeting its short term obligation. Apple current ratios of 2.01 in 2010, 1.60 in 2011and 1.50 in 2012 financial year whereas Samsung company reveals increasing trend of 1.54 in 2010, 1.61 in 2011, and 1.86 in 2012. Cash flow ratio Cash flow ratio is used in evaluating the firm’s ability in settling off its current liabilities using cash and cash items from operating activities. Cash and cash items from operating activities are utilized in paying the companies short-term financial obligations. Cash flow ratio determines the extent of firm’s capacity in paying off its short liabilities using cash from operating activities. It is arrived at using the formula = net cash flows from operating activities / current liabilities Apple Particulars/ FY 2010 2011 2012 Net cash flow from operating activities 18,595 37,529 50,856 Current liabilities 20,722 27,970 38,542 Cash flow ratio 0.90 1.32 1.33 Samsung Particulars/ FY 2010 2011 2012 Net cash flow from operating activities 20,920,870 21,396,603 35,452,160 Current liabilities 35,073,071 41,377,102 43,817,619 Cash flow ratio 0.60 0.52 0.81 From the table above, both companies’ shows an increasing trend in utilizing its cash and cash items from operating activities to settle current financial obligation. Apple Company shows 0.90 in 2010 1.32in 2011 and 1.33 in 2012 financial years whereas Samsung Company also shows fluctuating trend of 0.60 in 2010, 0.52 in 2011and improvement in 2012 to 0.81. Capital Structure ratio Capital structure ratio involves combination of both long term sources of finances and short term sources of finances. Capital structure ratios evaluate the companies’ long term financial strength which is delineated by the coverage and structural ratios such as debt ratios, debt equity ratios. This ratio reveals the percentage ratio of the debt and firm's equity and provide a benchmark on extend to which the firm utilizes its long term debt. Equity ratio Equity ratio reveals the amount of dollars of equity in every dollar of assets. According to the accounting equation total equity is equal to total assets plus liabilities thus if equity ratio is less than 50%, then it reveal that the company was more dependent on debt funding than equity funding. This reveals that the company had more liabilities over its assets. It is accounted for as follows = total equity / total assets x 100 Apple Particulars/ FY 2010 2011 2012 Total equity 47,791 76,615 118,210 Total assets 75,183 116,371 176,064 Equity ratio 63.56% 65.84% 67.14% Samsung Particulars/ FY 2010 2011 2012 Total equity 78,452,095 94,588,395 113,416,306 Total assets 117,910,918 145,458,186 169,051,975 Equity ratio 66.53% 65.02% 67.10% Apple and Samsung table above shows more than 50% equity ration thus mean the companies are more dependent on equity as compared to debt. Apple Company shows an increasing trend of equity ration from 63.56% in 2010, 65.84% in 2011, and 67.14% in 2012 financial years while Samsung Company shows an average increasing trend of 66% to 67.1 % in 2012 (Kendrick, 2006). However this shows that both companies’ have more assets as compared to their obligation thus good for investment. Debt ratio Debt ratio is used in determining the amount of liabilities that exist per dollar of assets in the firm. Usually if debt ratio is more than 50%, it is considered that the corporate finances its investments in assets by using debt than the equity available in the firm. It is accounted for as follows= total liabilities / total assets x 100 Apple Particulars/ FY 2010 2011 2012 Total liabilities 27,392 39,756 57,854 Total assets 75,183 116,371 176,064 Debt ratio 36.43% 34.43% 32.90% Samsung Particulars/ FY 2010 2011 2012 Total liabilities 39,458,823 50,869,791 55,635,669 Total assets 117,910,918 145,458,186 169,051,975 Debt ratio 33.46% 35.0% 32.91% Apple and Samsung companies reveal that they rely mostly on debt as compared to equity since their debt ratio is less than 50% (Kendrick, 2006). Apple Company reveals a decreasing trend of debt ratio from 36.43% in 2010, 34.43% in 2011, and 32.90% in 2012 whereas Samsung Company reveals a fluctuating trend from 33.46% in 2010, 35.0% in 2011, and 32.91%2012. However, this signifies that the companies are not worth to invest. Conclusion The profitability analysis of the company as disclosed in the analysis of companies’ indicates a decreasing trend in generating profits in the 2010 to 2012 financial years. Return on equity indicates an increase equity ratio from 63.56% in 2010, 65.84% in 2011, and 67.14% in 2012 financial years while Samsung Company shows an average increasing trend of 66% in 2010 to 67.1 % in 2012. However this shows that both companies’ good for investment. According to gross profit margin shows an increase in each dollar from the sales revenue. In 2010 to 2012 gross profit margin Apple Company shows increases f gross profit margin from 39.38% in 2010, 40.48% in 2011, and 43.87% in 2012 while Samsung gross profit margin decrease in 2011 to 32.03% as compared to initial year 2010 with 33.61% and 2012 with 37.02% gross profit margin ratio% indicating that the companies’ are profitable enough for potential investors to invest. Return on assets reveals a decreasing nature of the assets utilization in generating profits. The recommended liquidity ratio should be 1 but according to the current ratio, the analysis indicates that Apple current ratios of 2.01 in 2010, 1.60 in 2011and 1.50 in 2012 financial year whereas Samsung company reveals increasing trend of 1.54 in 2010, 1.61 in 2011, and 1.86 in 2012 hence more than1 however the company is in good financial health. The analysis of asset efficiency ratios reveals that the companies’ efficiency in utilizing assets to generate earnings. Apples reveal an increase in asset turnover form 0.87 in 2010 to 0.93 in 2011 and decreases in 2012 to 0.89 and Samsung shows a decline in asset turnover from 1.51 in 2010 to 1.10 in 2011 and 1.11 in 2012 financial year. Thus, indicating inefficiency in utilizing their assets to earn revenue hence not viable for investment. Capital structure ratio shows an improvement in the company financial stability since the equity ratios reflect an increasing rate of Apple Company from 63.56% in 2010, 65.84% in 2011, and 67.14% in 2012 financial years while Samsung Company shows an average increasing trend of 66% to 67.1 % in 2012 good for investment. Works Cited Fabozzi.J. “Financial management and analysis. .” New York, USA: : McGraw-Hill., 2008. Kendrick, J. Improving Company's Productivity: Ratio analysis . Hopkins University Press, 2006. Kothari, S. P., and Ray Ball. Financial Statement Analysis. Mcgrew-Hill Companies, 2004. Penman, Stephen H. Financial statement analysis and security valuation. New York, NY: McGraw-Hill/Irwin, 2007. Appendix one Apple Appendix two Apple Appendix three Apple Appendix Four Samsung Appendix Five Samsung Appendix Six Samsung Read More