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The purpose of this letter is to make investment recommendations about the purchase of stock relying on Apples financial performance. The calculated ratios indicate that Apple mostly outperforms the Computer Hardware industry. In particular, Apples acid test ratio is two times greater than the industrys average. However, for the past two years, the companys current ratio tends to be slightly smaller than the industrys average. One may note that since Apples total assets cover its total liabilities, the company is not expected to experience liquidity problems (Atrill & McLaney, 2017).
However, one of Apples main competitors, Samsung, has higher current (2.5 versus Apples 1.12) and acid test (2.109 versus Apples 1.09) ratios. Even though both companies are able to meet their short-term obligations, Samsung may do it more successfully.
Apple significantly underperformed its industry and Samsung in terms of ability to meet long-term obligations. The companys debt-to-equity ratios are higher than the industrys ratios for the past three years ( Computer hardware industry, 2019). Interestingly, Samsungs debt-to-equity ratio has remained relatively low for years 2016-2018, yet it is also higher than the industrys average debt-to-equity ratio. While Apples debt-to-equity ratio is 1.07, Samsungs ratio is just 0.38. Thus, Apple uses much more debt to finance its assets in relation to the shareholders equity than Samsung.
Speaking of profitability, Apple mostly outperforms the industry in terms of gross profit margin and net profit margin. While Samsungs gross profit margins are higher than those of Apple, its net profit margins are lower than those of its competitors. Apples gross profit margin is 38%, and Samsungs gross profit margin is 45%, though Apples net profit margin is 22%, whereas Samsungs ratio is 18% (Apple Inc., 2018; Samsung Electronics, 2019). Even though Samsung generated more gross profit, it did not generate as much net profit as Apple did. Thus, Apple has a better ability to generate net profit relative to revenue.
The purchase of Apples stock is a viable option for several reasons. Firstly, the company is expected to meet its short-term obligations successfully. Secondly, its performance has been stable over the past three years and mainly above the industrys averages. Thirdly, there is a constant growth in sales and gross profit, and net profit margins, which means that Apple rationally manages its expenses. However, the high debt-to-equity ratio should be viewed as a sign of concern as the company may not generate enough cash to meet its debt obligations.
References
Apple Inc. (2018). Form 10-K. Web.
Atrill, P., & McLaney, E. J. (2017). Accounting and finance for non-specialists (10th ed.). Harlow, UK: Pearson Education.
Computer hardware industry financial strength information. (2019). Web.
Samsung Electronics. (2019). Consolidated financial statements of Samsung Electronics Co., Ltd. and its subsidiaries index to financial statements. Web.
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