FINANCIAL STATEMENT ANALYSIS FINAL

PAPER REQUIREMENT

LENOVO
[COMPANY NAME]  [Company address]
  Introduction – Company Profile (10 points)

Apple Inc. is an American multinational technology company headquartered

in Cupertino, California, United States. Apple is the largest technology company by revenue
(totaling US$365.8 billion in 2021) and, as of June 2022, is the world's biggest company by
market capitalization, the fourth-largest personal computer vendor by unit sales and second-
largest mobile phone manufacturer. It is one of the Big Five American information
technology companies, alongside Alphabet, Amazon, Meta, and Microsoft.

Apple was founded as Apple Computer Company on April 1, 1976, by Steve

Jobs, Steve Wozniak and Ronald Wayne to develop and sell Wozniak's Apple I personal
computer. It was incorporated by Jobs and Wozniak as Apple Computer, Inc. in 1977 and the
company's next computer, the Apple II, became a best seller and one of the first mass-
produced microcomputers. Apple went public in 1980 to instant financial success. The company
developed computers featuring innovative graphical user interfaces, including the 1984 original
Macintosh, announced that year in a critically acclaimed advertisement. By 1985, the high cost
of its products and power struggles between executives caused problems. Wozniak stepped back
from Apple amicably and pursued other ventures, while Jobs resigned bitterly and
founded NeXT, taking some Apple employees with him.

As the market for personal computers expanded and evolved throughout the 1990s,
Apple lost considerable market share to the lower-priced duopoly of the Microsoft
Windows operating system on Intel-powered PC clones (also known as "Wintel"). In 1997,
weeks away from bankruptcy, the company bought NeXT to resolve Apple's
unsuccessful operating system strategy and entice Jobs back to the company. Over the next
decade, Jobs guided Apple back to profitability through a number of tactics including
introducing the iMac, iPod, iPhone and iPad to critical acclaim, launching "Think different" and
other memorable advertising campaigns, opening the Apple Store retail chain, and acquiring
numerous companies to broaden the company's product portfolio. When Jobs resigned in 2011
for health reasons, and died two months later, he was succeeded as CEO by Tim Cook.

Apple became the first publicly traded U.S. company to be valued at over $1 trillion in
August 2018, then $2 trillion in August 2020, and most recently $3 trillion in January 2022. The
company receives criticism regarding the labor practices of its contractors, its environmental
practices, and its business ethics, including anti-competitive practices and materials sourcing.
Nevertheless, the company has a large following and enjoys a high level of brand loyalty. It is
ranked as one of the world's most valuable brands

Purpose and use of financial ratios

Ratio analysis refers to the analysis of various pieces of financial information

in the financial statements of a business. They are mainly used by external analysts to
determine various aspects of a business, such as its profitability, liquidity, and
solvency.

Analysis of financial ratios serves two main purposes:

1. Track company performance

Determining individual financial ratios per period and tracking the change in their
values over time is done to spot trends that may be developing in a company. For
example, an increasing debt-to-asset ratio may indicate that a company is
overburdened with debt and may eventually be facing default risk.

2. Make comparative judgments regarding company performance

Comparing financial ratios with that of major competitors is done to identify whether
a company is performing better or worse than the industry average. For example,
comparing the return on assets between companies helps an analyst or investor to
determine which company is making the most efficient use of its assets.

Users of financial ratios include parties external and internal to the company:
  External users: Financial analysts, retail investors, creditors, competitors, tax
authorities, regulatory authorities, and industry observers
 Internal users: Management team, employees, and owners

What Does Ratio Analysis Tell You?

Investors and analysts employ ratio analysis to evaluate the financial health of
companies by scrutinizing past and current financial statements. Comparative data
can demonstrate how a company is performing over time and can be used to estimate
likely future performance. This data can also compare a company's financial standing
with industry averages while measuring how a company stacks up against others
within the same sector.

Investors can use ratio analysis easily, and every figure needed to calculate the ratios
is found on a company's financial statements.

Ratios are comparison points for companies. They evaluate stocks within an industry.
Likewise, they measure a company today against its historical numbers. In most
cases, it is also important to understand the variables driving ratios as management
has the flexibility to, at times, alter its strategy to make its stock and company ratios
more attractive. Generally, ratios are typically not used in isolation but rather in
combination with other ratios. Having a good idea of the ratios in each of the four
previously mentioned categories will give you a comprehensive view of the company
from different angles and help you spot potential red flags.

Ratio Analysis – Categories of Financial Ratios

There are numerous financial ratios that are used for ratio analysis, and they are
grouped into the following categories:

1. Liquidity ratios
Liquidity ratios measure a company’s ability to meet its debt obligations using its
current assets. When a company is experiencing financial difficulties and is unable to
pay its debts, it can convert its assets into cash and use the money to settle any
pending debts with more ease.

Some common liquidity ratios include the quick ratio, the cash ratio, and the current
ratio. Liquidity ratios are used by banks, creditors, and suppliers to determine if a
client has the ability to honor their financial obligations as they come due.

2. Solvency ratios

Solvency ratios measure a company’s long-term financial viability. These ratios

compare the debt levels of a company to its assets, equity, or annual earnings.

Important solvency ratios include the debt to capital ratio, debt ratio, interest coverage
ratio, and equity multiplier. Solvency ratios are mainly used by governments, banks,
employees, and institutional investors.

3. Profitability Ratios

Profitability ratios measure a business’ ability to earn profits, relative to their

associated expenses. Recording a higher profitability ratio than in the previous
financial reporting period shows that the business is improving financially. A
profitability ratio can also be compared to a similar firm’s ratio to determine how
profitable the business is relative to its competitors.

Some examples of important profitability ratios include the return on equity ratio,
return on assets, profit margin, gross margin, and return on capital employed.

4. Efficiency ratios
Efficiency ratios measure how well the business is using its assets and liabilities to
generate sales and earn profits. They calculate the use of inventory, machinery
utilization, turnover of liabilities, as well as the usage of equity. These ratios are
important because, when there is an improvement in the efficiency ratios, the business
stands to generate more revenues and profits.

Some of the important efficiency ratios include the asset turnover ratio, inventory
turnover, payables turnover, working capital turnover, fixed asset turnover,  and
receivables turnover ratio.

5. Coverage ratios

Coverage ratios measure a business’ ability to service its debts and other obligations.
Analysts can use the coverage ratios across several reporting periods to draw a trend
that predicts the company’s financial position in the future. A higher coverage ratio
means that a business can service its debts and associated obligations with greater
ease.

Key coverage ratios include the debt coverage ratio, interest coverage, fixed charge
coverage, and EBIDTA coverage.

6. Market prospect ratios

Market prospect ratios help investors to predict how much they will earn from specific
investments. The earnings can be in the form of higher stock value or future
dividends. Investors can use current earnings and dividends to help determine the
probable future stock price and the dividends they may expect to earn.

Key market prospect ratios include dividend yield, earnings per share, the price-to-
earnings ratio, and the dividend payout ratio.
Most ratio analysis is only used for internal decision making. Though some benchmarks are set
externally (discussed below), ratio analysis is often not a required aspect of budgeting or
planning.

Application of Ratio Analysis

The fundamental basis of ratio analysis is to compare multiple figures and derive a
calculated value. By itself, that value may hold little to no value. Instead, ratio
analysis must often be applied to a comparable to determine whether or a company's
financial health is strong, weak, improving, or deteriorating.

Ratio Analysis Over Time

A company can perform ratio analysis over time to get a better understanding of the
trajectory of its company. Instead of being focused on where it is today, the company
is more interested doing this type of analysis is more interested in how the company
has performed over time, what changes have worked, and what risks still exist
looking to the future. Performing ratio analysis is a central part in forming long-term
decisions and strategic planning.

To perform ratio analysis over time, a company selects a single financial ratio,
then calculates that ratio on a fixed cadence (i.e. calculating its quick ratio every
month). Be mindful of seasonality and how temporarily fluctuations in account
balances may impact month-over-month ratio calculations. Then, a company
analyzes how the ratio has changed over time (whether it is improving, the rate at
which it is changing, and whether the company wanted the ratio to change over time).

Ratio Analysis Across Companies

Imagine a company with a 10% gross profit margin. A company may be thrilled
with this financial ratio until it learns that every competitor is achieving a gross profit
margin of 25%. Ratio analysis is incredibly useful for a company to better stand how
its performance compares to similar companies.
 To correctly implement ratio analysis to compare different companies, consider
only analyzing similar companies within the same industry. In addition, be mindful
how different capital structures and company sizes may impact a company's ability to
be efficient. In addition, consider how companies with varying product lines (i.e.
some technology companies may offer products as well as services, two different
product lines with varying impacts to ratio analysis).

Different industries simply have different ratio expectations. A debt-equity ratio that
might be normal for a utility company that can obtain low-cost debt might be deemed
unsustainably high for a technology company that relies heavier on private investor

Examples of Ratio Analysis in Use

Ratio analysis can predict a company's future performance—for better or worse.
Successful companies generally boast solid ratios in all areas, where any sudden hint
of weakness in one area may spark a significant stock sell-off. Let's look at a few
simple examples

Net profit margin, often referred to simply as profit margin or the bottom line, is
a ratio that investors use to compare the profitability of companies within the same
sector. It's calculated by dividing a company's net income by its revenues. Instead of
dissecting financial statements to compare how profitable companies are, an investor
can use this ratio instead. For example, suppose company ABC and company DEF
are in the same sector with profit margins of 50% and 10%, respectively. An investor
can easily compare the two companies and conclude that ABC converted 50% of its
revenues into profits, while DEF only converted 10%.

Using the companies from the above example, suppose ABC has a P/E ratio of
100, while DEF has a P/E ratio of 10. An average investor concludes that investors
are willing to pay $100 per $1 of earnings ABC generates and only $10 per $1 of
earnings DEF generates.

What Are the Types of Ratio Analysis?

Financial ratio analysis is often broken into five different types: profitability,
solvency, liquidity, turnover, and earnings ratios. Other non-financial metrics may be
scattered across various departments and industries. For example, a marketing
department may use a conversion click ratio to analyze customer capture.

What Are the Uses of Ratio Analysis?

Ratio analysis serves three main uses. First, ratio analysis can be performed to
track changes to a company over time to better understand the trajectory of
operations. Second, ratio analysis can be performed to compare results with other
similar companies to see how the company is doing compared to competitors. Third,
ratio analysis can be performed to strive for specific internally-set or externally-set
benchmarks.

Why Is Ratio Analysis Important?

Ratio analysis is important because it may portray a more accurate representation of

the state of operations for a company. Consider a company that made $1 billion of
revenue last quarter. Though this seems ideal, the company might have had a
negative gross profit margin, a decrease in liquidity ratio metrics, and lower earnings
compared to equity than in prior periods. Static numbers on their own may not fully
explain how a company is performing.
PART I. LIQUIDITY RATIOS 2016 AND 2017

1. Current Ratio Computations:

2017

Current Ratio = Current Assets = 128,645

Current Liabilities 100, 814
= 1. 27 times

2016

Current Ratio = Current Assets = 106,869

Current Liabilities 79,006
= 1.35 times

Interpretation:

A current ratio that is in line with the industry average or slightly higher is generally
considered acceptable. A current ratio that is lower than the industry average may indicate a
higher risk of distress or default. In theory, the higher the current ratio, the more capable a
company is of paying its obligations because it has a larger proportion of short-term asset value
relative to the value of its short-term liabilities

In general, a current ratio between 1.5 and 3 is considered healthy. Ratios lower than 1
usually indicate liquidity issues, while ratios over 3 can signal poor management of working
capital.  Ratio greater than 1 implies that the firm has more current assets than a current liability.
Apple Inc's current ratio is 1.35 for 2016 and 1.27 for 2017, a current ratio of 1.35:1
indicates 1.35 assets and a current ratio of 1.27:1 indicates 1.27 assets are available to meet the
short-term liability of the company.

2. Quick Ratio

2017
 Quick Ratio = Current Assets – Inventories = 128,645 - 4855 = 123,790
Current Liabilities 100,814 100,814
= 1. 23

2016

Quick Ratio = Current Assets – Inventories = 106,689 - 2132 = 104,737

Current Liabilities 79,006 100,814
= 1. 33

Interpretation :

 A quick ratio that is equal to or greater than 1 means the company has enough liquid assets to
meet its short-term obligations. And for Apple Inc both computed Quick Ratios for 2016 and
2017 are greater than 1 which means that Apple Inc has enough liquid assets to meet its short-
term obligations.

PART II. PROFITABILITY RATIOS 2016 AND 2017

1. Profit Margin

2017

Profit Margin = Net Profit = 48, 351 = 0. 2109 x 100 = 21.09%

Sales 229, 234

2016
Profit Margin = Net Profit = 45, 687 = 0. 2119 x 100 = 21.19%
Sales 215,639

Interpretation:

A 21% net profit margin indicates that for every dollar generated by Apple in sales, the company
kept $0.21 as profit. A higher profit margin is always desirable since it means the company
generates more profits from its sales. However, profit margins can vary by industry

2. Return on Total Assets

2017

Return on Total Assets = Net Income = 48, 351 = 0.1288 x 100 =12.88 %
Total Assets 375,319

2016

Return on Total Assets = Net Income = 45,687 = 0.142 x 100 = 14.20 %

Total Assets 321,686

Interpretation:
An ROA of 5% or better is typically considered good, while 20% or better is considered
great. In general, the higher the ROA, the more efficient the company is at generating profits.
However, any one company's ROA must be considered in the context of its competitors in the
same industry and sector.

And based on the computed ROA of Apple Inc, the ratios for 2017 and 2016 are considered
good. They are efficient at generating profits. The Apple Inc company generates a profit of $12.8
for every $1 in sales on 2017 while it generates $14.20 for every $1 in sales on 2016. The
company generates $1 in profit for every $12.8 and 14.20 in total assets for 2017 1nd 2016.

3. Return on Common Equity

2017
ROE = Net Income = 48,351 = 0.3607 x 100 = 36.07 %
Common Equity 134,047

2016

ROE = Net Income = 45,687 = 0.3562 x 100 = 35.62 %

Common Equity 128,249

Interpretation:

The return on shareholders' equity ratio shows how much money is returned to the owners
as a percentage of the money they have invested or retained in the company. It is one of five
calculations used to measure profitability. A return on equity (ROE) of 20+% is considered
good, 30% ROE is considered exceptional.

The Apple In has 36.07 % ROE for 2017 and 35.62 % for 2017 means that they have higher
that 30 % .It only means that the company's ROE percentage is better over these years. A higher
percentage indicates a company is more effective at generating profit from its existing assets.
Likewise, a company that sees increases in its ROE over time is likely getting more efficient.

Part III. Asset and Debt Management 2016 and 2017

1. Debt Ratio

2017

Debt Ratio = Total Liabilities = 241,272 = 0.6428 x 100 = 64.28 %

Total Assets 375,319

2016

Debt Ratio = Total Liabilities = 193,437 = 0.6013 x 100 = 60.13 %

Total Assets 321,686

Interpretation:
 What counts as a good debt ratio will depend on the nature of the business and its industry.
Generally speaking, a debt-to-equity or debt-to-assets ratio below 1.0 would be seen as relatively
safe, whereas ratios of 2.0 or higher would be considered risky. Some industries, such as
banking, are known for having much higher debt-to-equity ratios than others.

A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while
a debt ratio of less than 100% indicates that a company has more assets than debt.

A ratio greater than 1 shows that a considerable amount of a company's assets are funded
by debt, which means the company has more liabilities than assets. A high ratio indicates that a
company may be at risk of default on its loans if interest rates suddenly rise. A ratio below 1
means that a greater portion of a company's assets is funded by equity

Apple Inc computed Debt ratios in 2016 and 2017 are below 1.0 or 100 % indicates that the
company has more assets than debt and at the same time there is a greater portion of a company’s
assets is funded by equity.

2. Time Interest Ratio

2017

TIO = EBIT = 64,089 = 4.07

Interest Charge 15,735

2016

TIO = EBIT = 61,372 = 3.91

Interest Charge 15,685

Interpretation:

From an investor or creditor's perspective, an organization that has a times interest earned
ratio greater than 2.5 is considered an acceptable risk. Companies that have a times interest
earned ratio of less than 2.5 are considered a much higher risk for bankruptcy or default.
 For 2016 and 2017 Apple Inc has 4.07 and 3.91 ratio and they are higher ratio that 2. 5 in
other words, they are good ratio and considered more acceptable risk. A higher times interest
earned ratio is favorable because it means that the company presents less of a risk to investors and
creditors in terms of solvency. It indicate that a ratio of 4 means that a company makes enough
income to pay for its total interest expense 4 times over.

3. Fixed Charge Coverage Ratio= N/A

Part IV. Market Values and DuPont Analysis 2016 and 2017

1. Price/Earnings Ratio = N/A

2. ROA = Net Profit Margin X Total Assets Turnover

Net Income x Sales = 48,351 x 229,234

Sales Total Assets 229,234 375, 319

= 21.09 % x 0.611

= 12.88 %
Interpretation:
Generally, the higher the ratio, the better. It should be noted that, in order to generate more sales,
management might reduce the net profit by reducing prices. Lowest-cost firms have used this
strategy very effectively.

So, Apple Inc has higher ratio of 12.88 which means that it generate more sales and has increase
sale profit.
Questions to Answer (25 points)

1. How liquid is the company?

Based on the computed current ratio and the quick ratio, both ratios of the Apple Inc are healthy.
It means that the Apple company has more current assets to current liabilities.Also the company
has the ability to pay back its liabilities (debt and accounts payable) with its assets
(cash, marketable securities, inventory, and accounts receivable).

2. Are the company’s managers effectively generating profit from the firm’s assets?
Based on the computed ROA of Apple Inc, the ratios for 2017 and 2016 are considered good. It
shows that the company are considered efficient at generating profits. In other words, the ratio is
showing they have many sales are generated from each dollar of assets a company owns.

3.How is the firm financed?

Apple is funded by 7 investors. Interscope Records and Berkshire Hathaway are the most recent
investors. Apple has raised a total of $375M across 2 funds, their latest being European tet fund .
This fund was announced on Jan 15, 2022 and raised a total of $75M .

4. Are the firm’s managers providing a good return on the shareholder’s return on assets
or return on equity?

Yes. The Apple In has 36.07 % ROE for 2017 and 35.62 % for 2017 means that they have higher
that 30 % .It only means that the company's ROE percentage is better over these years. A higher
percentage indicates a company is more effective at generating profit from its existing assets.
Likewise, a company that sees increases in its ROE over time is likely getting more efficient.

5. Are the firm’s managers creating or destroying values?

Corporate governance might be deemed to provide value if all the interpretations have been
compiled. Apple Inc. appears to be a stable and stable revenue stream because it is highly
efficient, profitable, and liquid, so the decline in 2017 is cause for concern.

Recommendation & Conclusion (15 points)

1. It has been suggested that in the case of Apple that in addition to cost-cutting, it will also need
to concentrate on lowering costs.

2. To maintain a competitive edge, the business must continue to innovate its products while
accumulating a substantial patent portfolio. In the markets where it operates, Apple Inc.
competes, not just in product design but also in price and use.

3. It is advised that Apple Inc.'s short-term debt repayments be strengthened in light of the
liquidity ratio. 2017 showed a noticeable fall, even if it was still above the sector average. It will
be detrimental to Apple if the trend keeps falling. Apple Inc. is a successful, effective, and liquid
business overall. Despite a substantial drop ,Apple continued to outperform the industry average
from 2016 to 2017. Enhancements can be made to increase profitability and more effective use
of resources Additionally, the financial accounts of Apple Inc. Because it makes more money
than it spends on operational costs, the company is profitable. The business has made money
over the past two years, particularly in the world of 2016 and 2017. Financial metrics display that
you have a sufficient amount of money to last you for a while
References:

CFI Team, November 1, 2022, Ratio Analysis Comparisons between the financial information in
the financial statements of a business
ADAM HAYES, March 28, 2022, CORPORATE FINANCE , FINANCIAL RATIOS, What Is
the Debt Ratio?

JAMES CHEN, April 04, 2022,Times Interest Earned Ratio: What It Is, How to Calculate TIE,
FUNDAMENTAL ANALYSIS  

WAYNE PINSENT, June 29, 2022, Decoding DuPont Analysis,

JIM MUELLER, July 19, 2022, What Financial Liquidity Is, Asset Classes, Pros & Cons,
Examples
Wikipedia, Apple Inc.