Financial Statements Analysis Assignment Sample

Apple Assignment

1) Does your company employ a strategy of product differentiation, cost leadership, or a combination of both?

ANS: Apple was established in 1976 and from then only through product differentiation it attempts to increase market demand and through which only it entails making products unique and attractive to the customers. It always focuses on the customers to provide them a premium-priced product. Apple uses both the differentiation and cost advantage strategy to gain a sustainable competitive advantage. IPhone is the bestselling product of Apple which enhances its sales. Apple uses a cost leadership strategy as well by producing cost-effective and high-quality products. Its vision is clear from the incorporation of the company that it has to create the premier product and charges premium prices from the customers. It always uses a combination of both strategies.

2) Based on your answer to (1), what are your general expectations for R&D expense (innovation), gross profit margin, net profit margin, and asset turnover for your company?

ANS: Considering the latest annual report of Apple i.e. of the annual report of FY 2019 it is clear that the major source for competitive advantage for Apple is technological innovations as it is one of the major top three brands of smartphone industries. As company adopts strategies of product differentiation and cost leadership, it incurs a large amount of money on innovation, research and development. On the basis of these facts, it is expected that the R&D Expense of the company will be quite high. It is also expected that company would have a high gross profit margin, net profit margin, and asset turnover ratio as it employ a strategy of cost leadership which enables the company to maximize its profitability.

3) Using horizontal and vertical analyses, identify and comment on key changes in your company’s income statement and balance sheet for the last three years.

ANS: Using horizontal and vertical analysis of company’s income statement and balance sheet for the last three years it is quite clear that the gross margin is in declining phase i.e. in the year 2017 it was 38.47% of total sales, in 2018 it is reduced to 38.34% and in 2019 it reduced to 37.82 %. Its net income was 21.09% in 2017 which increased to 22.41% in 2018 and again reduced to 21.24% in 2019. However, considering balance sheet, the current assets in 2017 were 34.28%, which increased to 36 % in 2018 an again increased to 48.1% in year 2019. Total liabilities was about 64.28% in 2017 which increased to 70.70% in 2018 and again increased to 73.27% in 2019 whereas shareholders equity has been fallen since 2017 from 35.72 in 2017 to 26.73% in 2019. It is clear that shareholders' equity has been fallen and liabilities are been increased that means Apple is majorly depending on debt funds rather than equity. i.e. Its debt-equity ratio is more than 1 for 2019 as well as for 2020.

4) Calculate your company’s sustainable growth rate for the past three years and comment on its trend.

a) If your company wanted to increase its sustainable growth rate, could it do so via profit margin, asset turnover, and/or financial leverage?

i) When answering this question:

(1) Calculate ROE and its component ratios.

(2) Refer to your prior analyses of ratios.

(3) Integrate your vertical and horizontal analyses.

(4) Consider how effectively your company uses leverage (ROE vs. ROA)

(5) Compare your company’s information to industry benchmarks for ROE, ROA, and Financial Leverage Ratio and comment on differences.

ANS: The company’s growth rate for past three years on basis of its revenues i.e. in 2017 it was having revenue of 6.3% which has increased in 2018 to 15.86% but reduced in 2019 to -2.04% and on basis of net income in 2017 it was having a net income of 5.83% which increased to 23.12% in 2018 which reduced to -7.8% in 2019. Its trend was earlier showing growth but in 2019 it shows a decline both in revenues as well as of net income also.

a) Yes, if a company wanted to increase its sustainable growth rate, via profit margin, asset turnover, and/or financial leverage it can do so by analyses the sustainable growth rate of them individually and then create such strategies so how to maintain the growth of the company via all these.

1) ROE = net income/shareholder’s equity

Hence ROE in March 2020 has increased from 2019.

2) Ratios:

Current ratios = current assets /current liabilities

Gross profit ratio= gross profit / net sales

Net profit ratio= operating profit / net sales

3) Integration of horizontal and vertical analyses has been given in question 3.

4) Roe (Return on equity) refers to helps out investors to have a look at how their investments are generating income whereas ROA (Return on Assets) refers to helps investors to measure how management is using its assets to generate more income. Apple is efficiently using its ROE as it is having ROE of 34.7 from the last 12 months and is performing better than other industries which are having an average of 24.34% in the same period. The ROA of the company in the past year is 11.9% as compared to the industry which was having only 9.06% in the same period. So the company is efficient using its leverage.

5) A given in above point 4 Apple is having good ROE, ROA as compared to benchmarks. If we will consider financial leverage ratios we will found that-

Debt equity ratio= Total liabilities/ Shareholders equity

Debt ratio= total liabilities /total assets

So the debt ratio of 0.5 is ideal above that it is considered that the company has been leveraged by the debt.

b) If your company pays dividends, comment on the implications of reducing dividend payout to achieve higher growth.

ANS: The company is paying a dividend to the shareholders as in 2019 the dividend per share was 1.46 which has increased to 1.54 in 2020 this shows that the company is having more ROE then what is expected i.e. it is distributing dividend to the shareholders but to have a growth of the company it has to retain its profits.

6) Comment on whether your analyses is matching your expectations in (2) above.

ANS: Yes. Our expectations match the analyses which we have made above.

7) Based on your analyses above, what decision would you make about owning shares of your company’ stock (i.e., buy, hold, or sell)? Provide a brief rationale for your decision

ANS: Based on the above analyses it is quite clear that one should buy the shares of the company as compared to earlier years it is having an increase in all i.e. the gross profit margin, net profit margin, and asset turnover ratio and earning per ratio also. So company financial signs are positive so one should buy the company's shares.

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