Power Point Presentation

Results of the Research Project Part 1

As an initial response to the discussion topic please create a Power Point presentation consisting of 7-8 slides, plus the title slide, that contains the main results  of all questions in part 1 of the Research Project you developed about the company’s financial performance, your recommendations on the company’s financial stability, and which steps should be done to improve its financial stability.  This is an individual (not a group) assignment.  You can use your paper as a reference by cut/pasting charts, graphs, tables etc. but use your own text in the PowerPoint.

completed Research Project attached

 

 

 

 

 

 

 

 

 

Research Project Part I

Apple Inc.

Colin Brogan

Edelmira Hernandez

Elizabeth Fisher

Francesca Bodunrin

Jessica Butler

Khalia Alexander-Cobbs

University of Maryland Global Campus

FINC 330 6982

July 20, 2021

 

 

 

 

 

Introduction

Apple Inc. is a tech company established in 1977 known for its design, development, and retailing of high-end electronic products. The products include iPhones, tablets, personal computers, smartwatches, among others. The company also offers services such as advertisements either through its internal platforms or third-party licensing. The company’s success makes it a very strong asset also traded in the stock market. This paper seeks to evaluate the company performance by looking at different rations and seeing where they stand in the market.

Trend Analysis

Sales Growth-  In the past five years Apple, Inc. has experienced sales growth in four out of five years. Starting 2016, Apple experienced growth of approximately 6% and then 15% until hitting a wall in 2019 in which the company had negative growth of 2%. Although many companies struggled in 2020 due to COVID-19, Apple, Inc. managed to increase their growth from -2% to approximately 5%. This implies that Apple is using effective marketing strategies and has designed products that are attractive to their customers. Another implication is that Apple, Inc. has increased their market share and profitability but they need to continue to adapt to the changing market in order to maintain this growth and customer acceptance.

Sales Growth Table

2016	2017	2018	2019	2020
No Data	6.70%	16.29%	-2.20%	5.46%

 

COGS Growth – Similarly to the sales growth, the COGS growth has also been positive 4 out of the last five years, with the highest growth being roughly 16% and the lowest growth around -1%. Once again, the negative growth came in 2019 and was turned around in 2020 when the company experienced around 5% of COGS growth. This information implies that it is becoming more expensive for Apple, Inc. to produce their products which can decrease the companies profitability. In order to fix these growing percentages of COGS, Apple, Inc. should improve cost controls and production by perhaps finding a more technologically advanced way of producing products that will save them wage expenses and will be more cost effective.

COGS Growth Table

2016	2017	2018	2019	2020
No Data	7.75%	15.61%	-0.95%	4.86%

 

Gross Income Growth – Apple Inc. experienced mostly positive gross income growth from 2016-2020 with the exception of 2019. Once again their highest year of growth was in 2018 which was 17.40% but their most recent year showed growth of 6.45% which is still impressive. This implies that Apple, Inc. has been successful at continuing to be highly profitable and has managed to bounce back from a year of negative gross income growth. Although this growth rate is not overly stable, there are many ways to fix this problem. A few commonly known ways of increasing their growth rate to a more stable percentage could be by reducing dividend payouts, increasing profit margins, reducing the COGS, and also issuing equity. All of these factors impact the company’s gross income and will be effective in increasing the growth rate to a more stable percentage.

Gross Income Growth Table

2016	2017	2018	2019	2020
No Data	5.02%	17.40%	-4.20%	6.45%

 

Interest Expense Growth – From 2016 to 2019, the interest expense growth has been positive but decreasing substantially each year. However, in 2020 the interest expense growth dropped down to -19.66%. This is good for Apple, Inc. because it means either the average interest rate is  going down, or the outstanding debt has decreased. Regardless of what caused the interest expense growth to decrease over the past 5 years, we know that ultimately Apple, Inc. is experiencing a higher net income because of this stable growth rate.

Interest Expense Growth Table

2016	2017	2018	2019	2020
No Data	59.55%	39.47%	10.37%	-19.66%

 

Net Income Growth – Over the past five years Apple, Inc. has experienced positive growth rates all years except for in 2019. The growth rate increased from 2016 to 2018 then dropped into negative percentages in 2019, and as of 2020 has increased again to 3.90%. This data shows that Apple’s Net income growth has not been very stable in the past five years, given the fact that it has gone from a 23.12% growth rate down to a – 7.18% growth rate in just a one year time period(2018-2019). The good news is that Apple, Inc. has managed to overcome the negative growth in 2019 and rebound with a positive growth rate in 2020. However, in order to reach more stable Net Income Growth, Apple, Inc. needs to increase their revenues. Some ways Apple, Inc. can do this is  by selling more products, increasing product prices, and also by decreasing their COGS.

Net Income Growth Table

2016	2017	2018	2019	2020
No Data	5.83%	23.12%	-7.18%	3.90%

 

Cash and Short Term Investments Growth- Apple, Inc. has had an extremely unpredictable cash and short term investments growth over the last five years. Since 2016 the growth has increased, decreased, increased, and then decreased again in 2020. This implies that the company’s cash and short term investment growth has been unstable and is not good for the future of Apple, Inc. Having higher and more stable cash and short term investments growth would allow Apple, Inc. to protect capital while also generating a return. Then, Apple, Inc. would be able to invest this excess cash into stocks and bonds to earn higher interest rates. Overall, by having higher amounts of cash and short term investments, Apple, Inc. will be more flexible with their money and can withdraw money in a shorter amount of time if needed.

Cash and Short Term Investments Growth Table

2016	2017	2018	2019	2020
No Data	10.46%	-10.62%	51.70%	-9.55%

 

Total Assets Growth- Apple, Inc. experienced positive asset growth from 2016-2017 but from 2017-2020 has experienced decreasing asset growth. This implies that Apple is experiencing some sort of financial or operational problem within their company and needs to fix this problem. However, this could be because Apple, Inc. has started to pay some of their debt which would cause their Assets to go down.

Total Assets Growth Table

2016	2017	2018	2019	2020
No Data	16.67%	-2.56%	-7.44%	-4.32%

 

https://www.marketwatch.com/investing/stock/aapl/financials?mod=mw_quote_tab

Financial Ratios Trends Analysis

Apple, Inc’s financial results for its second quarter 2021 fiscal cycle ending on March 27, 2021 recorded revenue of $89.6 billion, up 54% higher than last year, and significantly stronger profits due to an onsite of software products and a charge for more iPhones from its consumers (Levy, 2021).  Apple’s quarterly earnings share of $1.40 for international sales accounted for 67% of the quarter’s revenue.  The company’s March quarter performance included revenue records in each of Apple’s geographic segments and strong double-digit growth in each product category, driving their installed base of active devices to an all-time high.  These results allowed the company to generate operating cash flow of $24 billion and return nearly $23 billion to shareholders during the quarter (Levy, 2021).

 

According to Apple’s Investor Updates of FY 21 Third Quarter Results, the company’s board of directors has declared a cash dividend of $0.22 per share of the Company’s common stock, an increase of 7 percent.  The dividend is payable on May 13, 2021 to shareholders of record as of the close of business on May 10, 2021.  The board of directors has also authorized an increase of $90 billion to the existing share repurchase program (Apple, 2021).

Here’s how Apple did versus its Refinitiv estimates (Leswing, 2021) :

• EPS: $1.40 vs. $0.99 estimated
• Revenue: $89.58 billion vs. $77.36 billion estimated, up 53.7% year-over-year
• iPhone revenue: $47.94 billion vs. $41.43 billion estimated, up 65.5% year-over-year
• Services revenue: $16.90 billion vs. $15.57 billion estimated, up 26.7% year over year
• Other Products revenue: $7.83 billion vs. $7.79 billion estimated, up 24% year-over-year
• Mac revenue: $9.10 billion vs. $6.86 billion estimated, up 70.1% year-over-year
• iPad revenue: $7.80 billion vs. $5.58 billion estimated, up 78.9% year-over-year
• Gross margin: 42.5% vs. 39.8% estimated

DuPont Analysis

A DuPont analysis takes into consideration three components, the profit margin, total asset turnover, and financial leverage to find the return on equity (ROE). These three components assist investors with comparing the operational efficiency of a company. Apple Inc has many competitors such as Samsung and Microsoft which makes a DuPont Analysis required by many shareholders. The profit margin is used to understand where the company is at and how to reduce expenses or even increase prices to help the margin increase. The profit margin is calculated by dividing the net profit by the revenues from the same year. The total asset turnover explains the efficiency a company has in using the assets on hand. This is a commonly used formula to compare two similar companies when choosing who to invest in. A high turnover rate is better for the company’s return on equity. The total asset turnover is calculated by dividing revenues by average assets from the same year. The financial leverage is used to determine the debt usage compared to the assets on hand. Any debt a company takes on should only be used to finance operations and continue growth for organization. There should be a healthy balance the company chooses for the debt taken on. The financial leverage is found by dividing average assets by average equity. Apple Inc’s ROE for the last three years is shown in the chart below. Apple’s increase in ROE is primarily due to the financial leverage ratio. The company has continued to increase their balance between debt and assets bettering the financial leverage of the company. Apple inc should work on improving their profit margin as over the past 3 years it has steadily decreased. Some ways that Apple could accomplish this would be decreasing the price of their products as many individuals have chosen to opt out of purchasing a new Apple product due to the cost. Many individuals will purchase used or refurbished products in place of a new model. However, Apple is continuing to strive in the technology industry and will continue to be a household name for many years to come.

Apple Inc ROE	2020	2019	2018	ROE
Profit Margin	20.91%	21.24%	22.41%	87.87%
Asset Turnover	.085	.077	.073	61.06%
Financial Leverage	4.96	3.74	3.41	55.56%

 

Another common household company is Microsoft. This company has been a main competitor for Apple as they sell a great amount of the same products to the same audiences. Apple Inc’s ROE compared to Microsoft’s ROE are listed in the chart below for comparison. At first glance it seems that Microsoft could have had a more successful year in 2020. However the 10% difference in profit margins only means that Microsoft had a lower cost of goods while still making a profit. Apple Inc generated double the sales that Microsoft did which would make the company less of a risk for investors and shareholders. Apple Inc also had a very successful year when balancing their financial leverage pushing them ahead in their ROE at 87.87% compared to Microsoft’s ROE of 37.43%.

(FY 2020)	Apple Inc	Microsoft Corp
Profit Margin	20.91%	30.96%
Asset Turnover	0.85	0.47
Financial Leverage	4.96	2.55

 

Recommendations

After studying the financial trends and figures posted by Apple Inc., it is clear that the Company is moving on an upward trend in terms of profit being realized and success in the long run. For instance, in the last five years, i.e., from 2016, the Company has generally been in steady growth from about 6% to 15%. However, in the year 2019, where the management realized a drop of approximately 2%. Also, the data that summarizes Apple Inc.’s performance compared to Refinitiv estimated projections show a positive result in the fundamental elements analyzed by the team in the financial department. For example, the figure posted by the department in EPS indicates an improvement in the earnings per share, which is a profit to the Company, i.e., the projection was $0.99, and the actual value realized by the Company was $1.40. Additionally, the other figures for revenues, iPhone revenues, services revenue, other products revenue, Mac revenue, iPad revenue, and gross margin are all positive figures from the estimated values, which indicates the growth of the Apple Inc. company.

Furthermore, the financial trends are showing growth to the Company, and in the coming years, the organization is set to demonstrate a similar trend with more improvements in the long run. However, some enhancements are necessary to ensure the proper growth of Apple Inc. company. First, the management should adopt various ways of doing business that minimize costs as profit is maximized. One of the means of achieving this is by investing heavily in technology and ensuring more work is done by machines instead of human beings, thus reducing the wage bill in the Company.  Another strategy is by carrying out more research on new trends and models of devices such as computers and mobile phones, which are on-demand in the market to boost sales and growth of the Company.

Reflection

Throughout the research work, we have studied the measurement of growth of Apple Inc. company concerning financial ratios and values posted by the financial department. On the same note, the group acquired different technical skills and mathematical concepts of working out the figures, which is crucial in the job market, more so in financial analysis. For instance, earnings per share is computed by taking the return of the Company and dividing it by the unsettled shares in the common stock, and the result shows the profit of the Company. The higher the value of EPS indicates more profit made by the Company under study. Of the workings indicate the profitability of the Company.  Also, gross margin is arrived at after compiling the selling price of a product less cost of the good sold. In the end, it shows the amount of profit made by the Company in terms of products it sells in the market.

Another piece of information gathered by the team members is the importance of undertaking projections at the start of every Company’s financial year—for instance, the summary on the performance of Apple Inc. Company concerning Refinitiv estimates aided on the measurement of growth of the Company. The approximations provided a basis from which the management and the workforce used to measure the operations’ level together with areas that required more attention for the realization of the goals and achievements.  Also, we learned the DuPont analysis and the three mechanisms entailed therein, i.e., the margin of the profit, asset turnover, and financial leverage, to compute the return on equity. The applications of the study are instrumental in measuring the workflow and the general operations of the Company. Therefore, the research work is beneficial in studying the Company’s financial aspects and general business sectors worldwide. In the job market, the skills we acquired are important, and the group is optimistic for more opportunities in the career industry.

References

 

Levi, Ari, APR 28, 2021. CNBC: Apple just recorded a 42.5% gross margin for the quarter, the highest in nine years. Accessed on JUL 16, 2021. Retrieved from https://www.cnbc.com/2021/04/28/apple-price-hikes-and-services-growth-produced-a-42point5percent-gross-margin.html

 

Apple.com, 2021. Investor Relations. Accessed on JUL 16, 2021. Retrieved from https://investor.apple.com/investor-relations/default.aspx#tabs_content–2021

 

Leswing, Kif, APR 28, 2021. CNBC: Apple reports another blowout quarter with sales up 54%, authorizes $90 billion in share buybacks. Accessed on JUL 16, 2021. Retrieved from https://www.cnbc.com/2021/04/28/apple-aapl-earnings-q2-2021.html