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Executive summary

Any successful business owner is constantly evaluating the performance of his or her

company, comparing it with the company's historical figures, with its industry competitors, and

even with successful businesses from other industries. To complete a thorough examination of a

company's effectiveness, however, you need to look at more than just easily attainable numbers

like sales, profits, and total assets. You must be able to read between the lines of the financial

statements and make the seemingly inconsequential numbers accessible and comprehensible.

This massive data overload could seem staggering. Luckily, there are many well-tested

ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify

and quantify your company’s strengths and weaknesses, evaluate its financial position, and

understand the risks you may be taking.

Ratios are highly important profit tools in financial analysis that help financial analysts

implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and

interest coverage. Although ratios report mostly on past performances, they can be predictive too,

and provide lead indications of potential problem areas.

Ratio analysis is primarily used to compare a company’s financial figures over a period of

time, a method sometimes called trend analysis. Through trend analysis, you can identify trends,

good and bad, and adjust your business practices accordingly. You can also see how your ratios

stack up against other businesses, both in and out of your industry.

So, in this report we analyze Apple’s financial ratios in three continuous years, and

compare these figures with those of HP and IBM – the two giant competitors of Apple.

The first part is an overview of Apple Inc. which includes the year of establishment, the

main products, and the innovative and sales development in recent years.

The second part is the financial ratios analysis, in which we calculate the ratios of three

companies mentioned in three recent years and comment about these figures. It includes four kinds

of ratios. The first is liquidity ratios, contains current ratio and quick ratio. The second is leverage

ratios, contains debt ratio, long term debt to total capitalization ratio, and time interest earned ratio.

The third is operating efficiency ratios which include inventory turnover ratio, days sales

outstanding (DSO), the fixed assets turnover ratio, and the total assets turnover ratio. The last kind

of ratios is profitability which contains profit margin on sales, basic earning power (BEP), return

on total assets (ROA), and return on common equity (ROE).

The third, also the last part is some specific recommendations about the financial

conditions of Apple compared with IBM and HP in the three years.

I- Overview of Apple Inc.

Apple was originally founded as a computer company in 1977 but has evolved into a

personal electronics solution.

The company's products include the Macintosh (Mac) family of personal computers, the

iconic iPod portable music player, the iPhone handsets, and, the iPad tablet device. Additionally,

Apple sells a variety accessories and peripherals including application software, printers, storage

devices, speakers, and headphones. Under the leadership of Steve Jobs, Apple's co-founder who

returned to head the company in 1996, Apple has demonstrated considerable acumen in

implementing high-technology in product design and marketing, generating sustained enthusiasm

and substantial growth.

In the past several years, Apple has been at the forefront of innovation within consumer

electronics, launching key products geared towards the high-end mobile market (the iPhone) and

the home entertainment industry (Apple TV). On June 9, 2008, Apple announced the iPhone 3G,

which featured increased speed, improved design, and lower pricing. The iPod has grown faster

than any other music player in consumer electronics history, accounting for half of the company's

revenue from the sales of hardware and content. Its rising brand equity has generated a "halo

effect" contributing to increases in sales of Mac desktops and laptops and the opportunity to

penetrate existing markets. In fact, its popularity among consumers has turned the tech company

into one of the highest revenue per square foot retailers in the world.

Apple reported $15.7 billion in revenue in 3Q10, a 61% increase over the previous year's

quarter, as well as a 78% surge in its quarterly profit, buoyed by strong iPad and iPhone 4 demand.

The company reported that the iPhone 4's antenna problems, a highly publicized signal algorithm

glitch on the device, did not have a significant impact on demand. Additionally, it stated that the

newly-released iPad, thought of as an ancillary competitor to the Macintosh computer, did not

result in cannibalization, as Mac sales rose 33% quarter-over-quarter.

In this quarter, Apple sold 3.47 million Macintosh computers (33% QoQ increase), 8.4

million iPhones (61% QoQ increase), 9.41 million iPods (8% QoQ decline), and 3.27 million

iPads.

With these good figures and booming sales of Apple through new innovative products in

2010, whether Apple is a stable growing company to invest in or not? We will solve this question

through analysis of Apple financial statement in 2007, 2008, 2009, in comparison with its two

other giant competitors, IBM and HP.

II- Financial Ratios Analysis:

1. Liquidity Ratios

a. Current Ratio:

The current ratio is calculated by dividing current assets by current liabilities:

Current ratio = Current Asset

Current Liabilities

- Apple Company:

In 2007: Current ratio = Current Asset

Current Liabilities =

21,956,0009,299,000

= 2.36



34,690,00014,092,000

= 2.46



31,555,00011,506,000

= 2.74

- Hewlett-Packard Company:



47,402,00039,260,000

= 1.21



51,728,00052,939 ,000

= 0.98



52,539,00043,003,000

= 1.22

- IBM:



53,177,00044,310,000

= 1.20



49,004,00042,435,000

= 1.15



48,935,00036,002,000

= 1.36

The current ratio of Apple has kept increasing since 2007. It means that, current asset of

Apple increased faster than current liabilities. From 2007 to 2009, the current ratios of Apple are

also always higher and more stability than its competitors, HP and IBM.

We can see that current ratios of HP were down in 2008 comparing to the previous year

and even lower than 1 (current ratio of HP 2008 is about 0.977). And current ratios of IBM

decreased in 2009, although they are still higher than 1. These falls show that current liabilities

increased faster than current asset; perhaps these two companies have met some financial troubles.

In 2009, Apple has a very strong current ratio of 2.74 times to cover its short-term

obligations. With a current ratio of 2.74, Apple could liquidate its current assets at only 37 percent

of book value and still pay off current creditors in full.

The analysis of current ratios of Apple shows that Apple has strong and reliable capability

to meet short-term obligations.

b. Quick Ratio:

Inventories often is typically the least liquid of a company’s current assets, the quick ratio

(acid-test ratio) measures the company’s ability to pay off short-term obligations without relying

on the sale of inventories. The quick ratio is calculated by deducting inventories from current

assets and then dividing the remainder by current liabilities:

Quick Ratio = Current Asset−Inventories

Current Liabilities

- Apple:

In 2007: Acid Test Ratio = Current Asset−Inventories


21,956,000−346,0009,299,000

= 2.32 times



34,690,000−509,00014,092,000

= 2.42 times



31,555,000−455,00011,506,000

= 2.70 times




47,702,000−8,033,00039,260,000

= 1.10 times



51,728,000−7,879,00052,939,000

= 0.83 times



52,539,000−6,128,00043,003,000

= 1.08 times

- IBM:



53,177,000−2,664,00044,310,000

= 1.14 times



49,004,000−2,701,00042,435,000

= 1.09 times

In 2009: Acid Test Ratio =Current Asset−Inventories


48,935,000−2,494,00036,002,000

= 1.29 times

The quick ratios of Apple are also strong, from 2007 to 2009, they are always above 2. It

means that the firm can fully meet its short-term obligation without having to liquid inventories.

The quick ratio of Apple is much better than HP and IBM. Quick ratios of HP and IBM are

just about 1, HP quick ratios in 2007, 2008 are even lower than 1. It means that HP must liquid

inventories to pay off full debts for creditors.

The comparison of quick ratios among Apple, HP and IBM shows that Apple has a

stronger and stability financial position and more credits in investors’ eyes than these others.

2. Asset Management Ratios/ Operating efficiency ratios:

a. Inventory turnover ratio:

The inventory turnover ratio is defined as sales divided by inventories:

Inventory turnover ratio = Sales

Inventories

- Apple Company:

In 2007: Inventory turnover ratio = Sales

Inventories =

24,006,000345,000

= 69.38 times


Inventories =

32,479,000509,000

= 63.81 times


Inventories =

42,905,000455,000

= 94.30 times



Inventories =

104,286,0008,033,000

= 12.98 times


Inventories =

118,364,0007,879,000

= 15.02 times


Inventories =

114,552,0006,128,000

= 18.69 times

- IBM Company:


Inventories =

98,786,0002,664,000

= 37.08 times


Inventories =

103,630,0002,701,000

= 38.37 times


Inventories =

95,758,0002,494,000

= 38.40 times

In 2009, as a rough approximation, each item of Apple’s inventory is sold out and

restocked, or “turned over,” 94.30 times. Besides, Hewlett-Packard Company’s turnover is 18.69

times; IBM Company is 38.40 times. After analyzing the inventory turnover ratio between these

companies in 3 years (2007, 2008, 2009) above, we can see that Apple’s turnover is much higher

than remaining companies. Moreover, within the last 3 years, the inventory turnover ratio is

increasing. This suggests that Apple is holding small inventories. This ratio is, of course, effective,

and it represents an investment with a high rate of return.

b. Days sales outstanding (DSO):

Days sales outstanding also called the “average collection period” (ACP), is used to

appraise accounts receivable, and it is calculated by dividing accounts receivable by average daily

sales to find the number of days’ sales that are tied up in receivables. Thus, the DSO represents the

average length of time that the firm must wait after making a sale before receiving cash, which is

the average collection period.

DSO = Receivables

Average Sales per day =

ReceivablesAnnual Sales /365

- Apple Company:

In 2007: DSO = Receivables

Annual Sales /365 =

5,196,00024,006,000/365

= 79.00 days


Annual Sales/365 =

6,936,00032,479,000/365

= 77.95 days


Annual Sales /365 =

5,435,00042,905,000 /365

= 46.24 days



Annual Sales/365 =

28,999,000104,286,000/365

= 101.50 days


Annual Sales /365 =

29,620,000118,364,000/365

= 91.34 days


Annual Sales/365 =

19,761,000114,552,000/365

= 62.96 days

- IBM Company:


Annual Sales /365 =

31,884,00098,786,000/365

= 117.81 days


Annual Sales/365 =

28,823,000103,630,000/365

= 101.52 days


Annual Sales /365 =

26,392,00095,758,000/365

= 100.60 days

(Note that in this calculation we assumed a 365-day year).

In 2007, the day sales outstanding of Apple Company are 79 days. Up to 2009, this figure

dropped to 46 days. The trend in DSO over the past few years has been rising. However, the DSO

of H-P Company and IBM Company are always much higher. So, these figures are outstanding

indicates that customers of Apple Company, on the average, are paying their bills on time. This is

effective for Apple of funds that it could use to invest in productive assets. Conversely, the fact

that customers of two remaining companies are paying late may signal that the customers is in

financial trouble, in which case these companies may have a hard time ever collecting the

receivable. In conclusion, this ratio is, again, indicating the effective action of Apple Company.

c. The fixed assets turnover ratio:

The fixed assets turnover ratio measures how effectively the firm uses its plant and

equipment. It is the ratio of sales to net fixed assets:

Fixed assets turnover ratio = SalesNet ¿

Assets¿

- Apple Company:

In 2007: Fixed assets turnover ratio = SalesNet ¿

Assets¿ = 24,006,0001,832,000

= 13.10 times


Assets¿ = 32,479,0002,455,000

= 13.23 times


Assets¿ = 42,905,0002,954,000

= 14.52 times



Assets¿ = 104,286,000

7,798,000 = 13.37 times


Assets¿ = 118,364,00010,838,000

= 10.92 times


Assets¿ = 114,552,00011,262,000

= 10.17 times

- IBM Company:


Assets¿ = 98,786,00015,081,000

= 6.65 times


Assets¿ = 103,630,00014,305,000

= 7.24 times


Assets¿ = 95,758,00014,165,000

= 6.76 times

In 1997, the inventory turnover ratio of Apple is lower than H-P Company. This suggests

that Apple is not reasonable to invest in fixed assets such as HP. However, in the following years,

this ratio increases rapidly and surpasses H-P and IBM Company. (In 2009, the inventory turnover

ratio of Apple is 14.52 times; meanwhile this ratio of H-P is 10.17 and IBM is 6.76). So, these

numbers indicating that the firm is using its fixed assets more intensively than are other firms in its

industry. In conclusion, Apple Company is quite reasonable in investment in its fixed assets.

d. The total assets turnover ratio:

The final asset management ratio, the total assets turnover ratio, measures the turnover of

the entire firm’s assets; it is calculated by dividing sales by total assets:

Total assets turnover ratio = Sales

Total Assets

- Apple Company:

In 2007: Total assets turnover ratio = Sales

Total Assets =

24,006,00025,347,000

= 0.95 times


Total Assets =

32,479,00039,572,000

= 0.82 times


Total Assets =

42,905,00047,501,000

= 0.90 times



Total Assets =

104,286,00088,699,000

= 1.18 times


Total Assets =

118,364,000113,331,000

= 1.04 times


Total Assets =

114,552,000114,799,000

= 0.99 times

- IBM Company:


Total Assets =

98,786,000120,431,000

= 0.82 times


Total Assets =

103,630,000109,524,000

= 0.95 times


Total Assets =

95,758,000109,022,000

= 0.88 times

In 2008, the total assets turnover ratio of Apple Company is lower than two remaining

companies – H-P Company and IBM Company. These figures maybe suggest that Apple’s ratio is

somewhat below the industry average, indicating that the company is not generating a sufficient

volume of business given its total asset investment. Sales should be increased, some assets should

be sold, or a combination of these steps should be taken. However, in 2009, this rate is different.

The total assets turnover ratio of Apple is 0.90 times. This ratio is between the ratio of IBM is 0.88

and the ratio of H-P is 0.99. So, this suggests that the average assets of Apple generated more

revenue than the previous years. However, Apple Company should still pay more attention in

using assets effectively. Sales should be increased, some assets should be sold, or a combination of

these steps should be taken.

3. Leverage ratios:

In finance, leverage is a general term for any technique to multiply gains and losses.

Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.

Leverage ratios are any ratio used to calculate the financial leverage of a company to get an idea of

the company's methods of financing or to measure its ability to meet financial obligations. There

are several different ratios, but the main factors looked at include debt, equity, assets and interest

expenses.

a. Debt ratio

The ratio of total liabilities to total assets is called the debt ratio, or sometimes the total

debt ratio. It measures the percentage of funds provided by sources other than equity:

Debt ratio = Total Liabilities

Total Assets

- Apple Company:

In 2007: Debt ratio = Total Liabilities

Total Assets =

10,815,00025,347,000

= 42.67%


Total Assets =

18,542,00039,572,000

= 46.86%


Total Assets =

15,861,00047,501,000

= 33.39%


http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Fixed_assets

http://en.wikipedia.org/wiki/Finance


¿ tal Assets =

50,173,00088,699,000

= 56.57%


Total Assets =

74,389,000113,331,000

= 65.64%


Total Assets =

74,282,000114,799,000

= 64.71%

- IBM Company:


Total Assets =

91,961,000120,431,000

= 76.36%


Total Assets =

96,058,000109,524,000

= 87.70%


Total Assets =

86,385,000109,022,000

= 79.24%

Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against

creditors’ losses in the event of liquidation. Stockholders, on the other hand, may want more

leverage because it magnifies expected earnings. Apple’s debt ratios in the last three years were all

smaller than 50 percent, which means that its creditors have supplied less than half the total

financing. While the debt ratios of HP and IBM was all higher than 50 percent. All the three

companies here have the trend of debt ratio increase in 2008 and lightly decrease in 2009. The

reason for this trend, with Apple and HP, is because of total assets increase. But in the case of

IBM, the main reason is the change of total liabilities. According to these figures, we can see that

IBM has the highest leverage, and Apple is the lowest among the three companies. This means that

expected earnings of HP and IBM is higher than that of Apple. But it’s also riskier for stockholders

who invested in HP and IBM in comparison with Apple.

b. Long term Debt to Total Capitalization ratio

A ratio showing the financial leverage of a firm, calculated by dividing long-term liabilities

by the amount of capital available:

L/T Debt to Total Capitalization ratio = L/T Liabilities

L/T Debt+Preferred Share+Equity

- Apple Company:

In 2007: L/T Debt to Total Capitalization ratio = 1,516,000

0+0+14,532,000 = 10.43%


0+0+21,030,000 = 21.16%


0+0+31,640,000 = 13.76%



4,997,000+0+38,526,000 = 25.07%


7,676,000+0+38,942,000 = 46.01%


13,980,000+0+40,517,000 = 57.40%

- IBM Company:


23,573,000+0+28,470,000 = 91.56%


23,391,000+0+13,466,000 = 145.49%


21,932,000+0+22,637,000 = 113.04%

A variation of the traditional debt-to-equity ratio, this value computes the proportion of a

company's long-term liabilities compared to its available capital. By using this ratio, investors can

identify the amount of leverage utilized by a specific company and compare it to others to help

analyze the company's risk exposure. Generally, companies that finance a greater portion of their

capital via liabilities are considered riskier than those with lower leverage ratios. As we can see

above, Apple always has the lowest portion of long term debt to total capitalization ratio in

comparison with HP and IBM. So, we can conclude that Apple’s activities are much safer than

HP’s and IBM’s.

c. Time interest earned ratio

The times-interest-earned (TIE) ratio is determined by dividing earnings before interest

and taxes (EBIT) by the interest charges:

Time interest earned ratio = EBIT

Annual Interest Expense

- Apple Company:

Can’t calculate time interest earned ratio because there’s no value of annual interest

expense.


In 2007: Time interest earned ratio = EBIT

Annual Interest Expense =

9,466,000289,000

= 32.75 times



10,802,000329,000

= 32.83 times

In 2009: Can’t calculate time interest earned ratio because there’s no value of annual interest

expense.

- IBM Company:



15,100,000611,000

= 24.71 times



17,388,000673,000

= 25.84 times



18,540,000402,000

= 46.12 times

Times Interest Earned or Interest Coverage is a great tool when measuring a company's

ability to meet its debt obligations. When the interest coverage ratio is smaller than 1, the company

is not generating enough cash from its operations EBIT to meet its interest obligations. The

Company would then have to either use cash on hand to make up the difference or borrow funds.

Typically it is a warning sign when interest coverage falls below 2.5. So, all the three companies

here are at good ratio of times interest earned. Especially, Apple had no long term debt, then no

annual interest expense. It means that they don’t have to worry about paying debts like HP and IBM.

And all their earnings would be used for further business activities or shared among the

stockholders.

4. Profitability:

a. Profit margin on sales

The profit margin on sales, calculated by dividing net income by sales, gives the profit per

dollar of sales:

Profit margin on sales = Net inome

Sales

- Apple Company:

In 2007: Profit margin on sales = Net inome

Sales=

3,496,00024,006,000

= 14.56%


Sales =

4,834,00032,479,000

= 14.88%


Sales =

8,235,00042,905,000

= 19.19%



Sales =

7,264,000104,286,000

= 6.97%


Sales =

8,329,000118,364,000

= 7.04%


Sales =

7,660,000114,552,000

= 6.69%

- IBM Company:


Sales =

10,418,00098,786,000

= 10.55%


Sales=

12,334,000103,630,000

= 11.90%


Sales =

13,425,00095,758,000

= 14.02%

Apple’s profit margin on sales is higher than HP and IBM. Besides, it increases from

14.56% in 2007 to 19.19% in 2009. This result has been occurred because costs of Apple are very

low. Net income is also called income after tax and interest. Therefore, interest charges will pull

net income down, and since sales are constant, the result will be a relatively low profit margin. In

such a case, the high profit margin would not indicate an operating problem rather it would

indicate a difference in financing strategies. Thus, Apple uses a higher rate of return on its

stockholders’ investment than use of financial leverage.

Apple’s profit margin o sales in 2009 is 19.19 percent higher than 6.69 percent of Hp and

14.02 percent of IBM, it means that if Apple, HP and IBM have $100 on revenue, Apple will earn

$19.19, HP will earn $6.69 and IBM will earn $14.02 on profit. And $100 on revenue of Apple in

2008 earns $14.88. Therefore, $100 on revenue of Apple in 2009 will earn more than in 2008 and

remaining companies in 2009. It shows that Apple has managed costs efficiency and effectiveness.

b. Basic earning power (BEP)

The basic earning power (BEP) ratio is calculated by dividing earnings before interest and

taxes (EBIT) by total assets:

Basic earning power ratio = EBIT

Total Assets

- Apple Company:

In 2007: Basic earning power ratio = EBIT

Total Assets =

5,008,00025,347,000

= 19.76%


Total Assets =

6,895,00039,572,000

= 17.42%


Total Assets =

12,066,00047,501,000

= 25.40%



Total Assets =

9,466,00088,699,000

= 10.67%


Total Assets =

10,802,000113,331,000

= 9.53%


Total Assets =

9,415,000114,799,000

= 8.20%

- IBM Company:


Total Assets =

15,100,000120,431,000

= 12.54%


Total Assets=

17,388,000109,524,000

= 15.86%


Total Assets=

18,540,000109,022,000

= 17.01%

This ratio shows the raw earning power of the firm’s assets, before the influence of taxes

and leverage, and it is useful for comparing firms with different tax situations and different degrees

of financial leverage. Apple is also with higher ratio than remaining companies.

In 2009, Apple’s BEP is 25.40% higher than 17.42 percent in 2008 and remaining

companies. It means that if Apple invests $100 on assets for operating, it will earn $25.40 on

EBIT. In 2008, it earns $17.42. In 2009, Apple’s BEP increases by 7.98 percent and the causing of

EBIT from operating increase highly, and the rate of EBIT’s growth is higher than the rate of

revenue’s growth.

In 2009, Apple runs operation more effective than last year.

c. Return on total assets (ROA)

The ratio of net income to total assets measures the return on total assets (ROA) after

interest and taxes:

Return on total assets (ROA) = Net IncomeTotal Assets

- Apple Company:

In 2007: Return on total assets (ROA) = Net IncomeTotal Assets

= 3,496,000

25,347,000 = 13.79%


= 4,834,000

39,572,000 = 12.22%


= 8,235,000

47,501,000 = 27.34%



= 7,264,000

88,699,000 = 8.19%


= 8,329,000

113,331,000 = 7.35%


= 7,660,000

114,799,000 = 6.67%

- IBM Company:


= 10,418,000

120,431,000 = 8.65%


= 12,334,000

109,524,000 = 11.26%


= 13,425,000

109,022,000 = 12.31%

In 2009, the return on total assets of Apple is 27.34%, while 6.67 percent of HP, and 12.31

percent of IBM. This ratio measures the performance of the company without regard to financial

structure. This high return results from (1) the company’s high basic earning power plus (2) low

interest costs resulting from its above-average use of debt, both of which cause its net income to be

relatively high than remaining companies. So, this ratio is, again, indicating effective operations

of Apple Company.

d. Return on common equity (ROE)

Ultimately, the most important, or “bottom line,” accounting ratio is the ratio of net income

to common equity, which measures the return on common equity (ROE):

Return on common equity (ROE) = Net Income

Common Equity

- Apple:

In 2007: Return on common equity (ROE) = Net Income

Common Equity =

3,496,00014,532,000

= 24.06%


Common Equity =

4,834,00021,030,000

= 22.99%


Common Equity =

8,235,00031,640,000

= 26.31%



Common Equity =

7,264,00038,526,000

= 18.85%


Common Equity =

8,329,00038,942,000

= 21.39%


Common Equity =

7,660,00040,517,000

= 18.91%

- IBM Company:


Common Equity =

10,418,00028,470,000

= 36.59%


Common Equity=

12,334,00013,466,000

= 91.59%


Common Equity=

13,425,00022.637,000

= 59.31%

Stockholders invest to get a return on their money, and this ratio tells how well they are

doing in an accounting sense. In 2009, Apple’s 26.31 percent return is below the 59.31 percent of

IBM and higher than 18.91 percent of HP. It means that if having $100 on common share invests

in operating; Apple will receive $26.31 on net income and it’s higher than $22.99 earnings in

2008. This causing is that the rate of net income’s growth is higher than the rate of common

equity’s growth.

Conclusion and recommendation

Financial Ratios Apple HP IBM Assess

ment2007 2008 2009 2007 2008 2009 2007 2008 2009

1. Liquidity Ratios

a. Current ratio (times) 2.36 2.46 2.74 1.21 0.98 1.22 1.20 1.15 1.36 Good

b. Quick ratio

(times)

2.32 2.42 2.70 1.10 0.83 1.08 1.14 1.09 1.29 Good

2. Asset management

a. Inventory turnover

ratio (times)

69.38 63.81 94.30 12.98 15.02 18.69 37.08 38.37 38.40 Good

b. DSO (days) 79.00 77.95 46.24 101.50 91.34 62.96 117.81 101.52 100.60 Good

c. Fixed assets turnover

ratio (times)

13.10 13.23 14.52 13.37 10.92 10.17 6.65 7.24 6.76

d. Total assets turnover

ratio (times)

0.95 0.82 0.90 1.18 1.04 0.99 0.82 0.95 0.88

3. Leverage Ratios

a. Debt ratio (%) 42.67 46.86 33.39 56.57 65.64 64.71 76.36 87.70 79.24

b. L/T Debt to total

capitalization ratio (%)

10.43 21.16 13.67 25.07 46.01 57.40 91.56 145.49 113.04

c. Time interest earned

ratio (times)

- - - 32.75 32.83 - 24.71 25.84 46.12

4. Profitability Ratios

a. Profit margin on sales

(%)

14.56 14.88 19.19 6.97 7.04 6.69 10.55 11.90 14.02

b. BEP (%) 19.76 17.42 25.40 10.67 9.53 8.20 12.54 15.86 17.01

c. Return on total assets 13.79 12.22 27.34 8.19 7.35 6.67 8.65 11.26 23.31

(%)

d. Return on common

equity

24.06 22.99 26.31 18.85 21.39 18.91 36.59 91.59 59.31

- After analyzing the Asset Management Ratios/Operating efficiency ratios between these

companies in 3 years (2007, 2008, 2009), we can see that Apple’s ratio is more effective

than remaining companies. Moreover, within the last 3 years, these ratios continue to

increase. So, it shows that Apple Company is quite reasonable in investment in its assets

and effective in its business. However, Apple Company should still pay a little attention in

using assets more effectively in future. Sales should be increased, some assets should be

sold, or a combination of these steps should be taken.

- Leverage allows a financial institution to increase the potential gains or losses on a position

or investment beyond what would be possible through a direct investment of its own funds.

- The most obvious risk of leverage is that it multiplies losses. A corporation that borrows

too much money might face bankruptcy during a business downturn, while a less-levered

corporation might survive. For instance, an investor who buys a stock on 50% margin will

lose 40% of his money if the stock declines 20%. So, in this case of Apple, it’s very safe

for the shareholders to invest in Apple’s stocks. At least, in the last three years, Apple had

no debt, no annual interest expense, but an increasing total assets, which assure the

investors’ profit.

http://en.wikipedia.org/wiki/Bankruptcy

We have results from http://ycharts.com/companies/AAPL/eps#zoom=5

Index Apple

2008 2009 Change

EPS= Net Income

Common ShareOutstanding$1.78 $3.67 206.18%

P/E ratio = Price per Share

Earnings per Share15.83 25.79

(Average)

162.92%

Price to book value (P/BV) =

Market price per shareBook value per share

3.31 5.33

(Average)

161.03%

http://ycharts.com/companies/AAPL/eps#zoom=5

Reference

1. Apple’s Price to Book Value:

http://ycharts.com/companies/AAPL/price_to_book_value#zoom=5

2. P/B Ratio http://en.wikipedia.org/wiki/P/B_ratio

3. Financial Ratios http://en.wikipedia.org/wiki/Financial_ratios

4. Principles of Corporate Finance 7th Edition.

5. Apple’s Finance Information and Financial Statement http://finance.yahoo.com/q?s=AAPL

6. HP’s Finance Information and Financial Statement http://finance.yahoo.com/q?s=HP

7. IBM’s Finance Information and Financial Statement http://finance.yahoo.com/q?s=IBM

8. Apple’s Stock quota and company profile

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=AAPL:US

9. Apple report first quarter results http://www.apple.com/pr/library/2010/01/25results.html

http://www.apple.com/pr/library/2010/01/25results.html

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=AAPL:US

http://finance.yahoo.com/q?s=IBM

http://finance.yahoo.com/q?s=HP

http://finance.yahoo.com/q?s=AAPL

http://en.wikipedia.org/wiki/Financial_ratios

http://en.wikipedia.org/wiki/P/B_ratio

http://ycharts.com/companies/AAPL/price_to_book_value#zoom=5

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