Apex Printing Financial Statement Analysis

Financial Analysis Apex Printing has a generally healthy financial condition. First, the company is liquid, with a current ratio of 1.13. While this is down from the prior year, it is still at a healthy level over 1.0. The long-term debt-to-equity has declined in the past year. This might indicate that some of the long-term debt is coming due this year, so it is important to know what the precise structure of this debt is, but getting the LTD to equity ratio under 1.0 is a healthy sign for the solvency of Apex.

Apex has been able to improve its gross margin in the past year, which is a positive sign for its profitability. As a result, its net margin has also increased, meaning that it has contained its costs to a point where all of the increase in the gross margin flows through to the net margin. The result of this is that Apex recorded a significant increase in its return on equity. This went from 10.27% to 31.05%, which is a huge increase.

While in some cases that sort of ROE increase reflects on a company that has very little equity value, that is not the case here because the LTD to equity ratio has improved. Thus, the improvement in the ROE is a good sign. There are, however, reasons to suspect that the improvements in financial condition last year for Apex might not be sustainable, in particular because they are out of line with industry norms.

Apex jumped significantly in profitability last year, and is a much superior performer in that regard than other firms in the industry. Even if, however, Apex regresses to the mean next year, it will still be a top performer in the industry, as it has better financial metrics that its peers. To demonstrate, Apex Printing can be compared with two of its closest competitors, RR Donnelly and Quad/Graphics. All three companies are liquid, with health current ratios over the past two years.

There is little cause for concern for any of these three companies, but some of the other metrics reveal that Apex is in a stronger financial position. The long-term debt to equity ratio is one area where Apex is superior. Apex has a capital structure that contains a healthy amount of equity and good balance between equity and debt, but the other two companies do not. RR Donnelly is heavily leveraged.

In its favor is that the degree of leverage appears to be stable over time, so this degree of leverage may well reflect a specific choice that the company's management has made about capital structure. Quad, on the other hand, appears to have almost no equity value at all. The LTD ratio to equity is over 900, meaning that the equity value is next to nil, and the firm is financed almost entirely by debt.

While it is liquid, this indicates that Quad might have solvency issues going forward, and would not make a great investment. All of the firms earn a reasonable gross margin, usually in the low 20s. Last year for Apex is an outlier, and more data will be needed to see if Apex can sustain this higher level for the gross margin. Last year, Apex also significantly outperformed the competition with respect to the net profit margin. RR Donnelly lost money in 2012 and turned a slim profit in 2013.

Quad turned a slim profit in both years. Last year, it barely earned any net income at all. In that sense, Apex is clearly performing better, even if last year's performance cannot be sustained. The ROE for Apex is 31%, much higher than it was for 2012, but that is mainly due to the fact that it increased its profitability in the year. RR Donnelly also experienced a high ROE in 2013, after recording a loss in 2012. However, we know that RR Donnelly does not.