Financial Analysis Apple Inc

Introduction

Apple Inc. and Microsoft Inc. are amongst the largest corporations in the United States and globally. Specifically, Apple Inc. is a multinational specializing in software, consumer electronics, and online services. Microsoft, a major competitor to Apple Inc., partakes in the production of consumer electronics, computer software, and personal computers.

Financial Ratio Analysis

Ratio

Formula

Apple Inc.

Microsoft Corporation

Earnings per share of Common Stock

Net Income / Outstanding Number of Common Shares

Current Ratio

Current Assets/Current Liabilities

Gross Profit Rate

Gross Profit/ Revenue

Profit Margin

Net Earnings/Revenue

Inventory Turnover

Cost of Goods Sold/ Inventory

Days in Inventory

(Inventory / Cost of Goods Sold) × 365 days

Accounts Receivable Turnover

Sales/Accounts Receivable

Average Collection Period

(Accounts Receivable/Revenue) × 365

Asset Turnover

Total Assets/ Revenue

Return on Assets (ROA)

Net Profit/Total Assets

Debt to Assets Ratio

Total Debt / Total Assets

Times Interest Earned Ratio

EBITDA/Interest Expense

Dividend Yield

Dividend per share / Current share price

Return on Common Stockholders’ Equity (ROE)

Net Income / Outstanding Number of Common Shares

Free Cash Flow

Current Assets – (Current Assets – Current Liabilities) + Depreciation

Price-Earnings Ratio

Share price/ Earnings per share

Earnings per share of Common Stock

Earnings per share is a ratio indicative of a firm’s profitability by demonstrating the income generated for every share of common stock. The EPS for Apple was $5.67, whereas Microsoft’s EPS was $8.12. This indicates that Microsoft was the more profitable firm of the two. This implies that Microsoft generated a higher return for each share of its common stock.

Current Ratio

The current ratio of Apple Inc. was determined to be 1.07, whereas that of Microsoft Corporation was 2.08. This implies that Microsoft is in a better financial position to pay its short-term obligations due within one year than Apple. Specifically, the computation shows that for Apple, the company had $1.07 of current assets for every $1 of current liabilities, whereas Microsoft had $2.08 of current assets for every $1 of current liabilities. This means that Microsoft has two times the amount of current assets than liabilities and, therefore, can comfortably deal with its short-term debts compared to Apple.

Gross Profit Ratio

The gross profit margin signifies the proportion of revenue that surpasses the cost of goods sold (Tracy, 2012). It is perceptible that Microsoft had a higher gross profit margin at 68.93 percent compared to 41.78 percent for Apple Inc. This indicates that Microsoft was more profitable than Apple in the 2021 fiscal year.

Profit Margin

Mostly referred to as the net profit margin, this financial ratio indicates a company’s profitability. Specifically, it expresses the proportion of net income concerning the revenues generated by the company (Tracy, 2012). Apple Inc. had a profit margin of 25.88 percent, whereas Microsoft had a margin of 36.45 percent. This implies that the company made a net return of 25.88 cents for every dollar of revenue generated by Apple. However, generated a higher margin with a net return of 36.45 cents for every dollar of revenue. This indicates that Microsoft was more profitable.

Inventory Turnover

Inventory turnover is a financial ratio that indicates the rate at which inventory is either retailed, utilized, or replaced (Raiyani et al., 2011). The inventory turnover for Apple Inc. in 2021 was 32.36 days, whereas that for Microsoft was 19.81. Considering that Apple had a higher inventory turnover ratio than Microsoft, it implies that the company had strong sales and that its product offerings sold better than the latter.

Days in Inventory

Days in inventory refers to the average period a firm preserves its inventory before selling it (Tracy, 2012). Based on calculations of their respective 2021 annual reports, Apple Inc.’s days in inventory ratio was 11.28 days, whereas Microsoft’s was 18.42 days. Both companies had good days in inventory. However, it can be noted that it was Apple with the lower days in inventory rate, signifying that the company had a greater ability to convert its inventory into sales rapidly. This implies that Apple was the more efficient company concerning inventory management and sales performance.

Accounts Receivable Turnover

This ratio takes the accounts receivable of a company divided by the sales of the financial period. It indicates the company’s efficiency in collecting debts owed towards the credit extended to consumers (Raiyani et al., 2011). For the 2021 financial year, Apple’s accounts receivable turnover was 13.92, whereas that for Microsoft Inc. was 4.42. In this case, it can be noted that Microsoft Corporation had a lower accounts receivable turnover, which implies that it was more efficient in collecting its debts owed towards the credit handed out to consumers.

Average Collection Period

This financial ratio indicates the average number of days a company takes to implement the collection and conversion of its accounts receivable into cash (Raiyani et al., 2011). The 2021 financial year analysis determined that Apple Inc. had an average collection period of 26.22 days. On the other hand, Microsoft had a collection period of 82.61 days. This indicates that in comparing the two companies, Apple Inc. was more efficient in collecting its accounts receivable from debtors and converting them into cash.

Asset Turnover

This metric is a key indicator of the efficacy with which a firm capitalizes its total assets to generate revenues (Tracy, 2012). Based on the computations, for the 2021 fiscal year, Apple Inc. had an asset turnover of 0.96. On the other hand, the asset turnover of Microsoft was 1.99. Comparing these two companies, it can be construed that Microsoft Corporation was more efficient in using its assets to generate revenue and therefore had a better performance than Apple Inc.

Return on Assets (ROA)

The return on assets ratio is defined as an efficiency ratio depicting the efficacy of a company in utilizing its assets to generate returns (Tracy, 2012). Concerning the computations, Microsoft Corporation had a return on assets of 18.36 percent. This implies that for every dollar of total assets, the company generated a return on 18.36 cents. On the other hand, Apple Inc. had a ROA of 26.97 percent, implying that the firm generated a higher return of 26.97 cents for every dollar of total assets. This indicates that Apple was more efficient in capitalizing on total assets to generate returns.

Debt to Assets Ratio

This financial ratio demonstrates the proportion of a company’s business owned by creditors compared to the proportion of the assets owned by shareholders (Raiyani et al., 2011). The ratio analysis indicated that Apple Inc. had a debt-to-assets ratio of 0.82. This indicates that 82 percent of Apple’s assets are funded through debt. On the other hand, Microsoft Corporation had a debt-to-assets ratio of 0.57. This indicates that 57 percent of Microsoft’s assets are funded through debt. In this regard, it is perceptible that Apple is more leveraged, which means that it is riskier for prospective investors to invest in and render loans.

Times Interest Earned Ratio

The time’s interest earned ratio of a company demonstrates the capability to pay its debts. This ratio is assessed by dividing the earnings before interest and taxes by total interest payable on debt (Tracy, 2012). In examining the 2021 financial year, the time’s interest earned ratio for Apple Inc. was 41.19, whereas that for Microsoft Corporation was 29.80. Both companies have a high ratio, which is a positive indication. However, in this case, it can be noted that Apple has the highest ratio, which indicates that it can easily repay its debts with its prevailing income.

Dividend Yield

The dividend yield is defined as a financial metric that indicates the percentage of a firm’s share price that the business pays out in dividends on an annual basis (Raiyani et al., 2011). The dividend yield for Apple Inc. was 0.15 percent, whereas that for Microsoft was 0.83 percent. This indicates that Microsoft had a greater proportion of dividends from the share price. This is indicative that Microsoft had a greater profitability level.