Average Roe and Net Profit Margin Ratios

Audit Planning The author of this report has been asked to select a publicly traded company for the purposes of a hypothetical scenario. As part of this scenario, the author will outline and identify the critical steps that will be necessary for an audit program associated with a review of the selected firm. There will be the analysis of at least two performance ratios for the company and it will be detailed what tests would or should be used to calculate and evaluate those ratios effectively.

In total, there would be at least three analytical procedures used to evaluate those two or more ratios. There will also be a review of the balance sheet and income statements for the company in question and the associated evidence collection that would go into verifying the authenticity and accuracy of the information. The report will conclude with a discussion of the audit risk model and what the primary responsibilities of an audit firm would be if the ending report was an unqualified audit report.

While Apple Corporation has been a bit of a juggernaut in recent years, there are some signs of potential issues in their financials. Analysis As clearly indicated by the thesis statement, the firm that will be analyzed as part of this report is Apple Corporation. The critical steps that would be necessary are fairly basic in nature but attention to detail is paramount. First, data collection must be complete, it must be from reputable sources and it must be scoured for things that are missing, suspect or otherwise not proper.

Doing this correctly, even in the era of GAAP and IFRS as they are currently constructed, can be difficult because companies wield and use accounting standards differently based on the situation, what is going on and the financial shape that they wish to portend. This is not to say that public companies are always devious when it comes to using the standards to their advantage.

Rather, they sometimes position information positively when there is some amount of detail that needs to be fleshed out so as to be ethical to investors and analysts, the former in particular (Yahoo Finance, 2016). The two ratios that will be analyzed and scrutinized when it comes to Apple and in general will be return on equity (RoE) and Net Profit Margin. Return on equity is the amount of net income returned as a percentage of shareholders' equity.

It is a strong metric and estimate of the profitability of a corporation as it reveals the amount of profit generated by a company with the money that has been granted by shareholders. The ratio is expressed in percentage form and it is simply the net income of a firm divided by shareholder's equity. This metric is also commonly referred to as return on net worth, or RNOW for short (Ready Ratios, 2013).

In terms of how Apple is doing when it comes to Return on Equity, they are doing fairly well given that their current return on equity is a shade above forty percent. Over the last five years, the ratio has wavered quite a bit as it has peaked at nearly fifty percent in early 2012 and swooned to twenty-eight percent or so in early 2014. There was a more recent peak after the swoon of about forty-three percent, so the current value is a recent high.

The last time it was this high before the swoon was in late 2012. One way to analyze this metric is to compare it to the larger market. Specifically, the author of this report would compare it to the S&P 500. In this regard, Apple is doing extremely well given that the average return on equity for that group is a scant 11.86%. In other words, Apple is well over three times the S&P average (Yahoo Finance, 2016). As for net profit margin, Apple is strong there as well.

For the year that ended September 26th, 2015 (the most recent year completed), Apple had total revenue of $233.72 billion. Over that same time period, Apple had net income of $53.39 billion. This is reflective of a net profit margin of nearly twenty-three percent. As compared to the S&P 500, this is also very strong as the average net profit margin for the S&P 500 is about a tad above seven percent. The same method has been used thus far for both metrics.

However, a new one should be introduced such as comparing Apple to its direct competitors like Microsoft, Samsung and others. However, Apple competitors actually varies by the product it sells so going an "apples to apples" comparison can be hard to pull off. For example, really no one competes with Apple strongly in the MP3 player realm. However, Apple and Samsung compete very strongly in the smartphone market and there are other firms like LG, HTC and others.

When it comes to computers, there is Microsoft when it comes to operating systems and then there are the computer makers themselves which include Microsoft (e.g. Surface Tablets), Hewlett Packard and Dell. Even with the lack of a clear comparison between companies, it is important to drill down further than the S&P 500 as profit margins, just as one example, can vary widely from sector to sector (Yahoo Finance, 2016). With that in mind, Microsoft's return on equity is a mere 12.71%.

As such, Apple clearly is better off when it comes to that metric. When it comes to net profit margin, Microsoft sits at 12.06%. That would be barely above average in the S&P 500 while Apple is much higher. When looking at Apple's most formidable smartphone competitor, that being Samsung, they have a profit margin of 9.50% and 11.38%. In short, Samsung and Microsoft are very close together when it comes to the selected metrics in this report while Apple's figures for the same performance metrics are much higher (Yahoo Finance, 2016).

The third and final analytical procedure that could be used for Apple or other firms is to drill down into what is supposedly feeding those revenue, net profit and other figures. When it comes to return on equity, how much is being invested could be audited for accuracy as well as net income as both numbers feed the ratio (Yahoo Finance, 2016).

As for looking at the income statement and balance sheet and analyzing those, the key thing to look for, at least at a high level, are outlier figures that might or might not make sense. For example, revenues will typically rise or fall in a proportional manner. When that is not the case, the reason should be figured out. After all, the profit margins, operating margins and so forth will do weird things if proportionality is not maintained.

To use Apple as an example, their revenue, gross profit and so forth are all growing at fairly consistent rates. However, the "Total Other Income" figure in 2014 for Apple is clearly out of phrase as it actually falls from 2013 to 2014 even though revenue went up.