DISCUSSION BOARD 1
Discussion Board 1
There are a number of reasons that could be floated in an attempt to explain why Apple’s stock happens to be priced only slightly higher than Amazon’s stock – despite the former’s market capitalization being twice as large as that of the latter. Ordinarily, one would expect Apple’s stock to trade at a significantly higher price than that of Amazon as a consequence of the big difference in the market capitalizations of the two companies. To begin with, the price could be impacted by the fact that Apple has more shares outstanding than Amazon. Secondly, the differences in the price of the two company’s shares could also be as a consequence of demand and supply factors. The demand for Amazon’s stock could be high as a consequence of a wide range of factors shaping or influencing investor expectations.
In my opinion, and based on my reading of the relevant materials, investors are willing to pay buy Amazon stock despite Amazon’s capitalization being significantly lower than that of Apple due to their expectations about the future performance of the two companies. For instance, with regard to expected growth in earnings base, it is likely that investors expect the earnings base of Amazon - despite its significantly lower market capitalization in comparison to Apple – to experience enhanced growth going into the future. Key considerations on the part of investors, i.e. in relation to earnings base expected growth, could be inclusive of, but they are not limited to, dividends per share, earnings per share, etc. (Brigham and Houston, 2015).
The relevance of financial statement analysis cannot be overstated when it comes to making based or rational investing decisions. Thus, in seeking to establish whether to invest in Apple or Amazon, I would first seek to comb through each company’s financial statements – specifically the balance sheet and the income statement. This, according to Berk, DeMarzo and Harford (2021), happens to be one of the most reliable ways of knowing more about a company. Some of the key financial ratios that I would rely upon on this front are inclusive of return on equity and the debt ratio. These have been highlighted in the tabular representations below.
a) Amazon
Ratio
Formula
Computation
Results
Return on Equity
Net income/shareholder equity
33,364/ 138,245
*in millions
0.24
Debt ratio
total debt/total equity
67,651/138,245
*in millions
0.49
NB: Data sourced from the most recent annual report.
b) Apple
Ratio
Formula
Computation
Results
Return on Equity
Net income/shareholder equity
94,680/ 63,090
*in millions
1.5
total debt/total equity
9,613/63,090
*in millions
0.15
NB: Data sourced from the most recent annual report.
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