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Apple Inc.

Apple Inc. is an American technology firm specializing in software, online services, & consumer electronics. It is the greatest information technology organization in terms of net revenue, and by January 2021, it will be considered the world's most useful firm, second-greatest mobile phone manufacturer and fourth-greatest personal computer vendor. However, Apple is the Big Five organization of information technology, alongside Alphabet, Alphabet, Microsoft, Amazon, and Meta. The company was established in the year 1976 by Steve Wozniak, Ronald Wayne, & Steve Jobs and is headquartered in California, United States. In August 2018, the group turned out to be the first and foremost publicly United States company valued at $1 trillion and $2 trillion in 2020. However, the company also receives criticism regarding the contractor's labour practices, business ethics, and environmental practices, containing anti-competitive materials sourcing and practices.

Furthermore, Apple possesses a high or superior level of brand loyalty and is stated as the most valuable brand. By the end of 2021, the group generated a total net income of around US$94.68 billion and net revenue of US$365.82 billion. In addition, by the end of 2021, Apple has also employed 154,000 employees for its business. The products of the company contain iPhone, iPad, Wearables, Mac, Accessories and Homes. In addition, its services contain Advertising, Cloud Services, Payment Services, AppleCare, and Digital Content. Its clients are mainly in the consumer, mid & small-sized business, government markets, enterprise, & education. The company operates or runs several hundred retail warehouses in several countries and online stores & iTunes Store.

Alphabet Inc. is a multinational technology corporation holding organization headquartered in Mountain View, California. Thus, it was generated through the restructuring of Google and turned out to be the parent firm of Google & several former Google subsidiaries. Google's two co-founders remained as board members, employees, and controlling shareholders of Alphabet (Ogbeide and Akanji 2017). It is the world's greatest technology organization by net revenue and the most valuable company. The company was established in 2015 by Larry Page and Sergey Brin. The company's segment contains Google Services, Other Bets and Google Cloud. Google Services contain services and products like ads, hardware, Google Play, YouTube, Android, Chrome, Google Maps, and Search.

Google Cloud contain Google's data analytics platforms and infrastructure, collaboration tools, & other services for the company's customers. Hence, its Google Cloud delivers enterprise-ready cloud facilities, including Google Workspace and Google Cloud Platform. Its Cloud Platform allows developers to test, deploy, and build applications on their infrastructure. Additionally, its Workplace collaboration tools contain Calendar, Meet, Drive, Docs, and Gmail applications. Its hardware products contain Chromecast with a Google TV & the Google Nest Hub smart display. Lastly, other bets segment is involved in the internet sales and television services, research and development, and licensing services. By the end of FY 2021, the company created a net profit of US$76 billion & net revenue of US$257.6 billion. Moreover, the total number of employees employed by the company will be 156,301 in the financial year 2021.

Task 1

Alphabet Inc.

DETAILs

APPLE

GOOGLE

2021

2020

2021

2020

SHORT TERM DEBT

125481

105392

56834

64254

TOTAL ASSETS

351002

323888

319616

359268

% OF DEBT

35.75%

32.54%

17.78%

17.88%

Based on the calculation, it has been seen that % of debt in Apple in 2020 was 32.54%, and in 2021 it increased to 35.75%, whereas % of debt in Google in 2020 was 17.88%, and in 2021 it decreased to 17.78%. Hence, it can be said that both are uncorrelated since the short-term debt of Apple has increased, whereas the short-term debt of Google has decreased (Kourtis,Kourtis and Curtis 2019).

APPLE WACC

COST OF CAPITAL

COST OF DEBT

2%

TAX RATE

26%

AFTER TAX COST OF DEBT

1.5%

RISK FREE RATE

2.50%

BETA

0.82

MARKET RISK PREMIUM

8%

COST OF EQUITY

9.1%

MARKET VALUE OF EQUITY

521140

MARKET VALUE OF DEBT

-133627

% OF MARKET VALUE OF EQUITY

134.5%

% OF MARKET VALUE OF DEBT

-34.5%

WACC

11.7%

ALPHABET WACC

COST OF CAPITAL

COST OF DEBT

1.2544%

TAX RATE

16.2250%

AFTER TAX COST OF DEBT

1.1%

RISK FREE RATE

1.99%

BETA

1.01

MARKET RISK PREMIUM

6%

COST OF EQUITY

8.1%

MARKET VALUE OF EQUITY

1780094.345

MARKET VALUE OF DEBT

27583.5

% OF MARKET VALUE OF EQUITY

98.5%

% OF MARKET VALUE OF DEBT

1.5%

WACC

7.94%

Based on the calculation of WACC, it has been noticed that the WACC of Apple inc. is higher than the WACC of Alphabet, which indicates that risk in Apple inc. is higher due to an increase in short-term debt, whereas the risk in Alphabet is lower due to low short-term debt. Hence, based on analysis, Alphabet company should be preferred as WACC is lower, which means that earnings will be more in Alphabet than Apple, and Alphabet will also rely less on outside funding (Rusdiyanto et al. 2019). Therefore, as risk is low in Alphabet, it is recommended to choose Alphabet.

Financial Ratio Analysis

Financial ratio analysis refers to contrasting the relationship between more than two items of the financial data from the firm's financial statements (Izzalqurny, Subroto and Ghofar 2019). Thus, it is created with the consumption of numerical figures taken from the financial statements to increase meaningful or valuable information with respect to the firm. The numbers found on the firm's financial statements, balance sheet, cash flow statement & income statement are utilized to perform quantitative analysis & evaluate a firm's liquidity, margins, profitability, valuation, leverage, growth, and more. Different financial ratios propose different approaches to a firm's financial position, from how it may cover its dues to how it uses its assets.

Ratio analysis provides information or data to the business managers by examining the values contained in the company's balance sheet, cash flow statement, and income statement (Herman Ruslim 2019). Hence, the information collected from the financial ratio analysis is irreplaceable to managers who devise to make decisions for the company & to external parties such as investors to evaluate or measure the business financial health. Moreover, financial ratios are beneficial tools that assist investors and business managers compare and analyze the financial relationships or connections between the books on the company's financial statements (Sadi’ah 2018).

Importance of Financial Ratio Analysis

The following importance of the financial ratio analysis are discussed and mentioned below:

  • By inspecting and analyzing the previous outcomes, ratio analysis might associate with various items.
  • Ratio analysis may be utilized to prepare the budget, which can formulate policies & also be utilized to plan the future.
  • Financial ratio analysis divulges whether the company is enhancing or not.
  • Financial ratio analysis performs as an efficiency surveyor.
  • Tells about the short-term liquidity performance.
  • Long-term solvency may be measured or evaluated.
  • Investors may analyze or examine a company's financial declarations to their interest through financial ratio analysis (Soboleva et al. 2018).
  • Determine or decide the company's profitability.
  • Operational efficiency may be analyzed or examined.
  • Assist in understanding or comprehending the financial risk and business of the company.

Ratio Calculation

Ratio

Apple Inc. (2021)

Apple Inc. (2020)

Units

Liquidity Ratios

 

 

 

Working Capital Ratio

39.10

7.16

Times

Acid Test Ratio

1.02

1.33

Times

Current Ratio

1.07

1.36

Times

Discussion

Apple's liquidity position is determined by analyzing or examining the three primary types of liquidity ratios for the financial years 2021 and 2020 (Griffin and Mahajan 2019). Working capital ratio, Current ratio, and Quick ratio are the ratios that have been utilized to analyze financial performance.

Working Capital Ratio

The working capital ratio demonstrates the assets to liabilities ratio, i.e., how many times an organization can cover its total current liabilities with its total current assets. This metric evaluates how effectively an organization utilizes its working capital to support growth and sales. On the basis of financial calculation, it has been observed that the working capital ratio increases significantly to 39.10 times in 2021 as compared to the previous year (7.16 times). Thus, it indicates that Apple generated a larger proportion of net sales with its networking capital and has also utilized it efficiently, but on the other hand, the company needs to raise additional net capital in order to support further growth and development. However, when the amount of total current assets is high than the amount of total current liabilities, then the amount of working capital is positive and favourable.

Acid Test Ratio

The acid-test ratio is also referred as a quick ratio that compares or contrasts the firm's short-term assets with its short-term debts to observe an organization has sufficient cash to cover its immediate liabilities like short-term debt. On analyzing Apple's acid test ratio, it has been observed that the acid-test ratio pertaining to 2021 and 2020 stands at 1.02 times and 1.33 times, implying that although it has decreased marginally in the current year, it has enough liquid assets to cover all of its short-term obligations and it is also not dependent on its available inventory and on getting additional financing. Hence, Apple is fully furnished with exactly sufficient assets to be promptly liquidated to cover its current liabilities. A higher ratio is considered to be a favourable and healthy ratio and is also important for external shareholders such as creditors, capitalists, investors, and lenders.

Current Ratio

The current ratio refers to a liquidity metric that evaluates an organization's capability to cover short-term implications or those due in one year. Thus, it tells analysts and investors how an organization may maximize or increase the total current assets on its statement of financial position to gratify its total current liability & other payables. On the basis of calculation, the current ratio of Apple pertaining to 2021 and 2020 is 1.07 times & 1.36 times. It has been noticed that although there is a slight reduction in the ratio, it has sufficient cash or liquid assets to pay all of its current liabilities as the value of current assets exceeds the value of current liabilities. However, a current ratio of more than 1 implies that the group has financial resources to remain diluter in the short term. In addition, if a firm has high metric, it means that they are capable enough to cover their short-term implications.

Task 2

As of September, 2021, Apple had outstanding or prominent fixed and floating rate notes with differing maturities for a combine principal amount of around $118.1 billion. Thus, the Notes are unsecured obligations & interest is payable. On the basis of chart that has been presented above, it can be observed that the floating-rate notes issued in 2021 is $1750 while that of 2020 it is $2250. While on the other hand, the fixed rate note issued on 2021 is around $95813 and $2020 it is 103,828. In addition, in the second quarter, only the fixed note was issued in the FY 2021 ($14,000) and in the case of fourth quarter, the total amount of fixed rate that has been issued in the current year 2021 is around $6500. Overall, the total term debt pertaining to 2021 and 2020 is $118,063 and $106,078, indicating that there is a considerable increment in the total term debt. Lastly, the non-current portion of the term-debt for 2021 is $109,106 and while that of 2020 it is $98,667.  Hence, on the basis of cash flow statement provided in the annual report, it can be observed that repayments of term debt has decreases to $8750 in 2021 from $12,629. 

Solvency & Financial Positions

Solvency Ratios

Apple Inc. (2021) 

Apple Inc. 2020 

Units 

Debt-to-Equity Ratio

4.56

3.96

Times

Debt Ratio

0.82

0.80

Times

Equity Multiplier

5.56

4.96

Times

Interest Coverage Ratio

42.29

24.35

Times

Apple's solvency and financial position are determined by analyzing or examining the four primary types of solvency ratios for the financial years 2021 and 2020 (Easton et al. 2018). Debt-to-equity ratio, Debt ratio, Equity Multiplier, and Interest Coverage Ratio are the ratios that have been utilized to analyze financial performance.

Debt-to-Equity Ratio

The debt-to-Equity ratio refers to the degree to which an organization can cover all of its debt (Dirman 2020). Thus, it is utilized to measure the organization's financial leverage & is computed by dividing the firm's total debts by its total shareholder's equity, and in corporate finance, this metric is considered to be a significant ratio. Based on the financial ratio table presented above, it can be seen that the debt-to-equity ratio pertaining to 2021 and 2020 is 4.56 times & 3.96 times, indicating that there is more debt in comparison to equity. Investors and lenders have a high risk because it indicates that the group is financing a considerable amount of its ability growth through borrowing. A higher ratio indicates higher risk & that the firm is financing its development and growth with debt.

Debt Ratio

The debt ratio is a financial metric that measures or evaluates the company's leverage extent. It is also known as a "debt-to-asset ratio, " mainly expressed as a percentage or decimal. This ratio implies the total asset percentage financed with debt. It is mainly utilized by creditors to decide the debt amount in an organization, the capability to repay its liability. On the basis of calculation, the company's debt ratio pertaining to 2020 and 2021 is 0.80 times & 0.82 times. Thus, it can be seen that there is no sudden change in the metric, which indicates that the group owns more debts in comparison to debts, and the firm is very leveraged & are highly risky in order to lend to or invest in the current year as compared to the previous year.

Equity Multiplier

Equity multiplier refers to a financial leverage metric that evaluates the firm's assets amount that the shareholders are financing by contrasting total assets with its total shareholder's equity (Christiana, Purnama and Ardila 2020). This metric demonstrates the percentage of the asset that is owned and financed by the shareholders. Based on the calculation, the equity multiplier increases to 5.56 times in 2021 compared to 4.96 times in 2020, implying that the company's level of debt has increased considerably. Moreover, the effective business strategy of Apple is being reflected that enables it to buy assets at a reasonable or lower cost. While on the other hand, the company might have incurred more debt than its norm, which can be complex to back if there is a descending trend in its cycle.

Interest Coverage Ratio

Interest coverage ratio refers to profitability & debt metric that is utili to determine how modestly an organization could clear interest on its outstanding debt. Hence, it is computed by dividing EBITDA with its interest during a stipulated period of time. The calculation shows that the interest coverage ratio increases significantly to 42.29 times in 2021 as compared to 24.25 times in 2020, suggesting that Apple has sufficient net profits in order to service all of its liabilities, but sometimes it also might mean the group is not utilizing its debt correctly in the current year as compared to the previous year. Hence, a higher metric implies stronger financial health, and the firm is capable enough to meet interest obligations.

Comparison of Solvency Position With its Competitor

Solvency Ratios

Alphabet Inc. (2021) 

Alphabet Inc. (2020) 

Units 

Debt-to-Equity Ratio

0.43

0.44

Times

Debt Ratio

0.30

0.30

Times

Equity Multiplier

1.43

1.44

Times

Interest Coverage Ratio

263.24

357.16

Times

In this section, a comparison of Alphabet's solvency financial performance has been made with that of Apple for the financial years 2021 and 2020 (SUTHAR 2018). The following are discussed and analyzed below:

Debt-to-Equity Ratio

Based on the calculation, Alphabet's debt-to-equity ratio pertaining to 2021 and 2020 is calculated at 0.43 times and 0.44 times. Thus, there is no considerable change in the current year's metric compared to the previous year, but Alphabet is trying to reduce its financial leverage (Chen et al. 2017). However, compared to Apple, it can be seen that the competitor is at par because its level of debt and value is lower than the company in 2021.

Debt Ratio

On analyzing Alphabet's debt ratio, it can be observed that the debt ratio has remained constant for the past two years. Thus, the debt ratio pertaining to 2021 and 2020 is calculated at 0.30 times and 0.30 times. But if it is compared with Apple Inc, it is being noted that the value of its competitor is considerably low and has a more stable or secure business, and lastly, the level of financial risk is also low than the company.

Equity Multiplier

On the basis of the calculation table that has been presented above, it can be seen that in the case of Equity Multiplier also, there is so significant change in the metric in 2021 compared to the previous year. Thus, the equity multiplier for the financial year 2020 and 2021 is 1.44 times and 1.43 times which mean that Alphabet is utilizing more shareholder's equity & less debt in order to finance the acquisition of assets. However, if it is compared with Apple, the competitors are at par because its value is lower than the company, which suggests a positive sign for Alphabet.

Interest Coverage Ratio

Based on the ratio calculation, the interest coverage ratio decreases to 263.24 times in 2021 from 357.16 times in 2020, indicating that although the metric has decreased, it can still cover all of its interest expenses from its available net profit (Thomas and Rabiyathul Basariya 2019). When it is compared to Apple, the competitor is at par because its value is higher than the company and its business is also more stable or secure.

Conclusion

Based on the above discussion and analysis, it can be concluded that Apple's financial performance is being analyzed or reviewed with the help of financial ratio analysis (Williams and Dobelman 2017). Thus, the financial ratio is a beneficial management tool that would enhance the understanding of the financial trends and results over time and deliver key indicators of organizational performance.

References

Chen, J.H., Hsu, S.C., Wang, R. and Chou, H.A., 2017. Improving hedging decisions for financial risks of construction material suppliers using grey system theory. Journal of Management in Engineering, 33(4), p.04017016.

Christiana, I., Purnama, N.I. and Ardila, I., 2020. The financial ratio in the analysis of earnings management. International Journal of Accounting & Finance in Asia Pasific (IJAFAP), 3(1), pp.8-17.

Dirman, A., 2020. Financial distress: The impacts of profitability, liquidity, leverage, firm size, and free cash flow. International Journal of Business, Economics and Law, 22(1), pp.17-25.

Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

Griffin, P.A. and Mahajan, S., 2019. Financial Statement Analysis. Finding Alphas: A Quantitative Approach to Building Trading Strategies, pp.141-148.

Herman Ruslim, M., 2019. The effect of financial ratio on company value with inflation as a moderation variable. Jurnal Akuntansi, 23(1), pp.34-46.

Izzalqurny, T.R., Subroto, B. and Ghofar, A., 2019. Relationship between financial ratio and financial statement fraud risk moderated by auditor quality. International Journal of Research in Business and Social Science (2147-4478), 8(4), pp.34-43.

Kourtis, E., Kourtis, G. and Curtis, P., 2019. An integrated financial ratio analysis as a navigation compass through the fraudulent reporting conundrum: a case study.

Ogbeide, S. and Akanji, B., 2017. A study on the relationship between cash-flow and financial performance of insurance companies: Evidence from a developing economy. Revista de Management Comparat International, 18(2), p.148.

Rusdiyanto, R., Agustia, D., Soetedjo, S., Septiarini, D.F., Susetyorini, S., Elan, U., Syafii, M., Ulum, B., Suparman, P. and Rahayu, D.I., 2019. Effects of Sales, Receivables Turnover, and Cash Flow on Liquidity.

Sadi'ah, K., 2018. The effect of corporate financial ratio upon the company value. The Accounting Journal of Binaniaga, 3(02), pp.75-88.

Soboleva, Y.P., Matveev, V.V., Ilminskaya, S.A., Efimenko, I.S., Rezvyakova, I.V. and Mazur, L.V., 2018. Monitoring of businesses operations with cash flow analysis. International Journal of Civil Engineering and Technology, 9(11), p.2034.

SUTHAR, K., 2018. Financial Ratio Analysis: A Theoretical Study. International Journal of Research in all Subjects in Multi Languages, Gujarat, India.

Thomas, J. and Rabiyathul Basariya, S., 2019. A Study on the Issues of Financial Ratio Analysis. Indian Journal of Public Health Research & Development, 10(3).

Williams, E.E. and Dobelman, J., 2017. Financial statement analysis. Quantitative Financial Analytics. London: World Scientific, pp.109-69.

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