Introduction
Apple Inc. manufactures and sells mobile communication devices, other portable electronics, and software applications that support its devices. The competitive environment is unpredictable because it relies on innovation. A company that manages to launch new products frequently becomes dominant. Apple has not been able to launch a new major product in 2013 even though it has reported a large sales volume of iPhones (33.8 million) and iPads (14.1 million) in the last quarter (Bora, 2013). Samsung launched several products in 2013. The Galaxy S Mini, Galaxy S4 Active, Galaxy S4 Zoom, and several ATIV devices were launched in 2013 (Samsung Premiere 2013 Galaxy & ATV, 2013). Apple had better financial performance in 2012 than in the other two years. Apple’s share market value was higher in 2012 because of the optimism that was created by its new products. Apple has managed inventory more efficiently than Samsung in the last three years. Apple increasingly financed its activities from debts in 2013 compared to the other two years. Apple received cash on its receivables more often than it made payments to suppliers. Samsung’s profitability may catch up with Apple’s if Apple remains dormant on developing new products.
Objectives
The objective of the study is to find out the performance of the management with relations to increasing shareholders’ value, reducing risk through debt management, efficient inventory management, and a higher level of profitability. The study also compares Apple Inc. to Samsung Electronics Ltd. following the media portrayal that Samsung has emerged as the major competitor.
Liquidity Ratios
Current ratio
The current ratio measures ability of a firm to meet its debt requirements (Fraser & Ormiston 2013).
Current ratio = current assets/ current liabilities
Current ratio 2013 = 73,286 million/ 43,658 million = 1.679
Current ratio 2012 = 57,653 million/ 38,542 million = 1.496
Current ratio 2011 = 44,988 million/ 27,970 million = 1.608
The firm may encounter no problem when covering its short-term debts.
Quick ratio
Apple’s
Quick ratio = current assets – inventory/ current liabilities
Quick ratio 2013 = (73,286-1,764) million/ 43,658 million = 1.638
Quick ratio 2012 = (57,653-791) million/ 38,542 million = 1.475
Quick ratio 2011 = (44,988-776) million/ 27,970 million = 1.581
Samsung’s quick ratio
Quick ratio 2013 (9 months) = (102,422,809-20,392,935) thousand/ 50,351,694 thousand = 1.629
Quick ratio 2012 = (81,476,069-16,569,333) thousand/ 43,817,619 thousand = 1.481
Quick ratio 2011 = (66,755,731-14,673,434) thousand/ 41,377,102 thousand = 1.259
The calculation uses values on the tables in the Samsung Annual report (2012) and Interim consolidated financial statements of Samsung Electronics Co., Ltd. And Subsidiaries (2013) (see appendices).
Cash flow liquidity ratio
Cash flow liquidity ratio = cash & cash equivalents + marketable securities + cash flow/ current liabilities
Apple’s cash flow liquidity ratio
2013 = $(14,259M+26,287M+3,513)/ 43,658M = 1.009
2012 = $(10,746M+18,383M+931)/ 38,542M = 0.780
2011 = $(9,815M+16,137M-1,446M)/ 27,970M = 0.876
Samsung’s
2013 = $(16,283,715+31,528,254+1,168,730-1,186,962) thousands/ 50,351694 thousands = 0.949
2012 = $(17,500,496+16,175,099+1,170,392+3,841,365) thousands/ 43,817,619 thousands = 0.883
Average collection period
The average collection period indicates the average number of days that a firm has to wait to convert account receivables into cash (Fraser & Ormiston 2013).
Average collection period = Net accounts receivable/ average daily sales
Apple’s
2013 = 13,102M/ (170,910M/365) = 27.981 days
2012 = 10,930M/ (156,508M/ 365) = 25.490 days
2011 = 5,369M/ (108,249M/365) = 18.103 days
Samsung’s
2013 = (receivables) average daily sales
= $ thousands (26,768,514)/ (157,508,406 /365) = 62.032 days
2012 = $ thousands (24,799,736)/ (134,850,099/365) = 67.126 days
The values used in calculation are found on the Samsung Annual report (2012) and Interim consolidated financial statements of Samsung Electronics Co., Ltd. And Subsidiaries (2013) (see appendices).
Accounts payable outstanding
Accounts payable outstanding = accounts payable/ average daily cost of sales
Apple’s
2013 = 22,367M/ (106,606M/365) = 76.581 days
2012 = 21,175M/ (87,846M/365) = 87.98 days
2011 = 14,632M/ (64,431M/365) = 82.89 days
Samsung’s
2013 (9 months) = $18,984,142 thousands/ (94,132,013thousands/365) = 73.61 days
Interim consolidated financial statements of Samsung Electronics Co., Ltd. and Subsidiaries (2013, p. 6).
Sources: Samsung Electronics Co Ltd (005930: Korea SE) (2013), Industry center – semiconductor equipment & material (2013), Apple Inc. Form 10K (2013), and Apple Inc. Form 10K (2012).
Activity Ratios
Account receivables turnover
Account receivables turnover ratio indicates the frequency of cash receipts from invoices in a year (Fraser & Ormiston 2013).
Accounts receivable turnover = net sales/ net account receivables
Apple’s
2013 = 170,910M/ 13,102M = 13.04 times
2012 = 156,508M/ 10,930M = 14.32 times
2011 = 108,249M/ 5,369M = 20.16 times
Samsung’s
2013 (9 months) = 157,508,406 thousands/ 26,768,514 thousands = 5.88 times
2012 = 134,850,099 thousands/ 24,799,736 thousands = 5.44 times
Apple has improved in giving distributors and dealers more time to make payments.
Inventory turnover
It measures the number of times inventory has been refilled and sold within a year (Fraser & Ormiston 2013).
Inventory turnover = cost of goods sold/ inventory
Apple’s
2013 = 106,606M/ 1,764M = 60.43 times
2012 = 87,846M/ 791M = 111.06 times
2011 = 64,431M/ 776M = 83.03 times
Samsung’s
2012 = $Thousands 118,244,730/16,569,333 = 7.14 times
2011= $Thousands 104,700,887/14,673,434 = 7.14 times
Apple compared to Samsung shows a wide difference in maintenance of inventory. Apple maintains a very small proportion of inventory. Samsung has emerged as a major competitor but its goods are more diversified than Apple’s.
Accounts payable turnover
Accounts payable turnover indicates the frequency of payments made towards clearing payables (Fraser & Ormiston 2013).
Accounts payable = cost of goods sold/ accounts payable
Apple’s
2013 = $106,606M/ 22,367M = 4.77 times
2012 = $87,846M/ 21,175M = 4.15 times
2011 = $64,431M/ 14,632 = 4.40 times
Samsung’s
2012 = $Thousands 118,244,730/ 15,768,229 = 7.50 times
2011 = $Thousands 104,700,887/ 17,280,823 = 6.09 times
Fixed Asset turnover
Fixed asset turnover shows the effectiveness of fixed assets in generating profits (Fraser & Ormiston 2013). High ratio shows high profitability in utilizing assets.
Fixed asset turnover = Net sales/ net property, plant, equipment
Apple’s
2013 = $170,910M/ 16,597M = 10.30 times
2012 = $156,508M/ 15,452M = 10.13 times
2011 = $108,249M/ 7,777M = 13.92 times
Samsung’s
2012 = $Thousands 187,754,283/ 63,938,701 = 2.94
2011 = $Thousands 154,048,895/ 57,925,451 = 2.66
Apple is more profitable but its asset profitability has reduced.
Total asset turnover
Total asset turnover shows the level of investment needed in assets to generate sales. High ratio means that a small proportion of assets generate large volumes in sales (Fraser & Ormiston 2013).
Total asset turnover = net sales/ total assets
Apple’s
2013 = $170,910M/ 207,000M = 0.83 times
2012 = $156,508M/ 176,064M = 0.89 times
2011 = $108,249M/ 116,371M = 0.93 times
Samsung’s
2012 = $Thousands 187,754,283/169,051,975 = 1.11
2011 = $Thousands 154,048,895/145,458,186 = 1.06
Apple appears to utilize a higher proportion of assets than Samsung to generate sales.
Sources: Lg Electronics Inc (066570: Korea SE) (2013), Samsung Electronics Co Ltd (005930: Korea SE) (2013) and Industry center – semiconductor equipment & material (2013).
Leverage Ratios
Debt ratio
The debt ratio is a measure of risk to owners, shareholders, and creditors. It shows the extent to which a firm’s existence is financed by debts (Fraser & Ormiston 2013).
Debt ratio = total liabilities/ total assets
Apple’s
2013 = 83,451M/207,000M = 40.3%
2012 = 57,854M /176,064M = 32.9%
2011 = 39,756M /116,371M = 34.2%
Debt to equity ratio
Debt to equity ratio measures riskiness to investors.
Debt to equity = total liabilities/ stockholder’s equity
2013 = $millions 83,451/ 123,549 = 0.68
2012 = $millions 57,854/ 118,210 = 0.49
2011 = $millions 39,756/ 76,615 = 0.52
There is increased risk in 2013 for shareholders.
Times interest earned
Times interest earned shows the proportion of operating profits is used to service debts (Fraser & Ormiston 2013). A higher number of times show increased ability to service debts.
Times interest earned = operating profit/ interest expense
2013 = $M 48,999/ 13,856 = 3.5 times
2012 = $M 55,241/ 11,414 = 4.8 times
2011 = $M 33,790/ 9,247 = 3.7 times
Cash flow adequacy
Cash flow adequacy ratio indicates whether cash flow is enough to cover dividends, pay debts, and cover operating expenses. Operating cash flow should be able to cover investing and financing activities.
Cash flow adequacy = cash flow from operating activities/ (capital expenditures + debt repayments + dividends
2013 = $M 53,666/ (6,757+10,564) = 3.10 times
2012 = $M 50,856/ (3,277+2,488) = 8.82 times
2011 = $M 37,529/ (1,814+0) = 20.69 times
Apple has adequate cash flow. It holds more cash that can be explained by the number of times Apple makes payments to accounts payables.
Additional source: Industry center – semiconductor equipment & materials (2013).
Profitability Ratios
Gross profit margin
Gross profit margin shows the ability to generate profits from sales (Fraser & Ormiston 2013).
Gross profit margin = gross profit/ net sales
2013 = $M 64,304/170,910 = 37.6%
2012 = $M 68,662/156,508 = 43.9%
2011 = $M 43,818/108,249 = 40.5%
Apple’s profitability has reduced in 2013.
Operating profit margin
Operating profit margin shows the efficiency of operating activities to generate profits.
Operating profit margin = operating profit/ net sales
2013 = $M 48,999/170,910 = 28.7%
2012 = $M 55,241/ 156,508 = 35.3%
2011 = $M 33,790/ 108,249 = 31.2%
Net profit margin
Net profit margin indicates the proportion of sales that is translated as net earnings.
Net profit margin = net earnings/ net sales
Apple’s
2013 = $M 37,037/ 170,910 = 21.7%
2012 = $M 41,733/156,508 = 26.7%
2011 = $M 25,922/ 108,249 = 23.9%
Samsung’s
2013 (9 months) = $Thousands 21,544,708/157,508,406 = 13.7%
Return on total assets (ROA or ROI)
ROA measures the efficiency of the firm in using its assets to generate profit.
ROA = net earnings/ total assets
2013 = $M 37,037/207,000 = 17.9%
2012 = $M 41,733/ 176,064 = 23.7%
2011 = 25,922/ 116,371 = 22.3%
The return on investment is high.
Return on equity (ROE)
Return on equity shows the efficiency of the firm in creating additional value for shareholders.
ROE = net earnings/ stockholders’ equity
2013 = $M 37,037/ 123,549 = 30.0%
2012 = $M 41,733/ 118,210 = 35.3%
2011 = $M 25,922/ 76,615 = 33.8%
The value that the firm adds to shareholders’ equity is higher than industry’s average.
Sources: Lg Electronics Inc (066570: Korea SE) (2013), Samsung Electronics Co Ltd (005930: Korea SE) (2013) and Industry center – semiconductor equipment & material (2013).
Market Ratios
Earnings per share (EPS)
EPS shows investors how much value has been added to each share.
EPS = net earnings/ average outstanding shares
2013 = $M 37,037/925,331,000 shares = 0.04003 x 1000 = $40.03 (basic)
2012 = $M 41,733/934,818,000 shares = 0.04464 x 1000 = $44.64
2011 = $M 25,922/924,258,000 shares = 0.02805 x 1000 = $28.05
Price to earnings (P/E) ratio
P/E ratio uses the market value of shares to show how much earnings have been generated in relation to the amount of investment per share (Fraser & Ormiston 2013). A smaller ratio value will indicate better performance than a higher ratio value.
P/E ratio = market price of common stock/ earnings per share
2013 = $431/40.03 = 10.77
2012 = $589/ 44.64 = 13.19
2011 = $335/28.05 = 11.94
In the case of Apple, 2012 appears to be a year of the poor performance of the P/E ratio mainly because of the market price appreciation that followed optimism attributed to its successful introduction of new products.
Dividend payout ratio
The dividend payout ratio shows the fraction of earnings per share paid out as dividends (Fraser & Ormiston 2013). Shareholders would prefer a larger percentage paid out as dividends unless the firm is reinvesting in expansion activities that may increase future earnings.
Dividend payout ratio = dividends per share/ earnings per share
2013 = $11.40/40.03 = 28.5%
2012 = $2.65/44.64 = 5.9%
2011 = $0.00/28.05 = 0.0%
Sometimes firms pay out a larger proportion of dividends to restore market confidence in their stock price. Apple may have paid out a larger proportion as dividends in 2013 as a result of falling market prices.
Dividend yield
Dividend yield shows dividends as a percentage of the market price of common stock (Fraser & Ormiston 2013).
Dividend yield = dividends per share/ market price of common stock
2013 = $11.40/$335 = 3.4%
2012 = $2.65/$589 = 0.4%
2011 = $0.00/$431= 0.0%
Dividends paid are a very small percentage of the market value of the common stock. However, it has improved dividend payments in 2013 compared to the other two years.
Additional sources: Industry center – semiconductor equipment & materials (2013) and Apple three-year financial history (2013).
Findings
Apple had better financial performance in 2012 than in the other two years. Apple’s share market value was higher in 2012 because of the optimism attributed to launching new products. Investor confidence declined with the ability of Apple to launch new products in 2013. Samsung has emerged as a dominant competitor through its innovative activities.
Apple kept a more efficient inventory than Samsung in the three years. It can be seen in Apple having a higher inventory turnover. There is a small difference between the quick ratio and the current ratio, which also indicates Apple’s efficient use of inventory. The difference between Samsung’s and Apple’s inventory turnovers can be explained by Samsung having a wider product differentiation. Apple’s inventory increased between 2012 and 2013 but reduced between 2011 and 2012. The large inventory could be a result of competitive forces that make inventories have slower movement.
Apple received cash on its receivables more often than it made payments. It could be one of the reasons that Apple has adequate cash flow through the three years. Apple may appear to put more pressure on distributors and dealers to make prompt payments than Samsung. Samsung appears to offer distributors and dealers more time, which may increase the availability of its products in shops.
Apple increasingly financed its activities from debts in 2013 compared to the other two years. It indicates an increased risk to shareholders.
Apple’s profitability has declined between 2012 and 2013. It was slightly higher than Samsung in 2012. Samsung’s profitability may catch up with Apple’s if Apple remains dormant on developing new products.
Apple still creates high value to shareholders, as can be seen in Apple’s market ratios compared to the industry’s average.
Conclusion
Apple performed well in most of the key indicators of efficiency. It maintained an efficient inventory than its major competitor. It was able to receive cash more promptly than it made payments to suppliers. As a result, the company had adequate cash flow. Apple maintains a lower debt to equity ratio than the industry average making it less risky than most firms in the industry. Apple was slightly more profitable than its key competitor in 2012. However, Samsung appears to be catching up. Apple used relatively more assets to gain profitability than Samsung. Samsung has a more efficient use of assets to generate sales than Apple. Apple needs to keep innovating new products if it wants to maintain the same level of profitability.
Reference List
Apple Inc. Form 10K. (2012). Web.
Apple Inc. Form 10K. (2013). Web.
Apple three-year financial history. (2013). Web.
Bora, K. (2013). Apple (AAPL) Q4 earnings 2013: Tim Cook says new product categories coming in 2014; An iWatch [Press release]. Web.
Fraser, L., & Ormiston, A. (2013). Understanding financial statements. Pearson Education [Lecture notes].
Industry center – semiconductor equipment & materials. (2013). Web.
Interim consolidated financial statements of Samsung Electronics Co., Ltd. and Subsidiaries. (2013). Web.
Lg Electronics Inc (066570: Korea SE). (2013). Web.
Samsung electronics annual report. (2012). Web.
Samsung Electronics Co Ltd (005930:Korea SE). (2013). Web.
Samsung Premiere 2013 Galaxy & ATIV. (2013). Web.