The assignment involves analysis of public traded company specifically an Multi National Corporation which has been trading on exchange for past 10 years and has some type of international influence. The analysis shall encompass the following element of finance mainly financial analysis of company, decision making, theoretical underpinning of modern portfolio theory, evaluation of financial risk and measurements associated with it. Further, the assignment also evaluates the assessment of risk and ethics in an international setting which is in relation to investments and finance. (Yahoo Finance, 2018)
The company that has been chosen for analysis is Apple Incorporated which is trading at USD 171.53
Apple Incorporated was founded by two college drop outs Mr. Steve Jobs and Mr. Steve Wozniak. The duo brought a new revolution in the computer generation. (Angelique Richardson, 2008)
The company is a Multinational Corporation dealing in wide range of electronic products encompassing mobiles, laptops, personal computer, tablets, i-pods etc. It became the largest traded corporation in the world in terms of market capitalisation on 30th June 2015 and the valuation of the company is approximately 1 trillion USD.
For the purpose of conducting financial analysis of company, the annual report of past three years of the company has been analysed. The details of the analysis is presented here-in-under:
The Gross profit margin of the company is computed by dividing the gross profits of the company by the sales of the company. The computation has been detailed here-in-below:
|
Sl. No. |
Particulars |
2018 |
2017 |
2016 |
|
1 |
Total Revenue |
265595 |
229234 |
215639 |
|
2 |
Total Cost |
163756 |
141048 |
131376 |
|
3 |
Gross Profit (1-2) |
101839 |
88186 |
84263 |
|
4 |
Gross profit Margin (3/1) |
38.34% |
38.47% |
39.08% |
On perusal of the above, it may be inferred that the Gross profit margin of the company has been consistent for the past three years and stands at near about 40% of revenue of the company.
The Net profit margin of the company is computed by dividing the Net profits of the company by the sales of the company. The computation has been detailed here-in-below:
|
Sl No |
Particulars |
2018 |
2017 |
2016 |
|
1 |
Total Revenue |
265595 |
229234 |
215639 |
|
2 |
Net Profit |
59531 |
48351 |
45687 |
|
3 |
Gross profit Margin (2/1) |
22.41% |
21.09% |
21.19% |
On perusal of the above, it can be inferred that net profit of the company has increased by 1% and has been approximately consistent over three years but represent a good return on sales.
The Operating profit margin of the company is computed by dividing the operating profits of the company by the sales of the company. The computation has been detailed here-in-below:
|
Sl No |
Particulars |
2018 |
2017 |
2016 |
|
1 |
Total Revenue |
265595 |
229234 |
215639 |
|
2 |
Total Cost |
194697 |
167890 |
155615 |
|
3 |
Operating Profit (1-2) |
70898 |
61344 |
60024 |
|
4 |
Operating profit Margin (3/1) |
26.69% |
26.76% |
27.84% |
On perusal of the above, it can be inferred that operating profit of the company has been stable over the period but represent a good return on sales.
The Return on Equity is computed by dividing the net profits of the company by the equity of the company. The computation has been detailed here-in-below:
|
Sl. No |
Particulars |
2018 |
2017 |
2016 |
|
1 |
Equity |
107147 |
134047 |
128249 |
|
2 |
Net Profit |
59531 |
48351 |
45687 |
|
3 |
Return on Equity (2/1) |
55.56% |
36.07% |
35.62% |
Note: For simplification purpose of average of equity has not been done
On perusal of the above, it can be inferred that return on equity has taken a huge leap in 2018 compared to 2017 and company is providing a very good return to its investors over the period.
The Current Asset Ratio is computed by using total of current asset and total of current liabilities and dividing the former by later. It represents the working capital of the company and the ideal ratio is 2. The computation has been detailed here-in-below:
|
Sl. No |
Particulars |
2018 |
2017 |
2016 |
|
1 |
Total Asset |
131339 |
128645 |
106869 |
|
2 |
Total Liabilities |
116866 |
100814 |
79006 |
|
3 |
Current Ratio (1/2) |
1.124 |
1.276 |
1.353 |
On perusal of the above, it can be inferred that the current ratio of the company is poor and does not have sufficient working capital but before making a strong step in this regard one needs to look at the industry.
The Debt to Equity ratio is computed by using total of Equity and total of long term debts and dividing the later by former. It represents the structure of funding of the company and the ideal ratio is 2. The computation has been detailed here-in-below:
|
Sl. No |
Particulars |
2018 |
2017 |
2016 |
|
1 |
Debt |
141712 |
140458 |
114431 |
|
2 |
Equity |
107147 |
134047 |
128249 |
|
3 |
Debt -Equity Ratio (1/2) |
1.32 |
1.05 |
0.89 |
On perusal of the above, it can be inferred that company is increasingly relying on debt as the ratio has seen a large increase over the period. Further, the beveefit of trading on equity is clearly witnessed on account of increasing Return on Equity.
On basis of the above, it can be seen that Apple Inc. has been performing well over the years and has been providing stable return over the years. Further, the company is also enjoying the benefit of trading on equity and the same shall be witnessed over years to come. The company is an ideal investment for stable investors with long term vision and believes in being the growth part of the company.
Modern Portfolio Theory or in other term mean- variance analysis is a modern theory under portfolio management whereby the return is maximised for a given level of risk. The theory relies on the benefit of diversification and is the extension of the same. The theory believes that is better to hold a range of asset with different risk compared to a single asset as the same results in cutting of risk and maximisation of profit. The theory has been devised by Harry Markowitz.
In terms of Modern Portfolio Theory, it is assumed that investors are rational and risk averse and the risk and reward moves hand in hand. Further, an efficient frontier is created by means of risk reward combination. The frontier represents highest level of return for a given level of risk which is presented by standard deviation of the portfolio. Portfolios with a combination below the efficient frontier shall not be efficient and accordingly shall not be chosen and vice versa. (A Modern Portfolio Theory Approach to Asset Management in the listed South African Property Market)
The theory is explained via an example. Supposedly, there are the following three portfolios in the market with the following risk and return as detailed in the table:
|
Sl. No |
Particulars |
Risk |
Return |
|
1 |
Portfolio A |
12% |
20% |
|
2 |
Portfolio B |
17% |
20% |
|
3 |
Portfolio C |
18% |
20% |
On perusal of the above, it can be seen that that Portfolio C is representative of efficient frontier as it provides the highest return for a given level of risk which is 20% in the given example. Further modern portfolio theory efficient frontier has been presented via a graph here-in-below:
Financial Risk is the possibility of the shareholder or other investor will lose out their money when they invest in a company in which debt is present and company is not in a position to pay out its financial obligations. In layman terms, the risk of default of debt and losing out of money of shareholders is financial risks. The major type of financial risks are detailed here-in-below:
Apple Incorporated is exposed to the following financial risks:
When a company goes international it is exposed to a variety of risk and ethical requirement relative to finance and investments among which some of them have been detailed here-in-below:
Apple Inc has maintained highest standard of ethics through its vision, mission and objectives. Apple Incorporated has addressed the following international ethics issue successfully encompassing the following:
The company has been named as one of the cleanest organisation by world peace. Further, the company has protected its intellectual property rights through American IP laws and has never been accused of imitating or stealing innovations or technology of other companies. The company has been socially proactive.
The company has outsourced its work to Asia through its sub-contractor Foxconn. Further, the company has tried to maintain or reduce the environmental impact on account of production of materials in those countries. (mallon, 2014)
The risk under an international setting has been detailed here-in-below:
Apple Inc. has been exposed to a range of risk with recently China imposing restrictions on Apple and India forcing Apple to establish its plant in India to continue selling their products in India exposes company to a wide range of risk other than those detailed herein.
Conclusion
On perusal of the above analysis on decision front to invest in Apple Inc., it can be seen that company is earning stable return and is an ideal choice of investment for long term returns as the company has been providing steady and good return to investor. Further, the financial risk of the company actual figures cannot be plotted on account of non-availability of annual report of the company for 2018 and 2017 in the public domain. Further, the company has tried to comply with the ethical requirements under an international setting but has been subject to a variety of litigations and constraints especially on tax avoidance front in Ireland and Luxembourg. In addition, the company is exposed to risk in an international setting in the form of different laws of different countries, compliance, domestic preference, domestic competition etc. Despite above the company is an ideal investment on account of good return and increasing sales.
A Modern Portfolio Theory Approach to Asset Management in the listed South African Property Market. (n.d.). Retrieved December 13, 2018, from core.ac.uk: https://core.ac.uk/download/pdf/39667232.pdf
Angelique Richardson, I. (2008, April). Apple Computer, Inc. . Retrieved December 13, 2018, from www.loc.gov: https://www.loc.gov/rr/business/businesshistory/April/apple.html
CFA Institute. (2018). Liquidity Risk. Retrieved December 13, 2018, from www.wallstreetmojo.com: https://www.wallstreetmojo.com/liquidity-risk/
Damodaran, A. (n.d.). Understanding Risk II: The risk in Stocks. Retrieved December 13, 2018, from people.stern.nyu.edu: https://people.stern.nyu.edu/adamodar/pdfiles/invphilslides/session3.pdf
mallon, k. (2014, December 9). Apple’s Ethical Corporate Culture. Retrieved December 13, 2018, from prezi.com: https://prezi.com/edlk5uks_2vv/ethics-in-international-an-apple-inc-case-study/
Yahoo Finance. (2018, December 13). Apple Inc. (AAPL.SW). Retrieved December 13, 2018, from in.finance.yahoo.com: https://in.finance.yahoo.com/quote/AAPL.SW/history?p=AAPL.SW
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