High Technology Corporation (HTC) is an established maker of a variety of electronic components, and it serves an international market. HTC is now fully-integrated wireless communication service for worldwide use. However, to establish its brand in the global market, it has to dominate in its B2B activities. In this regard, it is useful if HTC invests in a global electronic brand in the international market. In the assignment, Apple Inc. has been selected for investment by HTC. The paper would conduct the financial assessment of Apple from a comparative perspective, to provide investment feasibility for HTC.
Background and Industry
Apple is credited for revolutionizing the mobile phone industry with the launch of Apple iPhones. The concept of the mobile phone has completely changed after the phenomenal success of iPhones. The logo of “the world at your fingertips” has become a reality. Hence, the introduction of smartphones remains a competitive advantage for Apple over its competitors. The largest strategic decision, initiative, and gain achieved by Apple were in January 2007 when Steve Jobs introduced the first iPhone. The hallmarks of the device were widescreen iPod with touch controls, revolutionary mobile phone, and Internet communication all stored in one single device. The Times Magazine declared it to be the “Invention of the Year.” The introduction of iPhone was practically the re-invention of the phone by Apple. The introduction of iPhone was by all definitions a resource-based competitive advantage by the company. It was considered as a high-risk decision as the market was dominated by its competitors like Nokia, Samsung, and Motorola that controlled around 60% of the market share. The development of iPhone also led to the development of an adapted version of Apple’s OS X platform that is known as the iOS. Regarding the PC industry, one of the most strategic moves by the company was the introduction of iPads. It was a new device category that was described to be easier and more intuitive than a PC. The launch of iPhones and iPads were highly popular. However, both products had to face market saturation as Samsung and other competitors followed suit to produce similar, yet slightly differentiated smartphones and tablets. The smartphone features for Samsung phones consisted of larger screens and easy to access applications.
One of the strategic failures of Apple was the introduction of Apple TV in 2007. The device was an attempt to bring digital video into the living rooms. Apple has a strong customer base with firmly established loyalty. It is likely to receive a strong reception for the launch of Apple Watch. The competitive advantage of the company exists in the form of the innovative culture which Steve Jobs developed. It is, therefore, essential for the success of the Apple Watch, that the culture is maintained. Apple is the legacy of Steve Jobs whose figure is considered as a legend. The historic introduction and success of iPods, iPhones, and iPads have undoubtedly presented a challenge for the new CEO Tim Cook, to carry forward the legacy of Steve Jobs or make a mark on his accord. Regarding the competitive advantage, it seems that the company would need to adopt the positioning approach to competitive advantage (Carpenter, Bauer, & Erdogan, 2010). Presently, the company does not have any unique resource to achieve differentiation over its competitors.
Apple has also benefited by the adoption of the balanced scorecard approach. This model combines both financial and non-financial elements to provide a more holistic development and progress of the organization (Kaplan, and Norton, 2015). The financial performance of Apple improved significantly from its near bankruptcy position in 1997. However, the factors behind the revolution brought about by Steve Jobs were the focus of internal culture and research and development in the organization. It was $150 million worth of investment and two and a half years of research that brought about the launch and subsequent success of iPhone. Hence, the non-financial performance of quality culture and research and development was instrumental in bringing about a turnaround in the industry. Therefore, it is essential to ensure a balanced scorecard approach to achieve strategic superiority in the launch of Apple Watch and Apple Pay.
Financial performance of Apple about its primary competitor Samsung has been assessed in a comprehensive manner.
It can be observed that the revenues for Apple in 2015, 2014, and 2013 were recorded as $233,715 million, $ 182,795 million, and $170,910 million respectively. In contrast, the revenues recorded for Samsung for the similar period were $205,987 million, 692,667 million, and $103,613 million. It can be observed that the level of revenues for Apple is more consistent than Samsung. Whereas, Samsung recorded considerably higher revenue in 2014 about Apple, however, the fluctuation between the three years indicates inconsistency in revenue policies. It can be observed that Apple seems more favorable from the revenue perspective than Samsung.
Net Income recorded for Apple over the years for 2015, 2014, and 2013 were $ 37,037 million, $39,510 million, and $53,394 million, respectively. The net income earned by Samsung in the similar period are recorded as $23,082 million, $29,821 million, and $23,185 million. Whereas, Apple has had a declining trend for net income at a rate larger than that of Samsung, however, the amounts for net income of Apple are significantly greater than that of Samsung. Hence, it indicates that the shareholders can anticipate larger returns in the form of dividends for Apple than Samsung. Thus, profitability performance of Apple can be described as relatively better than Samsung.
Working capital is the amount of finance a company has after taking into account current liabilities from current assets. Hence, it effectively reveals the liquidity of capital of the company. The working capital recorded for Apple in the years of 2015, 2014, and 2013 are $8,768 million, $5,083 million, and $29,628 million. The working capital for Samsung has been recorded as $63,132 million, $59,444 million, and $40,335 million. Regarding cash flow situation, Samsung appears to be in a better position about Apple. Whereas Apple had an increasing trend in the last two years, however, it has had a fluctuating trend in the three years. It suggests inconsistency in cash flows that can have an adverse impact on day to day operations. Samsung has a declining trend in the last three years. However, the amount of working capital is significantly larger than Apple.
Net assets recorded for Apple in the years for 2015, 2014, and 2013 were $ 290,479 million, $231,839 million, and $207,000 million respectively. The net assets for Samsung in the similar period were recorded as $230,422,958 million, $214,075,018 million, and $181,071,570 million. In the analysis of net assets, it can be observed clearly that Samsung has far greater net assets than Apple. The net assets for Samsung are not only increasing at a rate greater than that of Apple but also, they are significantly greater in value. One of the reasons for this can be that Samsung is in existence for a period longer than Apple and provides a larger range of products.
The profitability ratios indicate the ability of the company to generate earnings in the context of its expenses and other costs. One of the ratios employed to assess the profitability of the company is operating margin ratio (Fridson, Fridson, & Alvarez, 2011). It determines the operating profit before interest and taxes earned by the company by its sales. Liquidity ratios are an essential indicator of the routine operations of the business. It indicates whether operations would be consistent or face cash flow difficulties. Moreover, it is also an indicator of the ability of an organization to convert its liquid assets into finances to meet its short-term liabilities. Thus, essentially the short-term insolvency position of the business can be determined by liquidity ratios (Shim, and Siegel, 2007). The current ratio is the ratio that analyzes the balance between the company’s liquid assets and dues. This analysis indicates the amount of assets available to cover the dues as the need arises. It is observed that the current ratio of Apple for the years 2015, 2014 and 2013 is 1.1 times, 1.08 times, and 1.68 times. The current ratio of Samsung for the years 2015, 2014, and 2013 is 2.21 times, 2.16 times, and 1.86 times. It is observed that the current ratio for Samsung is relatively better than that of Apple. Acid-test ratio is another tool to analyze the liquidity position of the company. The ratio ignores the least liquid asset, i.e. inventory. Hence, it is the measure of balance between the company’s liquid assets and liabilities. The ideal standard for a company with regards to acid-test ratio is 1.5. It is observed that the quick ratio of Samsung for the years 2015, 2014, and 2013 is 1.89 times, 1.73 times, and 1.61 times. The quick ratio of Apple for the years 2015, 2014, and 2013 is 0.82 times, 0.89 times, and 0.82 times. Acid-test ratios and current ratios show how quickly the company can convert its assets into cash. It can be observed that the current ratio for Samsung is relatively better than that of Apple.
Activity ratios analyze the management performances of the company (Peterson, & Fabozzi, 2012). It can be observed that the receivable ratio of Apple for the years 2015, 2014, and 2013 is 26.79 days, 30.51 days, and 25.66 days. The receivable ratio of Samsung for the years 2015, 2014 and 2013 is 46.53 days, 43.53, and 46.13 days. It can be observed that the activity ratio for Apple is relatively better than that of Samsung. The receivable days of the company indicates that the trade debtors take 50 days to make payments to the company. The number of times the stock is finished and replenished is called Inventory Turnover. It is the measure that indicates the number of times an inventory of a company would be sold and replenished over a period. It also shows the number of days it takes for the company to sell the inventory, which is referred to as inventory turnover period. The data shows that inventory turnover for Apple is 5.81, 6.30, and 4.37 for 2015, 2014, and 2013 respectively. The data also shows that the trade creditor days for the Apple are 85.57, 85.45, and 74.54 days respectively. It means that the company on average takes these days to pay off its creditors. In contrast, the inventory turnover for Samsung is 51.86, 48.88, and 48.22 for 2015, 2014, and 2013 respectively. The data also shows that the trade creditor days for Samsung are 41.15, 36.35, and 45.76 days respectively. The method of computing the financial ratios is as follows:
Return on equity evaluation
Return on equity is the profit earned by the company on its investment. Hence, it is an important ratio from the investment point of view. ROE for Apple is recorded to be 45%, 26%, and 14% for 2015, 2014, and 2013 respectively. ROE for Samsung is recorded as 1%, 1%, and 2% for 2015, 2014, and 2013 respectively. The statistics indicate that the return on equity for Apple is considerably better than Samsung, which is encouraging from the investment perspective. However, this perspective can be better comprehended if DuPont analysis is applied.
DuPont analysis reveals that return on equity is influenced by three factors: operating efficiency, asset utilization efficiency, and financial leverage. In this regard, it would be essential to analyze the profit margin, total asset turnover, and equity multiplier. The formula to compute DuPont analysis is as follows:
ROE = Profit margin * Total Asset Turnover * Equity Multiplier
It can be observed from the table that the ROE based on DuPont analysis for Apple is 61.52%, 53.13%, and 40.02% for 2015, 2014, and 2013 years respectively. In the case of Samsung, it can be observed that ROE based on DuPont analysis for the years 2015, 2014, and 2013 respectively is 15.16%, 15.98% and 27.64% (Financials.morningstar.com, 2016). Thus, it can be described that Apple has a relatively favorable situation from operating efficiency, asset utilization efficiency, and financial leverage situation. Therefore, it is likely that investment in Apple would yield favorable returns about Samsung. HTC can benefit from this position as Apple has a strong profitability position, and shareholders are expected to invest further from this perspective. Hence, HTC can benefit by engaging with Apple in B2B activities. Furthermore, an alliance with a brand as profitable as Apple would also enhance the image of HTC. Leverage measures evaluate the financing position of the company (Chan, 2012). The company is financed by a combination of equities and liabilities. It is in the benefit of the company if the finances are mostly based on equity than liabilities (Healy, and Palepu, 2012) Asset turnover ratio is the measure for determining the contribution of assets to the generation of the company’s revenue. It is determined by dividing the sales by assets.
Stock evaluation is fundamentally the most important aspect of investment analysis. The reason is that stock performance of the company is the indication of future performance of the company related to providing healthy returns to the shareholders. Earnings per share (EPS) are the level of earning which are achieved on each share (Gibson, 2009). EPS for Apple is reported as 9.46%, 9.28%, and 6.49% for the years 2015, 2014, and 2013. In contrast, the EPS for Samsung is reported as 13.64%, 15.31%, and 19.78% for 2015, 2014, and 2013 respectively. Apple has achieved the healthy rate of earnings per share and has an increasing trend. It indicates that it is likely that the company would be subjected to increased investments by shareholders.
Analysis of Apple Inc. from diverse perspectives with regards to investment feasibility. To derive an accurate picture of the scenario, the financial performance of Apple has been evaluated against that of Samsung. Regarding profitability assessment, it can be described that Apple has a more favorable outlook than Samsung. It has been further validated by DuPont analysis which determines profitability and returns on equity aspect from a variety of angles. However, it has also been observed that Samsung has a strong position from the financial health perspective, and it is less likely to face liquidity issues. The company is also in a position of advantage from cash flow operations. However, the financial health of the company alone cannot be considered as a primary factor for investment. The stock performance for Apple is also considerably better than Samsung with higher EPS. Hence, the investment is also likely to provide higher returns. Furthermore, the company has a large customer base and is renowned for its quality. Therefore, HTC by committing alliance with Apple would be able to enhance its customer base and promote its brand. Thus, by profitability, financial and non-financial assessment, it is recommended that HTC engages in operations with Apple Inc.
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