Executive summary

Any successful business owner is constantly evaluating the performance of his or her
company, comparing it with the company's historical figures, with its industry competitors, and
even with successful businesses from other industries. To complete a thorough examination of a
company's effectiveness, however, you need to look at more than just easily attainable numbers
like sales, profits, and total assets. You must be able to read between the lines of the financial
statements and make the seemingly inconsequential numbers accessible and comprehensible.

This massive data overload could seem staggering. Luckily, there are many well-tested
ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify
and quantify your company’s strengths and weaknesses, evaluate its financial position, and
understand the risks you may be taking.

Ratios are highly important profit tools in financial analysis that help financial analysts
implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and
interest coverage. Although ratios report mostly on past performances, they can be predictive too,
and provide lead indications of potential problem areas.

Ratio analysis is primarily used to compare a company’s financial figures over a period of
time, a method sometimes called trend analysis. Through trend analysis, you can identify trends,
good and bad, and adjust your business practices accordingly. You can also see how your ratios
stack up against other businesses, both in and out of your industry.

So, in this report we analyze Apple’s financial ratios in three continuous years, and
compare these figures with those of HP and IBM – the two giant competitors of Apple.

The first part is an overview of Apple Inc. which includes the year of establishment, the
main products, and the innovative and sales development in recent years.

The second part is the financial ratios analysis, in which we calculate the ratios of three
companies mentioned in three recent years and comment about these figures. It includes four kinds
of ratios. The first is liquidity ratios, contains current ratio and quick ratio. The second is leverage
ratios, contains debt ratio, long term debt to total capitalization ratio, and time interest earned ratio.
The third is operating efficiency ratios which include inventory turnover ratio, days sales
outstanding (DSO), the fixed assets turnover ratio, and the total assets turnover ratio. The last kind
of ratios is profitability which contains profit margin on sales, basic earning power (BEP), return
on total assets (ROA), and return on common equity (ROE).

The third, also the last part is some specific recommendations about the financial
conditions of Apple compared with IBM and HP in the three years.
 I- Overview of Apple Inc.

Apple was originally founded as a computer company in 1977 but has evolved into a
personal electronics solution.

The company's products include the Macintosh (Mac) family of personal computers, the
iconic iPod portable music player, the iPhone handsets, and, the iPad tablet device. Additionally,
Apple sells a variety accessories and peripherals including application software, printers, storage
devices, speakers, and headphones. Under the leadership of Steve Jobs, Apple's co-founder who
returned to head the company in 1996, Apple has demonstrated considerable acumen in
implementing high-technology in product design and marketing, generating sustained enthusiasm
and substantial growth.

In the past several years, Apple has been at the forefront of innovation within consumer
electronics, launching key products geared towards the high-end mobile market (the iPhone) and
the home entertainment industry (Apple TV). On June 9, 2008, Apple announced the iPhone 3G,
which featured increased speed, improved design, and lower pricing. The iPod has grown faster
than any other music player in consumer electronics history, accounting for half of the company's
revenue from the sales of hardware and content. Its rising brand equity has generated a "halo
effect" contributing to increases in sales of Mac desktops and laptops and the opportunity to
penetrate existing markets. In fact, its popularity among consumers has turned the tech company
into one of the highest revenue per square foot retailers in the world.

Apple reported $15.7 billion in revenue in 3Q10, a 61% increase over the previous year's
quarter, as well as a 78% surge in its quarterly profit, buoyed by strong iPad and iPhone 4 demand.
The company reported that the iPhone 4's antenna problems, a highly publicized signal algorithm
glitch on the device, did not have a significant impact on demand. Additionally, it stated that the
newly-released iPad, thought of as an ancillary competitor to the Macintosh computer, did not
result in cannibalization, as Mac sales rose 33% quarter-over-quarter.

In this quarter, Apple sold 3.47 million Macintosh computers (33% QoQ increase), 8.4
million iPhones (61% QoQ increase), 9.41 million iPods (8% QoQ decline), and 3.27 million
iPads.

With these good figures and booming sales of Apple through new innovative products in
2010, whether Apple is a stable growing company to invest in or not? We will solve this question
through analysis of Apple financial statement in 2007, 2008, 2009, in comparison with its two
other giant competitors, IBM and HP.

II- Financial Ratios Analysis:

1. Liquidity Ratios

a. Current Ratio:

The current ratio is calculated by dividing current assets by current liabilities:

Current Asset
Current ratio =
Current Liabilities

- Apple Company:

Current Asset 21,956,000

In 2007: Current ratio = = = 2.36
Current Liabilities 9,299,000

Current Asset 34,690,000

In 2008: Current ratio = = = 2.46
Current Liabilities 14,092,000

Current Asset 31,555,000

In 2009: Current ratio = = = 2.74
Current Liabilities 11,506,000

- Hewlett-Packard Company:

Current Asset 47,402,000

In 2007: Current ratio = = = 1.21
Current Liabilities 39,260,000

Current Asset 51,728,000

In 2008: Current ratio = = = 0.98
Current Liabilities 52,939 ,000

Current Asset 52,539,000

In 2009: Current ratio = = = 1.22
Current Liabilities 43,003,000

- IBM:

Current Asset 53,177,000

In 2007: Current ratio = = = 1.20
Current Liabilities 44,310,000

Current Asset 49,004,000

In 2008: Current ratio = = = 1.15
Current Liabilities 42,435,000

Current Asset 48,935,000

In 2009: Current ratio = = = 1.36
Current Liabilities 36,002,000
 The current ratio of Apple has kept increasing since 2007. It means that, current asset of
Apple increased faster than current liabilities. From 2007 to 2009, the current ratios of Apple are
also always higher and more stability than its competitors, HP and IBM.

We can see that current ratios of HP were down in 2008 comparing to the previous year
and even lower than 1 (current ratio of HP 2008 is about 0.977). And current ratios of IBM
decreased in 2009, although they are still higher than 1. These falls show that current liabilities
increased faster than current asset; perhaps these two companies have met some financial troubles.

In 2009, Apple has a very strong current ratio of 2.74 times to cover its short-term
obligations. With a current ratio of 2.74, Apple could liquidate its current assets at only 37 percent
of book value and still pay off current creditors in full.

The analysis of current ratios of Apple shows that Apple has strong and reliable capability
to meet short-term obligations.

b. Quick Ratio:
Inventories often is typically the least liquid of a company’s current assets, the quick ratio
(acid-test ratio) measures the company’s ability to pay off short-term obligations without relying
on the sale of inventories. The quick ratio is calculated by deducting inventories from current
assets and then dividing the remainder by current liabilities:

Current Asset−Inventories
Quick Ratio =
Current Liabilities

- Apple:

Current Asset−Inventories 21,956,000−346,000

In 2007: Acid Test Ratio = = = 2.32 times
Current Liabilities 9,299,000

Current Asset−Inventories 34,690,000−509,000

In 2008: Acid Test Ratio = = = 2.42 times
Current Liabilities 14,092,000

Current Asset−Inventories 31,555,000−455,000

In 2009: Acid Test Ratio = = = 2.70 times
Current Liabilities 11,506,000

- Hewlett-Packard Company:

Current Asset−Inventories 47,702,000−8,033,000

In 2007: Acid Test Ratio = = = 1.10 times
Current Liabilities 39,260,000
 Current Asset−Inventories 51,728,000−7,879,000
In 2008: Acid Test Ratio = = = 0.83 times
Current Liabilities 52,939,000

Current Asset−Inventories 52,539,000−6,128,000

In 2009: Acid Test Ratio = = = 1.08 times
Current Liabilities 43,003,000

- IBM:

Current Asset−Inventories 53,177,000−2,664,000

In 2007: Acid Test Ratio = = = 1.14 times
Current Liabilities 44,310,000

Current Asset−Inventories 49,004,000−2,701,000

In 2008: Acid Test Ratio = = = 1.09 times
Current Liabilities 42,435,000

Current Asset−Inventories 48,935,000−2,494,000

In 2009: Acid Test Ratio = = = 1.29 times
Current Liabilities 36,002,000

The quick ratios of Apple are also strong, from 2007 to 2009, they are always above 2. It
means that the firm can fully meet its short-term obligation without having to liquid inventories.
The quick ratio of Apple is much better than HP and IBM. Quick ratios of HP and IBM are
just about 1, HP quick ratios in 2007, 2008 are even lower than 1. It means that HP must liquid
inventories to pay off full debts for creditors.
The comparison of quick ratios among Apple, HP and IBM shows that Apple has a
stronger and stability financial position and more credits in investors’ eyes than these others.

2. Asset Management Ratios/ Operating efficiency ratios:

a. Inventory turnover ratio:

The inventory turnover ratio is defined as sales divided by inventories:

Sales
Inventory turnover ratio =
Inventories

- Apple Company:

Sales 24,006,000
In 2007: Inventory turnover ratio = = = 69.38 times
Inventories 345,000

Sales 32,479,000
In 2008: Inventory turnover ratio = = = 63.81 times
Inventories 509,000
 Sales 42,905,000
In 2009: Inventory turnover ratio = = = 94.30 times
Inventories 455,000

- Hewlett-Packard Company:
Sales 104,286,000
In 2007: Inventory turnover ratio = = = 12.98 times
Inventories 8,033,000

Sales 118,364,000
In 2008: Inventory turnover ratio = = = 15.02 times
Inventories 7,879,000

Sales 114,552,000
In 2009: Inventory turnover ratio = = = 18.69 times
Inventories 6,128,000

- IBM Company:

Sales 98,786,000
In 2007: Inventory turnover ratio = = = 37.08 times
Inventories 2,664,000

Sales 103,630,000
In 2008: Inventory turnover ratio = = = 38.37 times
Inventories 2,701,000

Sales 95,758,000
In 2009: Inventory turnover ratio = = = 38.40 times
Inventories 2,494,000

In 2009, as a rough approximation, each item of Apple’s inventory is sold out and
restocked, or “turned over,” 94.30 times. Besides, Hewlett-Packard Company’s turnover is 18.69
times; IBM Company is 38.40 times. After analyzing the inventory turnover ratio between these
companies in 3 years (2007, 2008, 2009) above, we can see that Apple’s turnover is much higher
than remaining companies. Moreover, within the last 3 years, the inventory turnover ratio is
increasing. This suggests that Apple is holding small inventories. This ratio is, of course, effective,
and it represents an investment with a high rate of return.

b. Days sales outstanding (DSO):

Days sales outstanding also called the “average collection period” (ACP), is used to
appraise accounts receivable, and it is calculated by dividing accounts receivable by average daily
sales to find the number of days’ sales that are tied up in receivables. Thus, the DSO represents the
average length of time that the firm must wait after making a sale before receiving cash, which is
the average collection period.

Receivables Receivables
DSO = =
Average Sales per day Annual Sales/365
 - Apple Company:

Receivables 5,196,000
In 2007: DSO = = = 79.00 days
Annual Sales/365 24,006,000/365

Receivables 6,936,000
In 2008: DSO = = = 77.95 days
Annual Sales/365 32,479,000/365

Receivables 5,435,000
In 2009: DSO = = = 46.24 days
Annual Sales/365 42,905,000/365

- Hewlett-Packard Company:

Receivables 28,999,000
In 2007: DSO = = = 101.50 days
Annual Sales/365 104,286,000/365

Receivables 29,620,000
In 2008: DSO = = = 91.34 days
Annual Sales/365 118,364,000/365

Receivables 19,761,000
In 2009: DSO = = = 62.96 days
Annual Sales/365 114,552,000/365

- IBM Company:

Receivables 31,884,000
In 2007: DSO = = = 117.81 days
Annual Sales/365 98,786,000/365

Receivables 28,823,000
In 2008: DSO = = = 101.52 days
Annual Sales/365 103,630,000/365

Receivables 26,392,000
In 2009: DSO = = = 100.60 days
Annual Sales/365 95,758,000/365

(Note that in this calculation we assumed a 365-day year).

In 2007, the day sales outstanding of Apple Company are 79 days. Up to 2009, this figure
dropped to 46 days. The trend in DSO over the past few years has been rising. However, the DSO
of H-P Company and IBM Company are always much higher. So, these figures are outstanding
indicates that customers of Apple Company, on the average, are paying their bills on time. This is
effective for Apple of funds that it could use to invest in productive assets. Conversely, the fact
that customers of two remaining companies are paying late may signal that the customers is in
financial trouble, in which case these companies may have a hard time ever collecting the
receivable. In conclusion, this ratio is, again, indicating the effective action of Apple Company.
 c. The fixed assets turnover ratio:

The fixed assets turnover ratio measures how effectively the firm uses its plant and
equipment. It is the ratio of sales to net fixed assets:

Sales
Fixed assets turnover ratio = Assets ¿
Net ¿

- Apple Company:

Sales 24,006,000
In 2007: Fixed assets turnover ratio = Assets ¿ = = 13.10 times
Net ¿ 1,832,000

Sales 32,479,000
In 2008: Fixed assets turnover ratio = Assets ¿ = = 13.23 times
Net ¿ 2,455,000

Sales 42,905,000
In 2009: Fixed assets turnover ratio = Assets ¿ = = 14.52 times
Net ¿ 2,954,000

- Hewlett-Packard Company:

Sales 104,286,000
In 2007: Fixed assets turnover ratio = Assets ¿ = = 13.37 times
Net ¿ 7,798,000

Sales 118,364,000
In 2008: Fixed assets turnover ratio = Assets ¿ = = 10.92 times
Net ¿ 10,838,000

Sales 114,552,000
In 2009: Fixed assets turnover ratio = Assets ¿ = = 10.17 times
Net ¿ 11,262,000

- IBM Company:

Sales 98,786,000
In 2007: Fixed assets turnover ratio = Assets ¿ = = 6.65 times
Net ¿ 15,081,000

Sales 103,630,000
In 2008: Fixed assets turnover ratio = Assets ¿ = = 7.24 times
Net ¿ 14,305,000

Sales 95,758,000
In 2009: Fixed assets turnover ratio = Assets ¿ = = 6.76 times
Net ¿ 14,165,000

In 1997, the inventory turnover ratio of Apple is lower than H-P Company. This suggests
that Apple is not reasonable to invest in fixed assets such as HP. However, in the following years,
this ratio increases rapidly and surpasses H-P and IBM Company. (In 2009, the inventory turnover
ratio of Apple is 14.52 times; meanwhile this ratio of H-P is 10.17 and IBM is 6.76). So, these
numbers indicating that the firm is using its fixed assets more intensively than are other firms in its
industry. In conclusion, Apple Company is quite reasonable in investment in its fixed assets.

d. The total assets turnover ratio:

The final asset management ratio, the total assets turnover ratio, measures the turnover of
the entire firm’s assets; it is calculated by dividing sales by total assets:

Sales
Total assets turnover ratio =
Total Assets

- Apple Company:

Sales 24,006,000
In 2007: Total assets turnover ratio = = = 0.95 times
Total Assets 25,347,000

Sales 32,479,000
In 2008: Total assets turnover ratio = = = 0.82 times
Total Assets 39,572,000

Sales 42,905,000
In 2009: Total assets turnover ratio = = = 0.90 times
Total Assets 47,501,000

- Hewlett-Packard Company:

Sales 104,286,000
In 2007: Total assets turnover ratio = = = 1.18 times
Total Assets 88,699,000

Sales 118,364,000
In 2008: Total assets turnover ratio = = = 1.04 times
Total Assets 113,331,000

Sales 114,552,000
In 2009: Total assets turnover ratio = = = 0.99 times
Total Assets 114,799,000

- IBM Company:

Sales 98,786,000
In 2007: Total assets turnover ratio = = = 0.82 times
Total Assets 120,431,000

Sales 103,630,000
In 2008: Total assets turnover ratio = = = 0.95 times
Total Assets 109,524,000

Sales 95,758,000
In 2009: Total assets turnover ratio = = = 0.88 times
Total Assets 109,022,000
 In 2008, the total assets turnover ratio of Apple Company is lower than two remaining
companies – H-P Company and IBM Company. These figures maybe suggest that Apple’s ratio is
somewhat below the industry average, indicating that the company is not generating a sufficient
volume of business given its total asset investment. Sales should be increased, some assets should
be sold, or a combination of these steps should be taken. However, in 2009, this rate is different.
The total assets turnover ratio of Apple is 0.90 times. This ratio is between the ratio of IBM is 0.88
and the ratio of H-P is 0.99. So, this suggests that the average assets of Apple generated more
revenue than the previous years. However, Apple Company should still pay more attention in
using assets effectively. Sales should be increased, some assets should be sold, or a combination of
these steps should be taken.

3. Leverage ratios:

In finance, leverage is a general term for any technique to multiply gains and losses.
Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.
Leverage ratios are any ratio used to calculate the financial leverage of a company to get an idea of
the company's methods of financing or to measure its ability to meet financial obligations. There
are several different ratios, but the main factors looked at include debt, equity, assets and interest
expenses.

a. Debt ratio
The ratio of total liabilities to total assets is called the debt ratio, or sometimes the total
debt ratio. It measures the percentage of funds provided by sources other than equity:

Total Liabilities
Debt ratio =
Total Assets

- Apple Company:

Total Liabilities 10,815,000

In 2007: Debt ratio = = = 42.67%
Total Assets 25,347,000

Total Liabilities 18,542,000

In 2008: Debt ratio = = = 46.86%
Total Assets 39,572,000

Total Liabilities 15,861,000

In 2009: Debt ratio = = = 33.39%
Total Assets 47,501,000

- Hewlett-Packard Company:
 Total Liabilities 50,173,000
In 2007: Debt ratio = = = 56.57%
¿ tal Assets 88,699,000

Total Liabilities 74,389,000

In 2008: Debt ratio = = = 65.64%
Total Assets 113,331,000

Total Liabilities 74,282,000

In 2009: Debt ratio = = = 64.71%
Total Assets 114,799,000

- IBM Company:

Total Liabilities 91,961,000

In 2007: Debt ratio = = = 76.36%
Total Assets 120,431,000

Total Liabilities 96,058,000

In 2008: Debt ratio = = = 87.70%
Total Assets 109,524,000

Total Liabilities 86,385,000

In 2009: Debt ratio = = = 79.24%
Total Assets 109,022,000

Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against
creditors’ losses in the event of liquidation. Stockholders, on the other hand, may want more
leverage because it magnifies expected earnings. Apple’s debt ratios in the last three years were all
smaller than 50 percent, which means that its creditors have supplied less than half the total
financing. While the debt ratios of HP and IBM was all higher than 50 percent. All the three
companies here have the trend of debt ratio increase in 2008 and lightly decrease in 2009. The
reason for this trend, with Apple and HP, is because of total assets increase. But in the case of
IBM, the main reason is the change of total liabilities. According to these figures, we can see that
IBM has the highest leverage, and Apple is the lowest among the three companies. This means that
expected earnings of HP and IBM is higher than that of Apple. But it’s also riskier for stockholders
who invested in HP and IBM in comparison with Apple.

b. Long term Debt to Total Capitalization ratio

A ratio showing the financial leverage of a firm, calculated by dividing long-term liabilities
by the amount of capital available:

L/T Liabilities
L/T Debt to Total Capitalization ratio =
L/T Debt + Preferred Share+ Equity

- Apple Company:
 1,516,000
In 2007: L/T Debt to Total Capitalization ratio = = 10.43%
0+0+14,532,000

4,450,000
In 2008: L/T Debt to Total Capitalization ratio = = 21.16%
0+0+21,030,000

4,355,000
In 2009: L/T Debt to Total Capitalization ratio = = 13.76%
0+0+31,640,000

- Hewlett-Packard Company:

10,913,000
In 2007: L/T Debt to Total Capitalization ratio = = 25.07%
4,997,000+0+38,526,000

21,450,000
In 2008: L/T Debt to Total Capitalization ratio = = 46.01%
7,676,000+ 0+38,942,000

31,279,000
In 2009: L/T Debt to Total Capitalization ratio = = 57.40%
13,980,000+ 0+40,517,000

- IBM Company:

47,651,000
In 2007: L/T Debt to Total Capitalization ratio = = 91.56%
23,573,000+ 0+28,470,000

53,623,000
In 2008: L/T Debt to Total Capitalization ratio = = 145.49%
23,391,000+ 0+13,466,000

50,383,000
In 2009: L/T Debt to Total Capitalization ratio = = 113.04%
21,932,000+ 0+22,637,000

A variation of the traditional debt-to-equity ratio, this value computes the proportion of a

company's long-term liabilities compared to its available capital. By using this ratio, investors can
identify the amount of leverage utilized by a specific company and compare it to others to help
analyze the company's risk exposure. Generally, companies that finance a greater portion of their
capital via liabilities are considered riskier than those with lower leverage ratios. As we can see
above, Apple always has the lowest portion of long term debt to total capitalization ratio in
comparison with HP and IBM. So, we can conclude that Apple’s activities are much safer than
HP’s and IBM’s.

c. Time interest earned ratio

The times-interest-earned (TIE) ratio is determined by dividing earnings before interest
and taxes (EBIT) by the interest charges:
 EBIT
Time interest earned ratio =
Annual Interest Expense

- Apple Company:

Can’t calculate time interest earned ratio because there’s no value of annual interest
expense.

- Hewlett-Packard Company:

EBIT 9,466,000
In 2007: Time interest earned ratio = = = 32.75 times
Annual Interest Expense 289,000

EBIT 10,802,000
In 2008: Time interest earned ratio = = = 32.83 times
Annual Interest Expense 329,000

In 2009: Can’t calculate time interest earned ratio because there’s no value of annual interest
expense.

- IBM Company:

EBIT 15,100,000
In 2007: Time interest earned ratio = = = 24.71 times
Annual Interest Expense 611,000

EBIT 17,388,000
In 2008: Time interest earned ratio = = = 25.84 times
Annual Interest Expense 673,000

EBIT 18,540,000
In 2009: Time interest earned ratio = = = 46.12 times
Annual Interest Expense 402,000

Times Interest Earned or Interest Coverage is a great tool when measuring a company's
ability to meet its debt obligations. When the interest coverage ratio is smaller than 1, the company
is not generating enough cash from its operations EBIT to meet its interest obligations. The
Company would then have to either use cash on hand to make up the difference or borrow funds.
Typically it is a warning sign when interest coverage falls below 2.5. So, all the three companies
here are at good ratio of times interest earned. Especially, Apple had no long term debt, then no
annual interest expense. It means that they don’t have to worry about paying debts like HP and IBM.
And all their earnings would be used for further business activities or shared among the
stockholders.

4. Profitability:

a. Profit margin on sales

 The profit margin on sales, calculated by dividing net income by sales, gives the profit per
dollar of sales:

Net inome
Profit margin on sales =
Sales

- Apple Company:

Net inome 3,496,000

In 2007: Profit margin on sales = = = 14.56%
Sales 24,006,000

Net inome 4,834,000

In 2008: Profit margin on sales = = = 14.88%
Sales 32,479,000

Net inome 8,235,000

In 2009: Profit margin on sales = = = 19.19%
Sales 42,905,000

- Hewlett-Packard Company:

Net inome 7,264,000

In 2007: Profit margin on sales = = = 6.97%
Sales 104,286,000

Net inome 8,329,000

In 2008: Profit margin on sales = = = 7.04%
Sales 118,364,000

Net inome 7,660,000

In 2009: Profit margin on sales = = = 6.69%
Sales 114,552,000

- IBM Company:

Net inome 10,418,000

In 2007: Profit margin on sales = = = 10.55%
Sales 98,786,000

Net inome 12,334,000

In 2008: Profit margin on sales = = = 11.90%
Sales 103,630,000

Net inome 13,425,000

In 2009: Profit margin on sales = = = 14.02%
Sales 95,758,000

Apple’s profit margin on sales is higher than HP and IBM. Besides, it increases from
14.56% in 2007 to 19.19% in 2009. This result has been occurred because costs of Apple are very
low. Net income is also called income after tax and interest. Therefore, interest charges will pull
net income down, and since sales are constant, the result will be a relatively low profit margin. In
such a case, the high profit margin would not indicate an operating problem rather it would
indicate a difference in financing strategies. Thus, Apple uses a higher rate of return on its
stockholders’ investment than use of financial leverage.

Apple’s profit margin o sales in 2009 is 19.19 percent higher than 6.69 percent of Hp and
14.02 percent of IBM, it means that if Apple, HP and IBM have $100 on revenue, Apple will earn
$19.19, HP will earn $6.69 and IBM will earn $14.02 on profit. And $100 on revenue of Apple in
2008 earns $14.88. Therefore, $100 on revenue of Apple in 2009 will earn more than in 2008 and
remaining companies in 2009. It shows that Apple has managed costs efficiency and effectiveness.

b. Basic earning power (BEP)

The basic earning power (BEP) ratio is calculated by dividing earnings before interest and
taxes (EBIT) by total assets:

EBIT
Basic earning power ratio =
Total Assets

- Apple Company:

EBIT 5,008,000
In 2007: Basic earning power ratio = = = 19.76%
Total Assets 25,347,000

EBIT 6,895,000
In 2008: Basic earning power ratio = = = 17.42%
Total Assets 39,572,000

EBIT 12,066,000
In 2009: Basic earning power ratio = = = 25.40%
Total Assets 47,501,000

- Hewlett-Packard Company:

EBIT 9,466,000
In 2007: Basic earning power ratio = = = 10.67%
Total Assets 88,699,000

EBIT 10,802,000
In 2008: Basic earning power ratio = = = 9.53%
Total Assets 113,331,000

EBIT 9,415,000
In 2009: Basic earning power ratio = = = 8.20%
Total Assets 114,799,000

- IBM Company:

EBIT 15,100,000
In 2007: Basic earning power ratio = = = 12.54%
Total Assets 120,431,000
 EBIT 17,388,000
In 2008: Basic earning power ratio = = = 15.86%
Total Assets 109,524,000

EBIT 18,540,000
In 2009: Basic earning power ratio = = = 17.01%
Total Assets 109,022,000

This ratio shows the raw earning power of the firm’s assets, before the influence of taxes
and leverage, and it is useful for comparing firms with different tax situations and different degrees
of financial leverage. Apple is also with higher ratio than remaining companies.

In 2009, Apple’s BEP is 25.40% higher than 17.42 percent in 2008 and remaining
companies. It means that if Apple invests $100 on assets for operating, it will earn $25.40 on
EBIT. In 2008, it earns $17.42. In 2009, Apple’s BEP increases by 7.98 percent and the causing of
EBIT from operating increase highly, and the rate of EBIT’s growth is higher than the rate of
revenue’s growth.

In 2009, Apple runs operation more effective than last year.

c. Return on total assets (ROA)

The ratio of net income to total assets measures the return on total assets (ROA) after
interest and taxes:

Net Income
Return on total assets (ROA) =
Total Assets

- Apple Company:

Net Income 3,496,000

In 2007: Return on total assets (ROA) = = = 13.79%
Total Assets 25,347,000

Net Income 4,834,000

In 2008: Return on total assets (ROA) = = = 12.22%
Total Assets 39,572,000

Net Income 8,235,000

In 2009: Return on total assets (ROA) = = = 27.34%
Total Assets 47,501,000

- Hewlett-Packard Company:

Net Income 7,264,000

In 2007: Return on total assets (ROA) = = = 8.19%
Total Assets 88,699,000

Net Income 8,329,000

In 2008: Return on total assets (ROA) = = = 7.35%
Total Assets 113,331,000
 Net Income 7,660,000
In 2009: Return on total assets (ROA) = = = 6.67%
Total Assets 114,799,000

- IBM Company:

Net Income 10,418,000

In 2007: Return on total assets (ROA) = = = 8.65%
Total Assets 120,431,000

Net Income 12,334,000

In 2008: Return on total assets (ROA) = = = 11.26%
Total Assets 109,524,000

Net Income 13,425,000

In 2009: Return on total assets (ROA) = = = 12.31%
Total Assets 109,022,000

In 2009, the return on total assets of Apple is 27.34%, while 6.67 percent of HP, and 12.31
percent of IBM. This ratio measures the performance of the company without regard to financial
structure. This high return results from (1) the company’s high basic earning power plus (2) low
interest costs resulting from its above-average use of debt, both of which cause its net income to be
relatively high than remaining companies. So, this ratio is, again, indicating effective operations
of Apple Company.

d. Return on common equity (ROE)

Ultimately, the most important, or “bottom line,” accounting ratio is the ratio of net income
to common equity, which measures the return on common equity (ROE):

Net Income
Return on common equity (ROE) =
Common Equity

- Apple:

Net Income 3,496,000

In 2007: Return on common equity (ROE) = = = 24.06%
Common Equity 14,532,000

Net Income 4,834,000

In 2008: Return on common equity (ROE) = = = 22.99%
Common Equity 21,030,000

Net Income 8,235,000

In 2009: Return on common equity (ROE) = = = 26.31%
Common Equity 31,640,000

- Hewlett-Packard Company:

Net Income 7,264,000

In 2007: Return on common equity (ROE) = = = 18.85%
Common Equity 38,526,000
 Net Income 8,329,000
In 2008: Return on common equity (ROE) = = = 21.39%
Common Equity 38,942,000

Net Income 7,660,000

In 2009: Return on common equity (ROE) = = = 18.91%
Common Equity 40,517,000

- IBM Company:

Net Income 10,418,000

In 2007: Return on common equity (ROE) = = = 36.59%
Common Equity 28,470,000

Net Income 12,334,000

In 2008: Return on common equity (ROE) = = = 91.59%
Common Equity 13,466,000

Net Income 13,425,000

In 2009: Return on common equity (ROE) = = = 59.31%
Common Equity 22.637,000

Stockholders invest to get a return on their money, and this ratio tells how well they are
doing in an accounting sense. In 2009, Apple’s 26.31 percent return is below the 59.31 percent of
IBM and higher than 18.91 percent of HP. It means that if having $100 on common share invests
in operating; Apple will receive $26.31 on net income and it’s higher than $22.99 earnings in
2008. This causing is that the rate of net income’s growth is higher than the rate of common
equity’s growth.
 Conclusion and recommendation

Financial Ratios Apple HP IBM Assess

ment
2007 2008 2009 2007 2008 2009 2007 2008 2009
1. Liquidity Ratios
a. Current ratio (times) 2.36 2.46 2.74 1.21 0.98 1.22 1.20 1.15 1.36 Good
b. Quick ratio 2.32 2.42 2.70 1.10 0.83 1.08 1.14 1.09 1.29 Good
(times)
2. Asset management
a. Inventory turnover 69.38 63.81 94.30 12.98 15.02 18.69 37.08 38.37 38.40 Good
ratio (times)
b. DSO (days) 79.00 77.95 46.24 101.50 91.34 62.96 117.81 101.52 100.60 Good
c. Fixed assets turnover 13.10 13.23 14.52 13.37 10.92 10.17 6.65 7.24 6.76
ratio (times)
d. Total assets turnover 0.95 0.82 0.90 1.18 1.04 0.99 0.82 0.95 0.88
ratio (times)
3. Leverage Ratios
a. Debt ratio (%) 42.67 46.86 33.39 56.57 65.64 64.71 76.36 87.70 79.24
b. L/T Debt to total 10.43 21.16 13.67 25.07 46.01 57.40 91.56 145.49 113.04
capitalization ratio (%)
c. Time interest earned - - - 32.75 32.83 - 24.71 25.84 46.12
ratio (times)
4. Profitability Ratios
a. Profit margin on sales 14.56 14.88 19.19 6.97 7.04 6.69 10.55 11.90 14.02
(%)
b. BEP (%) 19.76 17.42 25.40 10.67 9.53 8.20 12.54 15.86 17.01
c. Return on total assets 13.79 12.22 27.34 8.19 7.35 6.67 8.65 11.26 23.31
(%)
d. Return on common 24.06 22.99 26.31 18.85 21.39 18.91 36.59 91.59 59.31
equity

- After analyzing the Asset Management Ratios/Operating efficiency ratios between these

companies in 3 years (2007, 2008, 2009), we can see that Apple’s ratio is more effective
 than remaining companies. Moreover, within the last 3 years, these ratios continue to
increase. So, it shows that Apple Company is quite reasonable in investment in its assets
and effective in its business. However, Apple Company should still pay a little attention in
using assets more effectively in future. Sales should be increased, some assets should be
sold, or a combination of these steps should be taken.
- Leverage allows a financial institution to increase the potential gains or losses on a position
or investment beyond what would be possible through a direct investment of its own funds.
- The most obvious risk of leverage is that it multiplies losses. A corporation that borrows
too much money might face bankruptcy during a business downturn, while a less-levered
corporation might survive. For instance, an investor who buys a stock on 50% margin will
lose 40% of his money if the stock declines 20%. So, in this case of Apple, it’s very safe
for the shareholders to invest in Apple’s stocks. At least, in the last three years, Apple had
no debt, no annual interest expense, but an increasing total assets, which assure the
investors’ profit.
We have results from http://ycharts.com/companies/AAPL/eps#zoom=5

Index Apple
2008 2009 Change

Net Income $1.78 $3.67 206.18%

EPS=
Common ShareOutstanding

Price per Share 15.83 25.79 162.92%

P/E ratio =
Earnings per Share
(Average)
Price to book value (P/BV) = 3.31 5.33 161.03%
(Average)
Market price per share
Book value per share
Reference

1. Apple’s Price to Book Value:

http://ycharts.com/companies/AAPL/price_to_book_value#zoom=5
2. P/B Ratio http://en.wikipedia.org/wiki/P/B_ratio
3. Financial Ratios http://en.wikipedia.org/wiki/Financial_ratios
4. Principles of Corporate Finance 7th Edition.
5. Apple’s Finance Information and Financial Statement http://finance.yahoo.com/q?s=AAPL
6. HP’s Finance Information and Financial Statement http://finance.yahoo.com/q?s=HP
7. IBM’s Finance Information and Financial Statement http://finance.yahoo.com/q?s=IBM
8. Apple’s Stock quota and company profile
http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=AAPL:US
9. Apple report first quarter results http://www.apple.com/pr/library/2010/01/25results.html