Apple and Microsoft Company Ratios Analysis

Executive Summary

Despite their differences Microsoft and Apple have been the most iconic organizationsthat have grown rapidly and conquered in their industry.Microsoft had the head-start in the industry having been founded in 1975 and a year later Apple came to existence. Both companies have thrived so fast making outstanding profit margins and growth contrast to some monolithic East India and Standard oils companies of decades ago. In order to understand the two companiesand determine the best among the two, we are going to consider some factor. Such, as Liquidity, asset efficiency, profitability, working capital management and Solvency. In this light we are going to contrast their ratios and also in depth review their financial, asset and industrial analysis.

Ratio Analysis of the Companies
Liquidity ratios.

This ratio shows the ability of a firm to settle or pay its short term liabilities as they become due together with its long term liabilities as they turn to current. Therefore liquidity ratios can be said to be the ratios showing a company’s cash levels and its ability to convert its other assets to cash to cater for its liabilities and obligations. Liquidity ratios include working capital ratios, current ratio, quick ratios and acid test ratios

a)Current ratio

The ratio is calculated by dividing current assets by current liabilities. Thecurrent ratio for apple was 1.68 in 2013 while that of Microsoft was 2.71.The following year the current ratio for apple decreased to 1.08 while that of Microsoft to 2.50. In 2015 the current ratio of able increased to 1.11.ForMicrosoft, itremained stagnant at 2.50. In 2016 that of apple increased further to 1.35 while that of Microsoft decreased to 2.35.in general, thecurrent ratio of apple took an uptrend while that of Microsoft went down through the three years.

Apple 2016

Current ratio = Current assets ÷ Current liabilities

= 106,869 ÷ 79,006 = 1.35

 

1. b) Quick ratio

It is calculated by adding up cash, shorttermmarketable and receivable and then dividing the result by current liabilities. The quick ratio of apple in 2013 was 1.40 while that of Microsoft was 2.53.in 2014 the ratios for the two companies decreased to 0.82 and 2.31 respectively. However, the quick ratio for apple increased to 0.89 in 2015 while that of Microsoft decreased to 2.30. In 2016 the ratio for apple increased to 1.22 while that of Microsoft decreased to 2.22.The quick ratio for apple increased through the three years but that of Microsoft decreased from 2014 to 2015 and from 2015 to 2016.

Apple 2016

Quick ratio = Total quick assets ÷ Current liabilities

= 96,454 ÷ 79,006 = 1.22

 

1. c) Cash ratio

It is calculated by adding cash plus short term marketable investment then dividing the result by current liabilities. ForMicrosoft, the cash ratio stood at 2.06 in 2013 in 2014 it decreased to 1.88. In 2014 the ratio again increased to 1.94 in 2015 but decreased to 1.91 in 2016.Conversely, apple saw its cash ratio decrease from 0.93 in 2014 to 0.40 in 2015. The ratio increased to 0.52 and in 2016 it further increased to 0.85.The cash ratio for apple increased from 2014 to 2015 and from 2015 to 2016.

 

Apple 20l6

Cash ratio = Total cash assets ÷ Current liabilities

= 67,155 ÷ 79,006 = 0.85

Solvency ratios

This ratio measure the ability of a company to cater for its long term obligations. They are also known as long term ratios. They include debt to capital, debt to equity and interest coverage ratios.

1. Debt to equity ratio

It is calculated by dividing total debts by shareholders equity. ForMicrosoftcorps,the debt to equity increased from 0.25 to 0.44 in 2015. In 2016 it further increased to 0.75. Apple’s debt to equity ratio increased gradually from 2014 to 2016. It moved from 0.32 to 0.54 and finally to 0.68 in 2016.

For apple 2016

Debt to equity = Total debt ÷ Shareholders’ equity

= 87,032 ÷ 128,249 = 0.68

 

1. b) Debtto capital ratio

It is calculated by dividing to debts by total debt added to shareholders equity. For Microsoft, the debt to capital ratio increased from 2014 to 2015 by 0.11 to stand at 0.31 in 2015.in 2016, it further increased to 0.43.the debt to capital ratio for apple in increased from 0.24 in 2014 to 0.35 in 2015 to 0.40 in 2016.

For apple 2016

Debt to capital = Total debt ÷ Total capital

= 87,032 ÷ 215,281 = 0.40

Profitability ratios

These ratios measure a company’s ability to make profitable sales out of its resources.

The ratios include gross profit margins, operatingmargin,net profit margin, return on equity and return on assts.

1. a) Gross profit margins

It states the revenue available to cover expenditures and operating costs in percentage. For apple Inc.,the gross profit margin increased between 2014 and 2015 but decreased but declined between 2015 and 2016.in 2014 the ratio was 38.59% while it was 40.06% in 2015 and 39.08%.on the other hand,Microsoft’s gross ratio was 68.82% in 2014.it decreased to 64.70% it further decreased to 61.58% in 2016.

1. b) Operating profit margin

It is calculated by dividing operating income by the company’srevenue. Apples operating profit margin increased from 20154to 2015. However from 2015 to 2016 it declined significantly. In 2014 the operating margin was 28.72% and 30.48% in 2015 and 27.84% in 2016. Microsoft had their operating profit margin at 31.97% in 2014. In 2015 it dropped to 19.41% but increased to 23.65% in 2016.

1. c) Net profit margin

It is calculated by dividing the net income by the company’s revenue.

The net profit margins of apple Inc. increased between 2014 and 2015 but deteriorated between 2015 and 2016 by a significant change. The net profit margin was 21.61%, 2.85% and 21.19% in 2014, 2015 and 2016 respectively. However,Microsoft had their ratios as 25.42% in 2014, 13.03% in 2015 and 19.69% in 2016.This was an increase for the three years consecutively.

Working capital management

It is they measure the efficiency with which a company caries out daily tasks example inventory management and receivable collections. Examples include net working capital, gross working capital and permanent working capital among others.

1. a) Net working capital

Calculatedby subtracting current liabilities from currentassets

Apple had its networking capital as $5318 in 2014, $5964 in 2015 and $6162 which was an improvement for the three years consecutively.

1. b) Permanent working capital

Calculatedas the minimum capital that should always be in the business.

For Apple, permanent capital was $1047million in 2014. However it improved to $1387 million in 2015 and dropped slightly to $1369 million in 2016. Microsoft 2016

 

Asset efficiency ratio

Measure the efficiency of a company in accomplishment of day to day tasks. They include net fixed asset turnover, equity turn over and total asset turn over.

 

Net fixed asset turnover

Calculated by dividing total asset by fixed asset. Apples net fixed turnover increased from 2014 to 2015 but decreased in 2016. Microsofts’s deteriorated for three consecutive years. That is it decreased from 2014 to 2015 and from 2015 to 2016.

Total asset turnover.

Calculated by dividing total revenue by total assets.

For Apple, asset turnover increased from 2014 to 2015 it however deteriorated in 2016. For Microsoft it improved in 2015 as compared to 2014. It however dropped in 2016. Therefore the trend was the same for the two companies.

 

Comparison of Ratios with Industry Ratios.

The key competitors in the industry are hp Inc., Intel corp. and cisco systems. The two companies operate under the industry of technology.

 

Liquidity ratios

1. A) Current ratio

The current ratio for the industry was 2.04 in 2014 and improved to 2.17 in 2015.

1. B) Quick ratio

The technology industry had their quick ratio at 1.73 in 2014 which later improved to 1.89 in 2015.

1. C) Cash ratio

The industry had its cash ratio at 1.26 in 2014 but improved to 1.44 in 2015. For the industry, the three ratio were all increasing.

Profitability ratios

1. A) Gross profit margins.

Cisco had gross margins of 58.91%, 60.38 and 62.87% for 2014, 2015 and 2016 respectively. Which is a key competitor. For HP Inc. the gross margins were 23.88%, 23.96% and 18.65% for the same years. Which is also a compitor.

1. B) Net profits margin.

The competitor HP Inc. Had the net margins as 4.50% for 2014,4.41% for 2015 and 5.17% for 2016. For the industry, the net profit margins were 19.30% in 2014 however, it increased to 17.22% in 2015.

1. C) Operating profit margin.

Intel had its operating profit margin for 2014, 2015 and 2016 as 27.47%, 25.29 %and 21.68% respectively. On the other hand,cisco Inc. had its margins as 19.82%, 21.91 and 25.71% respectively. For the industry, the operating margin s were 23.81% for 2014 and 22.54% in 2015. Which was a decrease from 2014.

Solvency ratios.

1. Debt to equity ratio

For the industry, the debt to capital ratio was 0.31 in 2014 in 2015 it increased to 0.43.

1. Debt to capital ratios

For the industry the ratio increase from0.24 in 2014 to 0.30 in 2015.

Working capital management.

a)Networking capital

Networking capital for the industry was $799 in 2014 and $860 in 2015 indicating an increase and an improvement.

1. b) Permanent working capital

In 2014 the industry permanent working capital was $1570million and improved to $1582 million in 2015.

Discussion and Interpretation of Ratios

Liquidity ratios

The higher the liquidity ratios the higher the companies safety in meeting its current liability. Generally the liquidity ratios for Microsoft are higher than those of apple. Therefore Microsoft is in a better position to meet its current liabilities in future, in addition the ratios of Microsoft are greater than one indicating financial health while some ratios of apple are less than one hence not so healthy financially.

Solvency ratios

A high solvency ratio is an indicator of financial strength by contrast, a low ratio signifies future financial struggles. Apple has higher debt to equity ratios than Microsofthence it means apple is better financially than Microsoft. Further the ratio of apple is increasing meaning it is in a better position to meet its long term obligations. The same case applies to the debt capital ratios. Hence apple is better placed in comparison to Microsoft in terms of financial strength.

Working capital management

Higher working capital indicates goodperformance. For apple the general performance is better than that of Microsoft. This is because the working capital of apple Inc. is higher than that of Microsoft.

Asset efficiency

High asset turnover indicates low profit margins while low asset turnover indicates a company’s high profit margins. The two companies saw their asset turnovers increase and then drop. This indicates improvement in profit margins for the two companies in 2016 as compared to the other years.

Discussion on Performance of the Company.

Based on the liquidity ratios of the industry. We can conclude that both companies are doing well. However,Microsoft is in a better position than most companies in the industry. Forapple, it is still in a good position to meet its current liabilities but it is far behind Microsoft in performance.

Using solvency ratios to compare the performance of the two companies, apple is better place in meeting its long term obligations. Comparing the two companies to the industry performance we can see that both are performing perfectly well. This is because the solvency ratios of the two companies are higher than the industry ratios.

Each company’s performance based on asset efficiency is good. However,some of the other companies in the industry are performing better since they have lowasset efficiency ratios implying good performance. Despitethis, both Microsoft and apple have their profits margins increasing hence there is hope for better performance in the industry..

For the two companies the performance based on working capital management is good. For apple it is better than that of Microsoft. Incomparison with other companies in the industry, the two companies are better off than others in the industry.

A Balanced Scores Card for an Organization

Balanced score card 1

Name                                                performance value    measure

HR STRATEGIES     46, 42%                       %

FINANCIAL PERSPECTIVE          81, 92%                       %

KPI profit increase per employee       81, 92%           81, 9    %

CUSTOMER PERSPECTIVE           40, 28%                       %

Inclusion         40, 28%           40, 2    %

Balanced score card 2          

Name                                          performance    value       measure

INTERNAL PROCESSES    21, 47%                       %

KPI data         15, 50%           15,500 score

Strategic analysis        0, 00% 0          %

Predictive analysis      0, 00% 0          %

Average hiring times0, 00%    101      days

Turnover          43, 00%           40        %

New employees           45, 00%           50        %

LEARNING AND GROWTH PERSPECTIVE40, 00%                 %

Time to new employees productivity  40, 00%           40        days

Employee entry level  30, 00%           60        score

Balanced score card 1 uses major components as financial perspective and customer perspective. The KPI strategy is used to measure performance while customer perspective is used to measure the degree of customer diversity and inclusion.

Balanced card 2 uses learning and growth perspective together with internal processes perspective. This indicators are used to show non-financial aspects affecting performance.

Measurement against KPI.

For Microsoft, theKPI seems to agree with the figures appearing in the ratios except for some instances. Some components such as unearned revenue components and product billing mix are however not captured. Therefore the strategies can be said to be working well. Forapple, although the KPI is not fully reflected in the rateanalyzed,it is however sufficient to say that the company’sKPI strategy are functional but improvements would be recommended.

Uses of KPI

Key performance indicators is important since it is usedto evaluate and make recommendations. Thisrecommendations are in turn used to assist the organization improve in future. If it is the key focus of a company KPI can be useful in solving of issues. By contrast if it is used solely it can lead to distortion of views on performance on an organization.

Advantages and disadvantages or ratio analysis and balanced score card.

Ratio analysis is important in establishment ofquantities and numerical relationship of two or more financial figures. These figures can also be used to show strengths and weaknesses of the company and its financial position(Stefanovska and Soklevski 2014). Inaddition, it assists in evaluation of some aspects of the firm.

Further ratio analysis is used in decision making, indication of profitability, indication of future solvency position, liquidityposition, comparingfirms, measurement of efficiency and communication among others.

On the other hand its disadvantages include, it is affected by problems related to the financial statements, different policies are used by different firms in accounting, there is no standard comparison and are affected by seasonal changes in data .

Conversely, balanced scorecard has the following advantages.it uses an approach that is more comprehensive and balanced in controlling and judging the performance of an organisatio.it also enables easy communication and understanding of the strategies and objectives of a company. It also draws the attention of an organization to its mission and vision hence management remain focused to it.it allows for integration of financial related goals with those that are not financial(Awadallah and Allam 2015).

The disadvantages includes it only considers performance in certain dimensions and not othrs.it also does not give recommendations on what should be done to improve performance. The balance score card has no specific way of controlling performance and goals. Further, the balance score card only limits itself to four perspectives and ignore other that may be important. Some of these include, social, managerial and workers welfare.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Stefanovska, L. and Soklevski, T., 2014. Benefits of Using Balanced Scorecard in Strategic and Operational Planning. Universal Journal of Management, 2(4), pp.165-171.

Awadallah, E.A. and Allam, A., 2015. A critique of the balanced scorecard as a performance measurement tool. International Journal of Business and Social Science, 6(7), pp.91-99.