Case study on Companies Overview of in this section, the overview of both selected companies Microsoft Corporation and Apple Inc. is briefly presented.

Final Report 

Introduction of Apple Inc.

In this section, the overview of both selected companies Microsoft Corporation and Apple Inc. is briefly presented.

a) Microsoft Corporation of in this section, the overview of both selected companies Microsoft Corporation and Apple Inc. is briefly presented.

Microsoft Corporation is a world-leading corporation in the technology sector. The corporation was established in America in 1975 by Bill Gates and Paul Allen. Microsoft Corporation provides several technological products in international markets for all kind of customers including students, households and professional. Following the company's information, more than 151,163 employees all over the world are working for Microsoft Corporation to execute all business operations. 

b) Apple Inc. 

Apple Inc. is also an American multinational company. Apple Inc. trades its equity in the open market to get financing. During last year Apple Inc. successfully generated the net income of $55.256 billion. Additionally, Apple Inc. is a competitor of Microsoft Corporation for several products and services. The portfolio of Microsoft Corporation and Apple Inc. overlaps to some extent as both works in relatively same industries. For instance, the OS system, mobiles, and laptop are the key products of both companies.   

Aims and Objectives of Apple Inc.: 

i) To analyze the financial condition of both companies.

ii) To highlight the liquidity health of both companies.

iii) To select an appropriate company for work after comparative analysis. 

Financial Ratios of Apple Inc.

The Gross Profit Margin Ratio can be calculated after dividing the gross profit by the total revenue amount stated in the income statement. Gross profit margin represents the profitability of the companies. While the debt to assets ratio is also calculated by using the values of total liabilities and total assets presented in the balance sheet of Microsoft Corporation and Apple Inc. for the fiscal year 2019. Debt to asset ratio is used as a measure to represent the solvency condition of both companies in the same year duration. 

Moreover, days sales in receivable ratio represent the company’s strength towards the collection of receivables. While on the other hand, accounts payable turnover ratio is an indicator of a company's strength to pay back loans and liabilities by using sales revenue. The ratio represents how many times a company is capable to pay back its liabilities to suppliers during a fiscal year (or defined accounting period). The day's sales in receivable and payable turnover ratios put a highlight on the managerial strategies and policies of a company to collect receivable and pay back the debt to suppliers. Although, a similar measure activity ratio is known as inventory turnover ratio which is also used to measure the profitability of an organization. Higher inventory turnover ratio indicates higher sales recorded by the company in that particular accounting period. 

Furthermore, liquidity ratios such as quick and current ratios are the most important measure to determine the financial strength of a company to meet its short term obligations and liabilities. The current ratio is a measure of liquidity for a company. Current ratio indicates the strength of a company to pay back its short term liabilities by using current assets. While on the other hand, Quick ratio is a measure of liquidity similar to the current ratio. However, the major difference between the two ratios is caused by the inventory. In a quick ratio, we subtract inventory from the current assets before dividing it by the current liabilities. A higher liquidity ratio from the minimum required ratio "1"  is more favourable for the company as it requires fewer struggles to pay off short term liabilities.  

Financial Ratio Analysis of Apple Inc.

1. Gross Profit Margin of Apple Inc.

             The gross profit margin for Microsoft Corporation is 65.9%. While for Apple Inc. gross profit margin is 37.8%. Comparatively, the gross profit margin for Microsoft Corporation is better than Apple Inc. A greater ratio indicates a higher probability of reasonable profit on sales if companies successfully manage MOH or all overhead cost. Thus, comparatively, Microsoft Corporation is expected to generate profit more than Apple Inc.  

2. Net Profit Margin of Apple Inc.

                Net profit margin is calculated based on net income recorded in the income statement of Microsoft Corporation and Apple Inc. for the fiscal year 2019. Calculated net profit margin ratio for Microsoft Corporation is 31.2%. While net profit margin calculated for Apple Inc. is 21.2%. According to the comparative analysis between Microsoft Corporation and Apple Inc., the net profit margin of Microsoft Corporation is greater than Apple Inc. Therefore, it can be said that Microsoft Corporation is capable to cover all cost and expenses with a higher profit margin than Apple Inc. Therefore, the profitability of Microsoft Corporation is greater than Apple Inc.

3. Debt to Assets of Apple Inc.

              According to the statement of financial position, total liabilities and total assets for Microsoft Corporation are $184,226 and $286,556. While recorded values for total liabilities and total assets in the balance sheet of Apple Inc. are $248,028 and $338,516. Thus, calculated debt to assets ratio for Microsoft Corporation and Apple Inc. are 0.64 and 0.73. The debt to assets ratio of Microsoft Corporation and Apple Inc. below the minimum required limit (1) show that a higher portion of the debt is not financed by the assets of Microsoft Corporation and Apple Inc. However, comparatively debt to assets ratio of Microsoft Corporation is better than Apple Inc (Needles & Powers, 2010).

4. Accounts Receivable Turnover of Apple Inc.

              According to the analysis, accounts receivable turnover ratio of Microsoft Corporation is 2.36. However, Apple Inc. has a relatively greater ratio for accounts receivable turnover which is 11.28. Thus, comparative analysis shows that Apple Inc. is managing its accounts receivable collection in a more efficient way than Microsoft Corporation. Moreover, Apple Inc. is capable to pay its debt and loans to the debtor easily and quickly as compared to the Microsoft Corporation. 

5. Day’s Sales in Receivable of Apple Inc.

              A suitable day’s sales outstanding ratio for large size corporation is more than 45 days. Currently, Apple Inc. has 32.35 day's sales receivable ratio. While day's sales in the receivable ratio for Microsoft Corporation is 154.7 days. Thus, based on comparative analysis day’s sales in the receivable ratio for Microsoft Corporation is better than Apple Inc. Comparatively, Apple Inc. is having deficiency for its collection activities and rigorous behaviour for customers which can directly hamper sales of Apple Inc.

6. Accounts Payable Turnover of Apple Inc.

             Accounts payable turnover ratio for Apple Inc. and Microsoft Corporation is 2.84 and 1.81 respectively. Comparative analysis of accounts payable turnover ratios for both companies show that a higher ratio of accounts payable turnover for Apple Inc. is relatively more favourable as compared to the Microsoft Corporation (Chandra, 2007). 

7. Payable Turnover in Days of Apple Inc.

               Payable turnover in days is a similar measure to days sales receivable. However, both measures have different meanings for financial managers in the decision-making process. Payable turnover in days ratio is calculated as 201.8 (converted to 202 days) and 128.54 (converted to 129 days) for Microsoft Corporation and Apple Inc. The comparative analysis represents that Microsoft Corporation is not enough strong to make payments quickly to their suppliers. Somehow, a higher ratio for Apple Inc. can be because of strict receivable collection policies of suppliers.  

8. Inventory Turnover of Apple Inc.

                The inventory turnover ratio for Microsoft Corporation and Apple Inc. are 6.89 and 35.97 (in order). The comparative analysis of both companies for this inventory turnover ratio conclude that Apple Inc. is having a higher demand for their products therefore their sales are greater than Microsoft Corporation. Thus, comparatively inventory turnover ratio of Apple Inc. is better than Microsoft Corporation. 

9. Day’s Sales in Inventory of Apple Inc.

           Day’s sales in inventory ratio for Microsoft Corporation and Apple Inc. are 52.99 (53 days) and 10.15 (around 11 days). Following the comparative analysis, the situation of Microsoft Corporation is better than Apple Inc (Annualreports.com, 2019). 

10. Cash Conversion Cycle of Apple Inc.

                The cash conversion cycle (CCC) is an indicator of companies capability to convert all its investment in inventory and other related resources which can produce cash flows in the form of sales revenue. The cash conversion cycle of Microsoft Corporation and Apple Inc. are calculated by using days inventory outstanding, days sales outstanding, and days in payable outstanding. The results for CCC are 5.83 and -86.05 for Microsoft Corporation and Apple Inc. Comparatively, the analysis found that Apple Inc. has a negative value for CCC because of which they are more capable to quickly convert inventory in cash as compared to Microsoft Corporation. Thus, comparatively situation of Apple Inc. is better than Microsoft Corporation. 

11. Working Capital of Apple Inc.

            Working capital can be calculated by subtracting the current liabilities from current assets for the same accounting period. According to the balance sheet, current assets of Microsoft Corporation and Apple Inc. are $169,662 and 131,339 respectively. While on the other hand, the current liabilities of Microsoft Corporation and Apple Inc. are $58,488 and $115,929 (in order). The working capital for Microsoft Corporation and Apple Inc. are $111,174 and $15,410. Comparatively,  working capital for Microsoft Corporation is better than Apple Inc (Mergers & Inquisitions / Breaking Into Wall Street, 2014).

12. Current Ratio of Apple Inc.

         Following the calculation work, the current ratio for Microsoft Corporation and Apple Inc. are 2.9 and 1.13 (from former to later). The comparative analysis represents that the current ratio of Apple Inc. is more favourable than Microsoft Corporation. A suitable measure of the current ratio is 1.5. However, comparatively, Apple Inc. will struggle more than Microsoft Corporation to pay back its current liabilities and obligations (such as loan and accounts payable) while using its current assets (e.g. cash and inventory). Although, both companies will not need to sell out their plant and fixed assets to meet these obligations as both companies are having healthy liquidity conditions. 

13. Quick Ratio of Apple Inc.

            According to the calculation, the quick ratio of Microsoft Corporation and Apple Inc. are 2.86 and 1.10 respectively. Comparative analysis shows that financing of Microsoft Corporation is relatively secure than Apple Inc. Moreover, Microsoft Corporation is capable to convert its current assets quickly in the cash flow stream to meet all liabilities due in one-year duration (or less than this). However, both companies do not require external funding and liquidation of non-current assets to cover up all short term liabilities (Accountingtools.com, 2018).  

Preferred Company for Work of Apple Inc.

Following the above comparative analysis of Microsoft Corporation and Apple Inc., Microsoft Corporation is performing relatively better than Apple Inc. Even at some points, financial ratio analysis indicated the better condition of Apple Inc. in comparison to Microsoft Corporation however still I would prefer Microsoft Corporation over Apple Inc. The key reason behind this decision is higher profitability Microsoft Corporation than Apple Inc. Following the outcomes of profitability ratio analysis (gross profit margin and net profit margin), Microsoft Corporation is capable to generate profit more than Apple Inc. Therefore, I would select Microsoft Corporation for work. By working in a profit-generating company I would have higher chances of commission and incentives. Moreover, chances of bankruptcy remain low which increases job security. Thus, considering the benefits of higher profitability a better option to work is Microsoft Corporation. 

Conclusion of Apple Inc.

            The whole discussion concludes that financial ratio analysis and data extracted from financial statements (balance sheets and income statement) can explain the financial strength of a company to meet its obligations and produce a profit at the end of all business operations. Summarizing analysis, Microsoft corporation is generating more profit as compared to Apple Inc. While the liquidity condition of both companies is strong. Financial activities such as receivable collection and payment for payables of Apple Inc. are better than Microsoft Corporation. 

References of Apple Inc.

Accountingtools.com. (2018). Ratio analysis. Retrieved from www.accountingtools.com: https://www.accountingtools.com/articles/ratio-analysis.html

Annualreports.com. (2019). Apple Inc. Retrieved from www.annualreports.com: http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_AAPL_2019.pdf

Chandra, P. (2007). Financial Management. Tata McGraw-Hill Education.

Mergers & Inquisitions / Breaking Into Wall Street. (2014). What Working Capital Means in Valuation and Financial Modeling. Retrieved from www.youtube.com: https://www.youtube.com/watch?v=Kkf_eyB3sTI&amp=&feature=youtu.be

Needles, B. E., & Powers, M. (2010). Financial Accounting. Cengage Learning.