Assignment One Financial Statement Analysis

1. Calculate the ratios, and

2. Be able to interpret the ratios and analyze what these ratios mean or indicate.

First, review the financial data provided on Apples Annual Report:

https://seekingalpha.com/filing/4679100

Note that for this assignment we are using Apples most recent annual report (i.e., 10-K filing). As Apples fiscal year ends in September, we are using Apples annual report for the fiscal year that ended on September 28, 2019 and not Apples most recent quarterly report.

Tasks:

1. Using information from Apples most recent annual report, compute the following ratios:

Please include the formula and the figures you use from the financial statements.

Example: Cash Ratio = Cash/Current Liabilities = $40,000/$100,000 = 40%.

Showing your work will allow me to award partial credit and more accurate feedback if one of your ratios is incorrect. For ratios that require a share price, use $222 as this was approximately Apples share price when

the earnings were announced to the market. For ratios that require depreciation, use the amount reported for Depreciation and amortization in the Consolidated Statements of Cash Flows Statements.

For ratios that require shares outstanding, use the weighted average diluted shares outstanding of 4.648913

billion (in millions this is 4,648,913 million). Firms report a weighted average to account for the number of shares outstanding changing during the year. Firms also report a diluted number to account for additional shares that can be issued from the conversion of existing securities (such as employee stock options, restricted share units, etc.). Such conversion is important to account for as it dilutes a current shareholder's ownership stake. Thus, you should understand the difference between EPS and diluted EPS. The latter is the one most analysts use because it accounts for additional shares that can be issued from the conversion of existing securities.

The benefit of doing an assignment like this is that you appreciate the many nuances that exist when computing the ratios when compared with the textbook examples where all the information is given to you. An extremely important part of the financial statements are the Notes that accompany the statements. For example, Note 1 (which begins on page 34 of Apples 10-K) describes Apple's main accounting policies that underlie the reported numbers. It also shows how Apple computed its earnings per share. If you look at Note 2, you will find, among other information, expanded details about Apples cash position and marketable securities. In Note 3, you will find information about Apples interest income and interest expense. You need to use the interest expense amount reported here for computations that require an interest expense. In Note 6 you will find expanded information about Apples debt. These are but a few examples but it should give you an idea of the importance of the notes that accompany the financial statements.

2. Interpret the ratios (in one or two sentences per ratio) and comment on the financial condition of Apple in each of the five categories listed above.

3. Decompose the ROE using Du-Pont Analysis, i.e., decompose ROE into:

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier

= (NI/Sales) * (Sales/TA) * (TA/TE)

4. Compare each component of ROE from the Du-Pont Analysis above for Apples most recent fiscal year with its prior fiscal year(s) to understand any trends. Make sure to comment on any significant changes or any areas that warrant further examination.

5. EXTRA CREDIT: Decompose the ROE using the extended Du-Pont Analysis.

We know that ROE = Net Income/Sales x Sales/Assets x Assets/Equity (see ratio chart above)

An interesting thing to note here is that if we cross out our matched numerators and denominators, we end up with the simple equation:

Return on Equity = Net Income/Equity, which is very intuitive to view as income over equity.

ROE =

Each of these components can be calculated as follows:

ROE= EBIT/Sales x EBT/EBIT x NI/EBT x Sales/TA x TA/TE

The first three ratios together should equal the overall profit margin of the firm (NI/Sales). It is just further broken down so you can see a couple of things:

- The first ratio EBIT Margin tells us about the operational profitability of the firm

- The second tells us about the financing structure of the firm, i.e. how much is interest paid on debt affecting our profitability?

- The third ratio Tax Burden tells us about the impact of taxes on our profit