Achieving Financial Security
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IntroductionAchieving financial security now and in the future is very important. To this end, it is important for individuals to make sound investment decisions that will ensure the achievement of financial security now, and in the future. Consequently, there are various types of investments from which an individual can pick the most appropriate to invest in. An investor can choose to invest or put his or her funds in a fixed earnings investment with minimal risk or an investment with a higher risk but better returns prospects. In this case, there are two types of investment options available, that is, a fixed earning bank account with an interest rate of 5 percent per annum. This is a fixed earnings investment with very low risk. On the other hand, there is an option of investing in stock of a listed company with the likelihood of higher returns as the company grows. However, as a result of the uncertainty associated with stock prices, investing in a stock has a higher risk compared to investing in a fixed earnings type of investment such as a putting the money in bank account or buying treasury bills or bonds.Problem StatementConsidering the argument presented above, in this case, the investor has to choose between putting his or her money in a fixed earnings investment with a lower risk or put the same in the stock of a company with a higher risk and a prospective higher rate of return. Based on calculated financial ratios and a qualitative analysis, the investor will decide and choose between keeping the money in a bank account with a 5% annual interest rate and investing in stock of a listed company. The analysis will facilitate the investor to make a decision on whether to keep the $100,000 in a savings account earning 5% per annum or invest in additional shares of a company listed in the stock exchange in the United States with a good financial performance and dividend paying history. Further, the company should have good future growth prospects; this is discerned from its current strategies, industry analysis, and the global operating environment. Based on this, Apple, Inc. one of the leading technological companies, not only in the United States but also globally was selected. Apple, Inc. is an American Multinational that specializes in design, manufacture, and marketing of various consumer electronics and supporting products such as the iPhone, iPod, iPad, Mac, Apple Watch, Apple TV, and consumer and professional software that run on most of Apple, Inc.’s devices.AnalysisUsing information gleaned from Apple, Inc.’s website, financial statements, and MarketWatch.com, it is evident that for the last five years, Apple, Inc. has posted continuous growth results in its financial performance. The company has over the years to grow to be the leading technological company in the United States in terms of Market Capitalization and revenues among other parameters; beating Microsoft, Alphabet, Inc., Verizon Communications, Oracle, Corp, AT&T and other leading technological and related companies in the United States. Using the financial statement of the company for the last five years, it is evident that the company has recorded very good performance in revenues, profitability, earnings per share, return on equity, return on assets, return on investment, and the overall valuation of the company. Further, an analysis of these ratios, and comparing with those of another global market leader like Samsung, demonstrates that Apple, Inc. has outperformed the company on various financial grounds. With consistent growth in profitability indicators in the last five years, the company has recorded pre-tax profit margin, gross profit margin, and net profit margin of 29.3%, 39.8%, and 21.5% respectively for FY 2014/15. This indicates that the company has been profitable for the last five years and there is a high likelihood of remaining profitable in future.
Further, a comparison of Apple, Inc.’s financial ratios against the Industry average, demonstrates that Apple’s performance is above the industry average for trailing twelve months, and five-year average. Return on equity, return on investment, and other profitability ratios of Apple, Inc. demonstrate consistent growth over the last five years. A scrutiny of the balance sheet and income statement shows that the company has favorable liquidity and solvency ratios. This demonstrates that the company is capable of meeting its financial obligations in the short-term without going bankrupt or becoming insolvent. The company has a current ratio of 1.1, and a quick ratio of 1.07. In addition, a calculated solvency ratio of 38% demonstrates Apple, inc. would not default on its financial obligations. On the other hand, a look at the industry and the general global economic and technological outlook demonstrates that Apple, Inc. has immense growth potential as a market leader in the industry driven by innovation and a customer focused strategy that seeks to continuously design, manufacture, and distributes exciting products. In addition, a consideration of how the micro and macro environments of the company will influence its operations shows that Apple, Inc. moving forward is going to remain one of the top performing technological companies. This is because the company has continued investment in research and design to come up with new and innovative products. Further, settlement of legal cases, patenting of new designs and products, and improved reputation for high quality and reliable products demonstrates that the stock of the company is an ideal investment for short-term and long-term investors.ConclusionA quantitative and qualitative analysis of the company will enable an investor to have an understanding of the financial performance of the company and have an understanding of the operating environment of the company. With this, an investor will identify the risks associated with investing in a specific company through a stock listed in the stock exchange. An investor should be risk-averse; he or she should go for investments that have reasonable risk exposure, an investment that does not increase an investor’s risk exposure. A financial ratios analysis, micro, and macro-environmental analysis will provide an insightful understanding of a company’s performance and the risks associated with investing in a particular company. Consequently, Apple, Inc.’s shares are the most appropriate investment. Compared to leaving the money in the account, which will earn a standard 5% interest rate per annum, an investment in Apple’s shares will provide a consistent dividend payout with an opportunity for growing the value of the investment through improved price of the company’s stocks in the bourse. InformationAmount($)100,000 Bank Annual Interest Rate0.05 Option 1Option 2 Savings AccountInvest in Apple Inc. Stocks Company Vs IndustryApple, Inc. Vs Industry Ratios Apple, Inc.Industry Revenue/Share TTM39.5332.7 Basic EPS9.286.45 Diluted EPS9.226.4 Book Value/Share MRQ23.4620.17 Tangible Book Value/Share MRQ21.8415.79 Cash/Share MRQ11.459.12 Cash Flow/Share TTM10.568.17 Return on Equity TTM37.90%31.29% Return on Equity 5YA38.48%29.44% Return on Assets TTM16.52%15.07% Return on Assets 5YA21.62%17.19% Return on Investment TTM21.63%19.27% Return on Investment 5YA28.64%22.47% Comparison With SamsungComparison With Major Industry Competitor Operating MarginNet Margin Apple28.80%21.64% Samsung15.20% 11.14% Figure 1: Apple, Inc. and Industry Financial Statistics