Msft And Apple Shares Comparison
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Assessment
You are a young financial analyst and you are given the job to make a choice of investment in the computer industry. You are to make in an in-depth analysis of Apple and Microsoft shares, which will be divided in three parts:
A financial statement analysis whose aim is to help you to decide which firm you would prefer to invest in.
A portfolio analysis which will should help you to estimate the potential benefits of combining the two stocks in the same portfolio.
A valuation analysis which will help you decide if Apple is fairly valued compared to Microsoft.
To help you answer the questions, you should find in appendix most of the data needed. You are also free to use Internet or other sources of information to help you refine your answers (a special bonus for creativity will be awarded!).
FINANCIAL STATEMENT ANALYSIS
1) Assess the financial risk that the two companies bear (liquidity, solvency, leverage). Which company is, to your mind, the less financially risky company? Give as many arguments as possible.
Apple
Apple is financially well in general. It has recovered very fast given the huge amount of liabilities it has absorbed. In terms of liquidity, the company is very capable of paying its short-term debts. In terms of financing, it could be said that the company has regained the trust of its financers given the fact that the company is being greatly financed by its shareholders which is in fact increasing exponentially every year. Also, the company is doing very well in terms of debt management because it does not use debts anymore to finance its operations. The increasing number of shareholders and better profits are enough to finance the companys business operations. The only debt expense the company incurs is the past debt it has absorbed which is near clearance.
Apples stock has an expected average annual return of 31.0%. That is tremendous; surpassing even the returns of some leading emerging-markets fund portfolios (they have expected returns of up to 25%). But you are taking huge risk to get that great return. The risk (standard deviation) of Apple stock is 77, which is more than 3 times greater than the risk of leading emerging market portfolios.
In other words, youre taking roughly 250% more risk to get just 24% greater expected return. I think you will agree that logically, thats not a good deal.
Investment in Apple shares can be considered to be of High Risk due to the high level of competition in the markets that Apple is involved in, as well as the historical volatility of earnings in these markets.
Microsoft
Microsoft can be considered as a very healthy financially talking company, while observing to their liquidity ratios we see a path in the current ratio of more than 4 years of growing from 3.56 in 2002 to 3.81 in 2003 to 4.22 in 2004 to 4.83 in 2005. This is because even that the liabilities were growing, asset growth was more significant. So we can observe that in the past years Microsoft has been making significant cost reducing operations so now they have all, the leverage ratio, the quick ratio and the cash ratio in positive numbers meaning that the total amount of liabilities has been decreasing.
Also the company is doing really well in the debt management ratios, we can observe that the Total Debt/ Equity Ratio is 0.00 and the reason is constant grow in Total Assets even though total equity was increasing too.
The more debt in a companys capital structure, the greater the financial leverage risk. If business turns weak, there are some costs a company can easily reduce to protect its profits and preserve liquidity. This is a strong point for Microsoft which doesnt have anymore debt so they can reduce the leverage ratio (total assets divided by total stockholder equity) at a minimum of 1.8.
The company is IT industry which is always risky because of fast changing technology, demands and strong competition, its stock has Low Risk Rate, but at the same time Microsoft stock price looks under priced, almost all ratios comparing to industry averages are higher. Microsoft can be considered as a stable company to invest in, with a low risk shares, even that the industry where its from its a very volatile industry; Microsoft is one of the leaders and have been in the top for several years.
Answer:
Considering this information we conclude that the less financially risky company, is definitely Microsoft, as we saw, the strength of their financial performance gives the category of a less risky investment than Apple.
2) Assess the efficiency of the two companies. Which of the two companies is the most efficient one?
Management Effectiveness
There are three key measures of management effectiveness that are return on assets, return on equity and return on investment.
Return on assets (ROA)
Is calculated by taking net income from the income statement and dividing by the assets of the company. It tells you how much profit management makes for every dollar of assets. Youll find out just how good the management is at selecting the companys assets. The higher the ratio, the better and the continued high level over time is even better because it indicates management makes a habit of managing with efficiency.
Return on equity (ROE)
Is calculated by taking net income from the income statement and dividing by the equity of the company. It measures how much profit you make for every dollar of equity. Along with everything else, this takes into consideration how well the financing of the company is managed.
The percentages can be compared year over year and considered relative to industry composites both to reveal trends and a companys position versus its competitors.
Return on Investment
Return on investment measures