Financial Investment Strategy
Investment is a way of engaging money into stock with an aim of getting profits. Investors and financial advisors follow their own strategies in choosing the appropriate investment opportunity, which are guided by the companies’ rationale. For the perfect company of choice to be obtained, the companies’ risk must be addressed on the investors’ point of view. These risk analysis determines whether the investor will be able to bear risks involved and continue with the investments in the company (Blessing, 2011). This essay addresses the rationale for a company of choice for investment which is supported by the investors’ investment strategies. In addition, financial ratios for Apple Inc. Company are addressed as well as the company’s operational risks with appropriate ways of minimizing occurrence of the risks.
Rationale for Apple Inc. Company as the U.S public traded company for investment
When considering rationale for choosing an investment company, investors as well as finance managers consider reducing the risk of operating at a loss. This involves considering the amount of capital available at the investor’s disposal and the varieties of investments available, including risk considerations so as to get the best and the most suitable investment (Blessing, 2011). On considering Apple Inc. background, it manufactures technological products and services which are sold worldwide through online sales, retailers and even wholesalers to satisfy their customers’ demand worldwide. This is the main source of the company’s profits leading it to be successful in the business market.
The Apple Inc. business strategies involve designing and developing new products and services in the market from the continued investment in research and development. These strategies also involve expanding the company’s distribution networks which has enabled the worldwide distributed customers to access the Apple Inc. products and services. Prior to the products and services availability, they are also in competitive high quality thus increasing the company’s sales and making it the most appropriate for investment.
Wide range of products including mobile communications, media devices, software products and operating systems among others make Apple Inc. financially stable. Any sales reduction in one product does not affect sales of the other varieties and thus the company remains stable in the international markets, making it the company of choice for investment with promising positive returns.
Investor’s investment strategy
In ensuring successful investment, investors and their financial advisors observe their investment strategies to guide them in selecting the most appropriate investment opportunity. Relative to the investor’s investment strategy, Apple inc. Company fitted in the following investor’s profile. First, the investor had a margin of safety for investment where in valuating assumptions, the investor was conservative. These was implicated by the investor’s carefulness in estimating future growth rates, and Apple Company indicated potential increase of Net sales from the past years consistence from $108,246 in 2011, $156,508 in 2012 up to $170,910 in 2013.
Secondly, investors are only ready to purchase the business they understand. Prior to the business understanding and recognition of the investors’ limitation, Apple Company suited this investors profile as the company’s future earnings per share could be easily estimated from the past three years consistence in growth. In 2011 financial statement, the basic earnings per share was $28.05, $44.64 in 2012 and $40.05 in 2013. This figures gave the investor high chances of making perfect estimates of earnings per share in addition to consideration of the Company’s per capita product sales in other countries.
Thirdly, the investor could measure success by the underlying performance of business where Apple Company proved its survival through tough competition in its production field. This competence character of Apple Company matched the investor’s profile which indicated no signs of closing doors due to market competition. Fourthly, the investor had a rational disposition towards price of the shares in market. From considering other companies which are selling shares a high prices, Apply Company emerged to be the one with an average price per share which could be more promising for increase in future. High shares price indicates their peak period while an average price indicates double end probability, which implies that the shares’ price may either raise or drop depending on the market season.
The fifth character in the investor’s profile was minimizing frictional expenses. From long term investments, investors are usually prone to low percentage returns while short term investments are usually more profit promising. With Apple Company, the investors have the decision on whether to make long term or short term investments depending on their comfort. Since the investor preferred to minimize frictional expenses, short term investment suited best thus making the Company suit the investor’s profile. From searching for the best investment as well as allocating capital by opportunity cost, Apple Company had the most suitable character compared to other investment companies making it the investor’s choice.
The financial statements of Apple Inc. included income statements, cash flow statements and balance sheets. From those financial statements, financial ratios could be calculated and they included current ratio, quick ratio, profit margin ratio, assets turnover ratio, price to earnings ratio, price to sales ratio, price to book ratio, dividend payout ratio, and return on assets ratio among others. We considering five of the financial ratios listed from the Apple Inc. company.
Current ratio is calculated from Balance sheet data. Through its calculation, a finance manager is able to measure the capability of a company to pay its short-term liabilities with its short-term assets. This ratio gives an implication of the company’s financial stability which by indicating whether a company can be able to pay its short-term debts in case of unexpected change in the business climate (Lewellen, 2004). Current ratio is calculated through dividing current assents by current liabilities (Current Ratio = Current Assets / Current Liabilities). When the current ratio is more than 1.0, it implicates that the company has more short-term assets than short-term liabilities, but when the current ratio is less than 1.0, it indicates that the company has more short-term liabilities than short-term assets which is a risk status for a company (Bull, 2008). For Apple Inc. Company, its Current Assets in the year 2013 were $73,286 and Current Liabilities of $43,658. The Current Ratio was 1.68 and thus the company has more short-term assets than short-term liabilities.
Quick ratio is calculated from Balance sheet data. Similar to the current ratio, a finance manager is able to realize a company’s financial stability from its calculation. Quick ratio determines the capability of a company to settle its short-term liabilities using its immediate available short-term liabilities. This requires the available assets but not inventory since inventory would take time before being sold considering immediate payments are required (Mcmillan, 2007). Quick ratio is therefore calculated through subtracting Inventory from Current assets and the dividing by Current liabilities (Quick Ratio = (Current Assets – Inventory) / Current Liabilities). In the year 2013, Apple inc. Company had Current assets of $73,286, Current Liabilities of $43,658 and Inventories of $973. The Quick Ratio was 1.66 implicating high capability of Apple Inc. to settle its short-term liabilities.
Profit margin Ratio
Profit margin ratio is calculated from Income statement data. Finance managers use the ratio to determine the flow of company sales with respect to the shareholders, which implicate that higher profit to the company, would lead to increased share returns to the shareholders (Lewellen, 2004). Profit margin ratio is calculated through dividing the company’s net income by its total sales (Profit margin Ratio = Net Income / Sales). Apple Company Net Income by September 2013 was $30,037 and Sales of $170,910, making the Profit margin Ratio of 0.176 which is greater than 0.1 indicating high profits to the company.
Assets turnover Ratio (ATR)
Assets turnover ratio is calculated from Income statement and Balance sheet data. To a finance manager, the Assets turnover ratio gives an implication of how a good a company is at production from using its own assets. Higher production than the value of its assets indicates that a company is highly performing which would at last translate to high profits (Lewellen, 2004 & Mcmillan, 2007). Assets turnover ratio is calculated through dividing total Sales by the average total Assets (ATR = Total Sales / Average total Assets). Apple Company had total Sales of $170,910 in the year 2013 and Average total Assets of $207,000 giving ATR of 0.826 implicating that the company utilizing its assets to maximum.
Price-to-Earnings Ratio (P/E)
Calculation of Price-to-earnings ratio is done from Income statement data and the company’s most recent Stock price. This ratio is used to determine the amount payable to the shareholders as per the companies earning which is usually direct proportional to the price per share. Price-to-earning is calculated through dividing Price per share by Earning per share (P/E = Price per Share / Earning per Share) (Bull, 2008 & Mcmillan, 2007). In Apple Company Income statement data for September 1st, 2013, the average Price per share was $481.33 while the Earning per share from the recent Stock price was $40.03, which gave P/E ratio to be 12.024.
The Risk level of the company from the investor’s point of view
Global economic conditions – Investors are significantly aware of the Apple Company’s dependency on the global economic conditions which determine the company’s performance as well as its operations. Increased prices for Apple products and services sold outside U.S is one of the advancing economic conditions worldwide could affect the demand. Customers would option for basic commodities rather than purchase some of its products. In addition, the suppliers and retailer of the Apple Company products might be affected by low sales which would translate to low income to the Company hence negative implication to investors.
Global market competition – There has been high competition on Apple Company’s products and service from many other Companies marketing similar products. These global markets are always at innovative and technological advancement which poses a great risk to investors if the Company fails to acquire new technology and upgrade its standards of products and services. Prior to these new products introduction to the market, the company cannot be sure of the customer’s response to the transition and the new products might fail to pick on introduction. In addition, some of the competing companies supply their products at cheaper prices hence reducing the Apple products sales which might lead to company’s closure it appropriate strategies are not applied to meet the challenge.
Insufficient quantities of components – Apple Company entirely depends on limited sources of components supply, on which several agreements are signed on certain conditions. In addition, demand for similar components is high from other competing companies and this might lead to increase in the components supply price. Fluctuation of the supply pricing or shortages will put the company at a risk of being unable to acquire essential components which would greatly discourage investors.
Dependency on third-party intellectual and property right – Most of the Apple Company products and services require third party licenses which might not be available if the third party declines to offer or makes it expensive for the company to acquire. This dependency creates a risk which could affect the whole company’s supply chain including investors who would view it as unsuitable investment opportunity.
Quality problems on company’s products and services – From the advancing technology, low quality products might lead to decreased sales. Other components and products acquired from third party may have defects which the company might not detect hence leading to low quality production. Investors are encouraged by high promising returns and their interest may be differed by the uncertainty involved in the production systems which affect the overall sales hence low returns or operation at a loss.
Worldwide laws and regulations – Due to the worldwide business operations of the Apple Company, any law and regulations changes could affect the company’s operation cost either domestically or in the international levels. Such laws and regulations include restriction on production and use of the devices which could lead to low sales, while others regulations are expensive to comply leading the company to operate at a loss. Any negative effects on the company’s sales have a direct impact on the investors who expect high sales on production for higher returns and thus a potential investors would view these laws and regulations changes as a risk to their investment.
The key strategies that may be applicable for minimization of these perceived risks
In addressing the global economic conditions, Apple Company can option for alternative low cost production which would result to average cost of its products worldwide to increase its competitiveness. Since global market competition is the most crucial sector in determining the company’s progress, the company should implement advanced technological systems to remain competitive globally. With the available Mac platform and the current financial stability, Apple Company would be able to continually improve the design of its products and services as well as managing the frequent products introduction and transition to improve on its competitiveness globally.
In minimizing the risk of insufficiency of components quantities, Apple Inc. Company should strategize on diversity of component suppliers since most of its new products require customized components. In addition to having diverse suppliers, the company should also budget and demand its components early in advance, a criteria which would cut off the delays offer time for adjustments if they occur. Considering the company’s dependency on third-party intellectual and property right, a permanent solution would be attained if Apple Inc. licenses new technology to provide remedies. The dependency solutions should be addressed early in advance to minimize the cost which would be expected for emergency cases.
Looking at the quality problems on the company’s products and services, which mostly occurs due to defects on components and other supplies from third party, strict inspection could minimize the quality problems. Since inspection requires enough time to be perfect, the company should order for the components early in advance so as to be able to full inspect the and uphold the company’s reputation. With the fluctuating worldwide laws and regulations, Apple Inc. should ensure that its products and services are certified in advance in accordance the respective country’s laws and regulation. In addition to the certification, the company’s employees and staff should be directed to the strictness of being loyal to both the company’s regulation as well as the respective governments’ laws and regulation.
Qualities of stock as an investment opportunity
Base on the qualities of the stock as an investment opportunity, Apple inc. Company would make the best choice for an investor. These qualities include; the business model, the management, access to capital, transparency of the company, the real share-count and valuation of the company.
The Business model – Apple Company has a wide range of business models which has ensured its operating market capital to be an estimate of over 10 million dollars. Apple Company has been developing even new business models to continue being competitive in the market like the introduction of the current laptop with Intel-Atom processor. Other business models include production of Apple televisions, iPhones, iPads, Tablets, iMax, iPods and iSO operating systems among others which makes the company’s plans promising. Similarly, most of its business models are not prone to any impact from law changes which make the company the best choice for investors to invest.
The Management – For a new investor, discussing and also evaluating management of a company before investing is usually a key obligation. Since most information of the Apple Company is readily available to the investors, they should freely evaluate the management system and the leaders and if possible compare with other United States publicly traded companies for comfortable resolutions. On considering the Apple Company management, it has both experience and expertise in addition to the history of success visible in the financial statements. Moreover, the independence of directors and other company leaders’ accountability also make Apple Company the choice for the investors.
Access to Capital – In most of the United States publicly traded Companies, attracting investment capital proves to be a great challenge. Prior to the challenges, the companies struggle to get the investment capital which might eventually lead to sell of stock at cheap or discounted rates leading to operations at a loss. While considering the Apple Company current status, the investment capital already acquired is already promising to fuel the company’s operation in the next concurrent years thus making it to be among the most stable companies in the United States. Since the Apple Company has already acquired trustable investment capital to its business operations, investors can venture in its stock as an investment opportunity.
Transparency of the company – Information concerning companies operations is usually available at the investors’ disposal, which implies that the investors can easily compute the risks involved in investing in the company of concern. Apple Company has maintained transparency in all its operations by even availing its concurrent years’ financial statements which can enable potential investors to determine as well as consult the company on the risk factors involved in their involvement. This transparency leaves the investors with a choice of whether they can bear the risks involved on their investment or not, hence enabling investors to venture into the Apple business whole heartedly.
The real share-count – The capital structures of most companies are never specific in indicating the convertible stock available and even the convertible liabilities and debts available. Failing to indicate the operation level of company leads to misunderstanding of investors who venture into the business without the crucial knowledge of the companies’ status. With the Apple Company’s capital structures, the convertible stock available and the convertible liabilities are clearly indicated as a sign of transparency, thus enabling the investors to make clear decisions. As mentioned in the company’s transparency, investors have all the required information which incorporates the company’s preferred shares to its true value and thus the investors can be recommended to its stock as an investment opportunity.
Valuation of the company – To potential investors, stock valuation makes a challenge when the demand gets higher with the supply stock getting limited. This requires a stable company which can balance the supply-demand ratio in its production. Apple Company has potential stability which ensures satisfactory stock supply to the markets, a profile which attracts many investors to trust on the company’s valuation and thus making it an investment opportunity.
In following the investors’ investment strategies with respect to the companies’ rationales, the perfect company for investment is conveniently made from the many investment companies available in the market. Prior to the investors’ choice, the companies’ risks should be well understood by the investors to enable them decide whether the risks are bearable with respect to their strategies. Analyzing financial ratios from financial Statements and Balance sheets could be of much help to the investors in adding more confidence on their choice of an investment opportunity.
Blessing, S. (2011). Alternative alternatives: risk returns and investment strategy. Chichester: Wiley.
Bull, R. (2008). Financial ratios: How to use financial ratios to maximize value and success for your business. Oxford: CIMA.
Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial Economics, 74(2), 209-235.
Mcmillan, D. (2007). Structural breaks in financial ratios: evidence for nine international markets. Applied Financial Economics Letters, 3(6), 381-384
United States Securities and Exchange Commission, Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934 (for the fiscal year ended September 28, 2013), Commission file number: 000-10030 Apple Inc. Washington, D.C. 20549 Form 10-K
United States Securities and Exchange Commission, Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934 (for the fiscal year ended September 29, 2012), Commission file number: 000-10030 Apple Inc. Washington, D.C. 20549 Form 10-K
United States Securities and Exchange Commission, Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934 (for the fiscal year ended September 24, 2011), Commission file number: 000-10030 Apple Inc. Washington, D.C. 20549 Form 10-K
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