Financial Performance Analysis Of Apple & Alpha

Question

Task: Prepare a report on financial performance analysis on Apple and Alpha.

Answer

Task 1: Role of Accounts and Finance in any organization
Introduction: For every business’s survival and growth the most important factor is financial performance analysis. In the absence of sufficient funds, no business could be run by any organization whether it is a small sized firm or a medium entity or a large sized company or whether it is a profit making entity or a non-profit making entity. It is important for every firm or an entity to know its past, present and future state of business in financial terms and hence it is important to keep a continuous track of its financial performance analysis and performance and to carry out the same activity it is indispensible for every business to put in place proper system of its accounting and financial management. From a layman’s perspective accounting and finance functions are understood as one and the same thing but the same is not the case technically. Rather, in the real scenario, the terms accounting and finance are altogether different and both the terms have their individual meanings and purposes to serve to a business. But, yes it would be appropriate to consider them as interlinked to each other and the two harmoniously helps the business keep going.

Role of accounting and finance in Apple
In the present report, the role of accounts and finance in the success of one of the renowned companies across the world i.e. Apple Inc. is being taken into consideration. Apple is the most valuable business entity across the world due to its products and its overall success. The overall success of Apple’s business covers the most important aspect of the success i.e. its financial success. However, it is important to note that for every organization it is very important to have a sound system of finance and accounting coupled with its sound operations. Apple could achieve its success at such a level which has attained now if it was only focused on its operation performance and not on its financial performance analysis. Apart from its core business operations, what actually has contributed to Apple’s remarkable success is the way it has managed its finances and related accounting functions (Heracleous and Papachroni, 2016).

To understand the role of accounting in any business, it is important to understand that accounting is considered as the language of any business. Accounting is a process of recording, classifying and summarizing the information related to all the business transactions of the entity that takes place in a particular period in terms of financial performance analysis. The present report is prepared illustrating the example of Apple to understand the importance of accounting and finance function in a business. Apple is a where the company designs, manufactures and sells the mobile communication and other media devices such as mobile phones, tablets laptops, watches, music players and so on (Bergvall-Kåreborn & Howcroft, 2013). To manufacture its products the company has to produce certain raw material or it has to purchase the same from different suppliers in the market. Such raw material is then stored in their warehouses and used at the time of production process which is undertaken at a mass level. Due to mass production, it is of high importance for the company to maintain a proper record of its inventory of raw material and finished goods. For instance, if Apple could not keep a track of its inventory it might have had fallen in the situation where either excessive money is blocked in high and obsolete inventory or it might have to face the problem of stock outs in the events of more demand of its products in the market. Therefore, the role of accounting comes in place to collect, record and maintain such record in the form of accounting information for the smooth functioning of its business (Zimmerman, 2015). Followed by the records of all the inventories purchased and produced, the record of sales made by the company is also undertaken wherein the accountant of the company has to maintain a record of all the sales transaction made during the year so as to determine the actual revenue generated by the business in a particular period. Apart from the core information related to production, purchases and sales, financial accounting also helps Apple to maintain a track of all the expenses of its business be it a direct expense or an indirect expense such as marketing and advertisement expense, cost of its warehousing, rents of the business infrastructure and so on. All these information obtained from the financial performance analysis helps in evaluating the amount of profit generated out of the business made in a particular period. The accounting function not merely helps Apple in determining the amount of purchases made, production undertaken or the sales revenue generated or the expenses incurred during a particular period but also helps in forecasting the growth of the business using the past trends of its overall business performance. Also this kind of financial information based on the financial performance analysis also helps the financial accountants of Apple to prepare its budgets for the forthcoming year on the basis of estimated revenues and expenses (De Loo, Verstegen & Swagerman, 2011). After capturing all the data related to overall business transactions, such data is then summarized and classified appropriately by the financial accountant to convert it into an important financial information which is then reported in the annual financial statements to be published every year for the purpose of disclosing the overall financial performance analysis of the business to stakeholders of the business. The owners of Apple Inc. use such financial reports to analyze the business performance so that strategies and policies could be framed for the areas which demand improvement or further up-gradations as per the requirement of business (Smith & Cordina, 2014). Various financial strategies are also framed basis the financial performance analysis of last year’s so that desirable growth in the business could be achieved in the required time. For instance, companies like Apple prefer to maintain colossal cash balances and hence they strategize to have maintains a certain quantum of money in the business to remain financially solvent even in the case where any catastrophic event occurs in the economy (Sikka & Murphy, 2015). The investors such as shareholders or bondholders seek company’s financial information to estimate the returns that the company will offer them in return of their investment in the same. For Instance, if Apple had not disclosed the results of financial performance analysis on yearly basis it could not make its potential investors aware about its Earnings Per Share and Dividend Per Share which forms important metrics for the investors to base their decision of investing their funds in certain company. Thereby, it would not be possible for Apple to source a large pool of funds which it requires for its business operations. The accounting and functions not only helps a business in analyzing its profitability position but also they help in identifying whether the assets held in the business are efficient enough to generate revenues for the business (Ahmed & Duellman, 2011). With the use its information from financial performance analysis Apple could compare its overall performance with its competitors in the industry and use such information to maintain its market share. Also, to determine the market value of company’s stock financial information and its future projects is required (Berninger, 2018). Moreover, if Apple applies for any loan from bank or financial institution it would be necessary for it to show its financial performance analysis over certain number of years from past to prove its credit worthiness and sound financial health (Brigham & Houston, 2012).

Conclusion
From the above discussion it can now be concluded that accounting and finance functions are the most essential aspects of the growth and survival of any business. If the adequate system of financial management is not put in place by Apple it might have to face the problems of poor liquidity position or risk of insolvency. Not only entities like Apple, if the finances of any organization are poorly managed they it would be very certain that it becomes insolvent in short or the long term whether it is small sized or big sized firm. Apart from the finances the financial accounting also plays an indispensible role in any organization whether it is profit making or a non-profit making entity. Financial performance analysis basis the financial reports play an important role in bridging the gap with company and its stakeholders. Hence, it can be concluded that financial reporting which is the main aspect of financial accounting is of utmost important for any company for its smooth and long term functioning. Without the application of proper accounting and financial management processes a company cannot evaluate its overall business performance and also it cannot survive and grow in the absence of appropriate financial performance analysis.

Task 2: Analysis of Financial Position of Alpha Limited in the year 2018
Introduction
The present report covers the financial performance analysis of UK based company named as Alpha Limited. The company was established in year 1954 and since then it is engaged in the manufacturing business and is categorized as a company with limited liability. The financial analysis of Alpha Limited is undertaken using the key financial tool called as Ratio Analysis. As a part of financial performance analysis, the financial performance of the company for the year 2018 is being evaluated and also it is compared with that of year 2017 using the key financial ratios such as current ratio, capital employed ratio, net profit margin ratio, debtor collection period and the creditor’s payment period ratio. The comparison of financial performance of Alpha Limited is carried with the purpose of identifying the change in the financial state of company’s business and the root causes of such changes alongside the impacts of such changes.

Financial Performance Analysis of Alpha Limited
Ratio Calculation

Workings:

Profitability Position
In order to evaluate the financial performance analysis of Alpha Limited’s business, one of the most important aspect of such performance i.e. profitability is being taken into consideration and for the purpose of evaluating profitability state of business two main profitability ratios termed as Net Profit Margin and Return on Capital Employed is calculated. Profitability is that aspect of financial performance analysis which tells about the capacity of a company to generate returns for its owners or shareholders and investors after paying off its business expenses and costs (Fridson, and Alvarez, 2011). The net profit ratio is the ratio which measures the net revenue remained for the owners of the company after paying off all the business expenses and taxes. The higher the net profits of the company means the more is the capacity of the company to generate high returns for its investors. From the financial performance analysis of the company it could be seen that though the sales of the company has increased in 2018 as compared to 2017 but at the same time the percentage of purchases to sales in 2018 has increased which has caused declined gross margin. In 2017, the purchases were around 56% of the total sales but in 2018, the purchases were around 80% of the sales and due to this the company could earn lesser gross profit margins. Apart from this the finance cost of the business has also doubled up in 2018 which has resulted in increased expenses for the business and ultimately reducing the net profits. The said reasons have contributed to decline in the percentage of net profit by around 4% which reflects 30% change in the percentage of net profit margin in 2018 as compared to 2017. Return on capital employed is another profitability ratio that has been calculated in the present scenario of Alpha Limited to analyze the returns generated for the shareholders of the company. Capital employed in a business helps in identifying as to how effectively total assets are performing taking into account the long term financing of the business. Return on capital employed shows the percentage of profits earned for the shareholders by the company using the total capital employed in the business. Return on capital employed takes into consideration the operating profits of the business and it can be seen from the financial performance analysis of Alpha Limited that there is approximately a decline of 2% in the operating profit percentage of the company. Also, there is more capital employed in 2018 as compared to 2017 which has resulted in decline of return on capital employed by 5.51% and this clearly implies that lesser returns were being offered to the shareholders of the company.

Liquidity Position
After analyzing the profitability performance of Alpha’s business, its liquidity position is being analyzed using one of the key liquidity ratios, which is commonly known as current ratio. Liquidity position of the business is its capacity to turn its current assets in cash or cash equivalents for the purpose of pay off its short term financial obligations. Ideally a company must maintain a minimum current ratio of 2:1 to maintain its liquidity position in the market. In the present case, there is significant decline (approximately 60%) in the current ratio of Alpha Limited in 2018 with respect to 2017 which is the clear indicator of declining liquidity position of the business in 2018. The major reason in the decline in the current ratio from 2.35 (2017) to 0.93 (2018) is sudden increase of accounts payables which is a current liability of the business from 322.5 (2017) to 1110 (2018). With the increased current liabilities, the company could not somehow increase its balance in current assets with the same proportion and hence it is short of current assets to meet its current liabilities whenever they are due. In 2017 the current ratio was even higher than the standard ratio of 2:1 which showed that company has good liquidity state in that particular year but after 2017 it could not maintain its liquidity state even at the standard level. The weak liquidity position might require company to use its non-current assets to meet its short term financial obligations in future which is not an indicator of sound financial position of the business (Golin & Delhaise, 2013)

Management’s Efficiency
Moving on to average receivables days or debtors collection period which is calculated to identify the average number of days taken by a firm to collect its receivables, it can be said that the efficiency of company to manage its receivables has reduced in 2018 as compared to 2017 as evidenced by the increase in the average days (by 5 days approximately) to collect the amount due from its receivables. Since more time is taken to convert the trade receivables into cash, the company’s liquidity and efficiency state have degraded in 2018 as it shows that the cash required for running business is being blocked in other current assets and hence considering the financial performance analysis, it can be stated that the company is requiring more short term credit to deal the business. Apart from this, creditors payment period is also calculated which determines the average time taken by the company to make the payment of its general trade payables of short term nature and it has been identified that in 2018 there has been a sudden increase in the trade payables of the business of Alpha Limited resulting in significant increase in average payment period of creditors. The increase of almost around 120 days in payment of trade payables is primarily due to two reasons that are inefficiency of company to collect its payment from its trade receivables in minimum possible time and its over reliance on trade payables to run the day to day business. The working capital structure of the company has worsened in 2018 due to improper working capital cycle of the business of Alpha Limited’s business.

Conclusion and Recommendation
From the above analysis it would be clear to identify that the financial performance analysis of Alpha Limited has degraded significantly in 2018 as compared to that of 2017 from almost all the aspects of financial performance be it profitability, liquidity or efficiency. The decline in the profitability position is a clear indicator of reduced capacity of the company to generate sufficient returns for its investors (Berk, DeMarzo, Harford, Ford, Mollica & Finch, 2013). When a company do not generate sufficient profits to distribute expected returns to its investors it not only prevents itself from attracting potential investors towards it but also it loses its existing investors to its peer competitors as investors are always keen to have maximum returns out of their investments made in the company (Brigham & Houston, 2012). The basic motive of any investor to invest their fund in any company is to seek higher returns by way of dividend or price appreciation on company’s share stock held by them but when the company underperforms in the market it loses its market worthiness and hence the prices of its shares starts reducing (Shapiro & Hanouna, 2019). Also, if seen from the liquidity point of view while conducting financial performance analysis it can be seen that the liquidity state of Alpha Limited’s business has reduced significantly which creates the sense of fear among the existing investors and the potential investors as well that the company might turn insolvent in the near future due to its inability to meet its short term business liabilities out of its current assets and it might have to dispose-off its fixed assets to seek finance for its current liabilities (Banerjee, 2012). Also, the increasing debtor collection period of Alpha Limited in 2018 is a true indicator of its inefficiency to convert its trade receivables into cash on time. Further, the excessive increase in the balance of account payables of the business gives an idea of company high dependence on trade credit to run its business. All these factors sum up to declining financial performance analysis of the company due to which it would be recommended to the potential investors to not invest in Alpha Limited in the current scenario otherwise it might cause them loss instead of the returns they expect from their investments. Rather, they should invest in other companies which might offer them the desirable returns. Also, it would be recommended to Alpha Limited to restrict its over reliance on trade credit to run its business and also to invest more in its current assets so that it could maintain sound liquidity position in the market so as to earn the trust of its existing and potential investors. This might also help the company to cut down its finance cost which would ultimately result in higher distributable profits.

References
Ahmed, A.S. and Duellman, S., 2011. Evidence on the role of accounting conservatism in monitoring managers’ investment decisions. Financial performance analysis Accounting & Finance, 51(3), pp.609-633.

Banerjee, B., 2012. Financial policy and management accounting. PHI Learning Pvt. Ltd..

Bergvall-Kåreborn, B. and Howcroft, D., 2013, December. The Apple business model: Crowdsourcing mobile applications. In Accounting Forum (Vol. 37, No. 4, pp. 280-289). Taylor & Francis.

Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N., 2013. Fundamentals of corporate finance. Pearson Higher Education AU.

Berninger, J., 2018. Forecasting the Time Series of Apple Inc.'s Stock Price (Doctoral dissertation, UCLA).

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

De Loo, I., Verstegen, B. and Swagerman, D., 2011. Understanding the roles of management accountants. Financial performance analysis European Business Review.

Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a practitioner's guide (Vol. 597). John Wiley & Sons.

Golin, J. and Delhaise, P., 2013. The bank credit analysis handbook: a guide for analysts, bankers and investors. John Wiley & Sons.

Heracleous, L. and Papachroni, A., 2016. Strategic Leadership and Innovation at Apple Inc. SAGE Publications Ltd.

Penman, S.H., 2013. Financial statement analysis and security valuation. McGraw-Hill.

Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. Wiley.

Sikka, P. and Murphy, R., 2015. Unitary taxation: Tax base and the role of accounting. Available at SSRN 2633997.

Smith, J.A. and Cordina, R., 2014. The role of accounting in high-technology investments. The British Accounting Review, 46(3), pp.309-322.

Zimmerman, J.L., 2015. The role of accounting in the twenty-first century firm. Financial performance analysis Accounting and Business Research, 45(4), pp.485-509.