Essay: The Sources of Information

2.1.1: Primary Date
Primary data is information collected by the researcher directly through instruments such as surveys, interviews, focus groups or observations. Primary research provides the researcher with the most accurate and up-to-date data. (ehow, Jennifer Neel)
Sources of Primary Data:
Sources of primary data will include Autobiographies, diaries, surveys, opinion polls etc.
2.1.2: Secondary Data
Secondary data on the other hand, is basically primary data collected and processed by someone else. Researchers re use and reproduce information as secondary data. It is easier, less time consuming and less expensive to collect but seldom as useful and accurate as primary data (ehow , Jennifer Neel)
Sources of Secondary Data:
Sources of secondary data will include Books such as biographies, encyclopaedia, dictionaries, articles etc
Note: No primary data will be used for this project.
2.2: A description of the methods used to collect information:
2.2.1: Method used to collect information:
•Company website: Most reliable and accurate data about a company will be available on company’s website. Data on company website presents true picture of the business and its performance. Websites are mostly easily accessible but they need to be differentiated between original and fake one.
•Public Library: Public libraries are also used to collect data and information on different topics. They are also really easily accessible and have plenty of data on a wide range of topics.
•Internet: The most popular method to collect data is through internet. Easily available and can be used at your convenience, contains bulk of data on every topic.
•Online Business Database: They are also very useful one can not only find any information about a company but also can compare it with industry average or other companies.
2.2.2: Information Sources:
•Internet Search: Lots of data is available on internet. If you type a single word on search engine like Google or Yahoo, the result will be so many websites showing results for the same topic.
•Newspaper: News papers are very useful to get up-to-date data and articles on recent topics.
•Books: Books written by different authors have thoroughly and properly explained topics. As they have to be reviewed before published they are very detailed and accurate.
•Company Financial Statement: Financial statement from company’s website are the most accurate and reliable data about the company. But sometimes they are manipulated.
2.3: Limitation of Information Gathering:
2.3.1: Word Limitation: For this project about 7500 words are allowed that is not a good number when there is a lot of information that need to be included in this research. 7500 words limit is restrictive.
2.3.2: Data Reliability: Differentiation between original and fake website, original and manipulated data is very difficult now a days. You need to verify the date that you are using from at least two sources.
2.4: Identification of ethical issues during information gathering:
2.4.1: Plagiarism: The Practice of taking someone else’s work or ideas and passing them off as one’s own.(oxford dictionaries)
How resolved: I have tried hard to use my own word and findings only by using synonyms where possible and defining things in my own words. I have also used Harvard referencing style to solve this problem.
2.4.2: Data Confidentiality: There is threat to this ethical issue if someone uses the confidential information for his own benefit.
How resolved: As for this research only secondary data will be used, so there is no threat to data confidentiality issue. All the data needed for this research is publically available.
2.5: An Explanation of Accounting and business techniques
2.5.1.1: Return on Capital Employed (ROCE): ROCE is a profitability ratio that measures how efficiently a company can produce profits from its capital employed .It compares net profit to capital employed.
ROCE = Profit before interest and tax
Capital employed
Capital employed =shareholder equity and non-current assets
2.5.1.2: Return on Equity ratio (ROE): It is a profitability ratio that measures the ability of firm to generate profits from the shareholder’s investments.
ROE = Net income
Shareholder’s equity
2.5.1.3: Return on Asset ratio (ROA): Return on assets is a profitability ratio that measures net income produced by total assets during a period. It is also called the return on total assets.
Return on assets ratio = Net Income
Average total assets
2.5.1.4: Gross profit ratio: It measures the amount of net income earned from sales by comparing the net sales and net income of company. It is also called profit margin ratio and return on sales ratio.
Profit margin ratio = Net Income
Net sales
2.5.1.5: Gross margin ratio: It compares the gross margin of a business to the net sales. It shows how profitable a company sell its inventory or products.
Gross margin ratio = Gross margin
Net sales
2.5.1.6: Work capital ratio: It is also called current ratio. It is a liquidity ratio that shows a firm’s ability to pay off its current liabilities with current assets.
Working capital ratio = Current assets
Current liabilities
2.5.1.7: Inventory turnover ratio: It is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period.
Inventory turnover ratio = Cost of goods sold
Average inventory
2.5.1.8: Quick ratio: It is a liquidity ratio that shows the company’s ability to pay off its current liabilities with only quick assets. Quick assets are current assets convertible into cash within 90 days. It is also called acid test ratio.
Quick ratio = ( Cash+ cash equivalents+ short term investments+ current receivables )
Current liabilities
2.5.1.9: Debt to equity ratio: It is a financial liquidity ratio that compares a company’s total debt to equity.
Debt to equity ratio = Total liabilities
Total equity
2.5.1.10: Receivable turnover ratio: Receivable turnover ratio shows how many times company can turn its account receivable into cash. In other words tells how efficient a company is in collecting outstanding sales receivable.
Receivable turnover ratio = Net sales
Account receivable
2.5.2.1: Porter’s five forces (Jurevicius, 2013): It was created by Mr Porter in 1979. This model uses five forces to determine the profitability of company and determine its competitive strategy. This model analyse the forces affecting the intensity of competition in an industry.
Five forces are
1.Threats of new entry
2.Bargaining power of suppliers
3.Industry rivalry
4.Bargaining power of buyers
5.Threats of substitute
1: Threats of new entrants: This force explains how easy or not it is to enter a particular industry. Factors determining the threats of new entrants are
•Low amount of capital required
•No Government regulations
•Products are nearly identical
•Patents requirements
2: Bargaining power of suppliers: Strong bargaining power enable suppliers to sell at higher prices or sell low quality product material. Supplier have strong bargaining power when
•Few suppliers are available
•Specific requirements of companies
•Few substitutes are available
•Cost of switching raw materials is high
3: Bargaining power of buyers: Strong bargaining power allows buyers to buy at lower price or enjoy high quality material. Buyers exercise strong bargaining power when
•Buying in large quantities (Bulk purchases)
•Few buyers exists
•Many substitutes available
•Lower prices and variety offered by competitors
4: Threat of substitute: When buyers can easily find substitute products with attractive prices or better quality and can switch between products with no or little cost
5: Rivalry among existing competitors: It determines how competitive a company is. In competitive industry, firms have to compete for their share and results in low profits. Rivalry is intense when
•There are many competitors
•Products have substitutes
•Competitors are of equal size
2.5.2.2: SWOT (Tim Berry)
Swot is an acronym that stands for Strengths, Weakness, Opportunities and Threats.
Strengths and Weaknesses are internal to company like Goodwill, Patents, location etc. Company have some measures of control over them.
Opportunities and Threats are external factors like suppliers, prices etc. They are uncontrollable by company.
Strengths are internal positive factors that need to be appreciated. They are controllable by company. It includes research and development capabilities, educated and skilled staff, Patents, technology etc.
Weaknesses are internal negative factors. These are areas that need to be enhanced to compete with the competitors. It may include any business lacks like lack of skilled labour, poor location etc.
Opportunities are external positive factors that represent reasons your business is likely to prosper. It will identify your market and environment that company can benefit from.
Threats are external negative factors that are uncontrollable. It will identify threats like company’s potential competitor, change in prices of raw material, Government regulations affecting the business etc.
2.5.3: Limitations of accounting techniques and business models
Limitations of accounting techniques
(Jewel, 2013)
i.If financial statements are manipulated then accounting techniques like ratios are not going to show the true position of business.
ii.Ratio analysis is mostly suitable for small organisations. When business gets complicated ratio analysis gets more difficult.
iii.Companies with different accounting assumptions are difficult to be compared with the same accounting techniques.
iv.There are different ways and definitions for calculation of same ratios which can cause confusion.
v.At what percentage ratio changes from good to bad is different for every business.
Limitations of business models
Limitations of SWOT analysis
(MSG experts)
i.External limitations of SWOT analysis include increase in prices of raw material, new Government laws introduction, economic environments, imports and exports restrictions etc.
ii.Internal limitations of SWOT analysis include poor management of research and development facilities, poor quality control, lack of skilled labour etc.
Limitations of Porter’s five forces
(Recklies, 2001)
i.Model is suitable for analysis of simple market structure. Analysis gets difficult in complex industries.
ii.Model is based on idea of competition. It ignores strategic alliances and industry network.
iii.It assumes relatively static market. It ignores factors affecting market structures like technological breakthroughs and dynamic markets entrants.
Ratio Analysis
Appendix 1
Figure: 1
Return on capital employed
Source: financial statements of Apple and Samsung
Return On Capital Employed:
FY (2012-2013)
Apple’s return on capital employed fell from 40.17 % in 2012 to 29.1% in 2013. This decrease in ROCE is due to decrease in operating profit (PBIT) and increase in capital employed. It means apple is not employing its capital effectively. But increasing equity from 118210 in 2012 to 123549 in 2013 and debt from 57854 in 2012 to 83451 in 2013(from financial statements of Apple) is not going to show immediate profit as it will take some time to show their value.
On the other hand Samsung electronics, although ranked on 5 places above rival apple and topped the list of latest edition of annual fortune 500 list (ranking of world’s largest corporations by revenue)(Vincent,2013) is not generating as good share holder’s value as apple does. Standing on half the ROCE of apple in 2012 that is 21.65% showed an improvement in 2013 and went to 22.66% this is due to increase in operating profit from 27121033 to 34943492 in 2013 (from financial statements of Samsung)
FY (2013-2014)
In 2014 apple ROCE showed some improvement and increased to 32%. This may be due to the investment in capital employed made in last period and consequently showed an increased operating profit of 52503 in 2014.
Samsung electronics is facing decreased ROCE of 14% due to sharp decline in operating profit from 34943492 to 23772272 even smaller then PBIT of 2012.
ROCE of Apple is decreasing but Apple has still got better returns than Samsung. It means that Apple can reinvest great proportions of its profit back into operations and has a competitive advantage over Samsung electronics.
Supporting statement: Samsung reported revenues of 178.6bn and profits of 20.6bn. Apple is behind Samsung in revenues and reported 156.5bn but profits are double the number of Samsung and reported 41.7bn profits (Vincent, 2013) being the main reason for Apple higher ROCE. Apple’s higher profits are attributed to higher prices charged by company.
Apple has believed to paid cash payments to business acquisitions (Cue, prime sense and Topsy) of almost 595 million and payment for acquisition of Property Plant and Equipment of 1.96 billion in Q1 of 2014 CEO Tim Cook said Apple is not concerned about money it is spending for acquisitions and assets but for return on investment that it gained from them(Dilger,2014) His statement can be evidenced by increased PBIT and ROCE in 2014.
Figure: 2
Return on Asset
Source: financial statements of Apple and Samsung
Return on Asset:
FY (2012-2013)
ROA of Apple decreased from 28.5% in 2012 to 19.3% in 2013. Reasons for decrease in ROA ratio is decrease in net income and increase in assets. Fall in ROA means that Apple has used its assets inefficiently in FY 2013 as compared to 2012.But why the assets increased and income decreased? Reason being the acquisitions made by Apple to stable the declining demands of phones and tablets in year 2013.As Iphones and ipads made more than 2/3rd of company’s sales. Apple was trying to keep its market shares and acquired 10 companies in 2013 (Elsner, 2013). Apple’s CEO Tim Cook also announced in a meeting with investors that Apple acquired 15 companies in 2013. 8 of them being made known to public and rest kept secret (Schindler, 2013).
Samsung ROA increased from 17.2% in 2012 to 18.66% in 2013 due to increased income in 2013. As Samsung successfully launched Galaxy S4 in the US . Samsung posted record earnings and also took away some of Apple’s phone share, said lee seung woo, an analyst at IBK securities co. (Lee, 2013)
FY (2013-2014)
Apple’s income increased in 2014 as compared to 2013 but ROA still falling and went to 18% due to further increase in total assets in year 2014. Apple, best known for its innovations to outclass competitors, acquired 20 more companies over the course of 2014 as announced by Tim Cook. Who also made a comment about the company’s strategy by saying they acquire companies to avoid letting money burn a hole in our pockets (Clover,2014). It means Apple is surely investing to get the benefits in the long run to beat its competitors.
Samsung has faced sharp decline in ROA ratio in 2014 declined to just 11% due to sudden decrease in income and increase in assets in 2014. Reasons for Samsung’s decreased income is explained in earnings report in july that says increased amount spent on marketing to inflate the sales of excess stock in China and Europe and Samsung is also facing hard competition from Apple and Xiaomi(Musll,2014). Samsung says its fourth quarter earnings is more than forecasted but net income fell on smart phones sales and sales for TV and home appliances also fell, making net income fall for 4 consecutive quarters(Halleck ,2015)
Although Apple’s ROA is declining year on year but Samsung performance is worse than Apple. As Apple is investing more and more money and it will see the benefits in the long run. On the other hand Samsung is struggling for income and has been in efficient to utilise its resources in proper manner.
Supporting statement: The technology obtained by Apple from acquisition will result in new products, updated technology and profits in future(Clover, 2014)
Samsung is facing declining sales of Galaxy phones, TV and home appliances, resulting in fall in net income (Halleck, 2015)
Figure: 3
Return on equity
Source: Financial statements of Apple and Samsung
Return on Equity
FY (2012-2013)
In financial year 2012 Apple’s ROE was at 35.3% that decreased in 2013 and went to 30%. This is due to decreased share price during 2013 when Apple suffered loss in market capitalization as share price fell from $530 per share to almost $390 per share (Sparks, 2013). Apple has to take a long term debt of $16960(Item 6: selected financial data of Apple Financial statements) decreasing the ROE for 2013 but the main reason for decrease is the decrease in net income for the year.
Samsung ROE ratio is almost constant by just small increase of 0.36% with an increase of net income (22595741-28877821) supported by increase in equity of almost 27040466(from financial statements of Samsung)
FY (2013-2014)
In 2013-2014 Apple’s ROE went back to 35% like it was in 2012. Net income increased to $2473(from F.S). It shows Apple is returning to profitability again like in 2012 and management is improving its performance in employing investments to generate profits.
On the other hand Samsung has a sharp decline in ROE as it went to 14%. This is due to increase in equity and decrease in income questioning management’s performance in 2014.
Apple seems better in placing investments to generate profits. It faced a downfall in 2013 but has regained its position in 2014 as can be seen from the ROE numbers. Samsung is not that efficient in making profits from invested capital.
Supporting statements: Samsung uses more debt in capital structure as compared to Apple (Gurufocus, 2013) and consequently paying more for interest payment reducing net income.
One of the reasons for the declining ratio for Apple in 2013 is decreased share price and loss of valuation of Apple of about $125 billion. Reason for this decline is decreasing margins and market share of Apple for Android (Sparks, 2013)
Figure: 4
Gross Margin Ratio
Source: Financial statement of Apple and Samsung
FY (2012-2013)
Apple’s Gross margin ratio has a decline in 2013 and went to 37.62% as compared to 43.9% in 2012. Reason for this decline is increase in Cost of Sales and decrease in G.P in FY 2013. AS selling price of iphone fell by $28 because the most popular phones are still iphone 4 & 4s. Average selling price for ipad decreased to 449 almost a drop of 200 as compared to 2 years earlier (CNN Money, 2013)
On the other hand Samsung increased to 40% in 2013 as compared to 37% in 2012. Due to increased sales and increased gross margin in year 2013. According to Gartner (leading information technology research and advisory company) Samsung was no.1 in 2013 vendor list and represented 31% of market share. Apple ranked 3rd with 15.6% market share (Olega, 2014)
FY (2013-2014)
Apple’s gross margin ratio increased to 38.59% in 2014 as sales and gross margin also increased in 2014 even better than in 2012. Reason was increased demand for iphone 6 enabling Apple to increase its margins too. Apple was China’s no 1 seller of smart phones by units shipped in Q4 of 2014 (BBC, 2015)
Samsung’s gross margin ratio fell down to 38% due to decreased sales and decreased gross margins in 2014. Samsung has decreased prices for Galaxy S5 to encourage sales at cost to its margins. But they are decreasing their costs too as said by Lee Min-Lee, an analyst at IM Investment (Kim, 2014)
Apple’s gross margin ratio has been deteriorating due to pressure it is facing by competitors to decrease its prices and declining sales. Samsung seems better at overcoming this problem by reducing costs. But it still hardly gets equal to Apple’s gross margin ratio.
Supporting statement: Samsung is trying to increase its market share by decreasing prices but overcoming this problem by reducing costs as well. On the other hand Apple is not really reducing its prices but still managing good profit margins by new products and innovations like introduction of iphone 6 (Reuters, 2014)
Figure: 5
Profit margin ratio
Source: Financial statements of Apple and Samsung
FY (2012-2013)
In FY 2012 profit margin ratio of Apple was 26.67% but fell in 2013 and went to 21.67%. Because profits of Apple fell in 2013 according to BBC Apple has a fall in profits for the first time in decade. As seen in gross profit margin ratio analysis of Apple inc, Apple is facing profit and margins problems due to slowing demands for its products. Tim cook also admitted their growth rate is slowing down as compared to the growth and margins in 2012. People are turning towards their rival product like Samsung especially due to offers they made to consumers (BBC, 2013). Apple’s costs also increased in 2013 from 88 billion to 107 billion this year. Including selling expenses and R&D costs etc (Koetsier, 2013)
Profit margin ratio of Samsung is increased in 2013 and went to 16.08 in 2013 as compared to 14.23 in 2012. Samsung has a record year with revenue increase of 14% from last year and operating profit were also increased by 27% in 2013. Samsung mobiles were responsible for more than half revenues of company and they also enjoyed strong sales of Galaxy tab 3 and Galaxy not 10.1 (Smith, 2014)
FY (2013-2014)
Apple’s profit margin ratio stayed constant in 2014 with 21.61%. But it showed an increased sales and increased profits in 2014. Apple sold 169.2 million iphones that is a record. According to Tim Cook iphone 6 and iphone 6 plus launch was biggest iphone launch ever (Golson, 2014) These reasons have contributed to increase in sales and income and keeping profit margin constant for FY 2014.
On the other hand, Samsung’s profit margin ratio falls in 2014 resulting in 12.13% as income and profits fell in 2014. Profits fell by 27% and mobiles sales also decreased especially due to increased competition in Chinese market (BBC, 2015)
Apple’s profits and GP ratio is falling but it still better than Samsung electronics due to its innovations and technological advancements strategies. Apple has also given Samsung a great competition in China market with launch of iphone 6.
Supporting statement: Apple became no.1 smart phone company in China in the last quarter of 2014 (BBC, 2015) Apple dominated Samsung Galaxy phones through its iphone 6 launch. Samsung is not only facing competition from Apple but also from cheaper Chinese rivals including Xiaomi, making its income and sales declined in China market (BBC, 2015)
Figure: 6
Working capital ratio
Source: Financial statements of Apple and Samsung
FY (2012-2013)
In 2012 Apple inc’s working capital ratio was 1.49 which was quiet stable as it indicates company has not only enough resources to pay the current liabilities as they fall due but it will be left with some current assets to run day to day business or re investment. And in FY 2013 it even further increased to 1.68. Apple has strong liquidity position according to the Telegraph Apple has reserves of £95 billion that were even greater than cash reserves of some states (Murray-Morris, 2014)
Samsung had quiet high ratio of 1.85 in 2012 that further increased to 2.16 in 2013. It means that company has more than enough current assets to cover its current liabilities. It is good for its liquidity position but at the same time not really helpful for the business because it implies that Samsung is not employing its excess current assets.
FY (2013-2014)
Fall in current ratio of Apple inc is alarming as it stood at 1.08 that is very close to 1 which is considered to be neither risky nor safe. The main reason being increase in current liabilities not only payables but other liabilities have also gone up too including a commercial paper of $6308000000 (from financial statements of Apple)
Samsung on the other hand has increased its Current asset ratio. It seems like it is hoarding money. They need to invest its excess current assets to efficiently run the business. It is good to have enough current assets to cover its current liabilities but current ratio of above 2 is not considered very helpful.
Although current assets of Apple inc was good in FY 2013 and 2013 but fell to 1.08 that need to be kept there if not improved. Samsung is not investing excess current assets despite of bad financial conditions faced in 2104.
Supporting statement: Samsung is facing pressure from investors and politician to invest money. Korean Government is also promoting a plan to impose 10% tax on excessive reserves to encourage companies including Samsung electronics to stop hoarding and invest excess money (Einhorn, 2014)
Figure: 7
Quick ratio/ Acid test ratio
Source: financial statements of Apple and Samsung
FY (2012-2013)
Apple’s quick ratio increased from 1.24 in 2012 to 1.40 in 2013. It means Apple’s liquid assets are greater than its current liabilities and company is able to settle its current liabilities on very short notice.
Samsung quick ratio increased from 1.37 in 2012 to 1.55 in 2013. Samsung has better liquidity position in 2013 as compared to Apple.
FY (2013-2014)
Apple’s liquidity position is not good in the year 2014 as its quick ratio falls below 1 and went to 0.82.It mean company is not able to pay off its debt with its liquid assets. It is not a good sign for business as it is considered risky by not maintain an appropriate buffer of liquid assets.
On the other hand Samsung has proved its self a financially secure company. As its quick ratio in 2014 is at 1.66 which is far more better than Apple. And Samsung has the ability to pay off its all current liabilities at a very short notice with only its liquid assets. Samsung has got better liquidity position than Apple in all the three consecutive years.
Supporting statement: Samsung has better liquidity position but it should re-invest money as financial conditions of Samsung electronics were not good in FY 2014. It should stop hoarding money and utilise it properly otherwise it will be forced to do so by the Korean Government (Einhorn, 2104)
Figure: 8
Inventory turnover ratio
Source: Financial statements of Apple and Samsung
FY (2012-2013)
Apple’s inventory turnover ratio was at 112.11 in 2012 but went to 83.44 in year 2013. Reasons for decreased ratio were increase in inventory levels and increase in costs due to increase in cost of marketing and cost of holding. Apple’s iphone 5 has lost sales because iphone 4 and 4s were still more popular than iphone 5. And ipad mini’s popularity is dragging down demand for the normal ipads. Apple has also facing competition for tablets from rivals too. All these reasons have caused demand for Apple products to decrease. That is why increase in inventory levels is seen in year 2013 dropping the inventory turnover ratio (CNN Money, 2013)
Samsung inventory turnover ratio is also decreased from 7.68 in year 2012 to 7.48 in 2013. But as compared to Apple inc ratio Samsung is more efficient in managing its inventory. It can also be evidenced by the rise in profits and income in year 2013.
FY (2013-2014)
Inventory turnover ratio further decreased for Apple and went to 57.94 due to increase in inventory. Apple’s sales for iphone 6 has increased sales for its phone but sales for ipads was still decreasing making inventory level to rise further in year 2014 (Thompson, 2014) Apple should decrease its stock by getting rid of its old inventory of iphones and ipads even at lower prices.
Samsung ratio further decreased to 7.04 in 2014. As Samsung has decreased demands especially due to increase sales of iphone 6 by Apple. Apple’s iphone 6 has also taken away market share from Samsung in China mobiles too (Rigby, 2015)
Apple’s inventory management is not as efficient as Samsung as Samsung decreased prices to increase sales to get rid of its old inventory. Samsung is getting advantage of Apple’s higher prices by making different offers to customers.
Supporting statement: Apple is losing its shares to competitors including Samsung as they are offering variety to customers to choose from different prices and designs (Associated press, 2014)
Figure: 9
Receivable turnover ratio
Source: Financial statements of Apple and Samsung
FY (2012-2013)
Apple receivable turnover ratio was quiet good in 2012 and stood at 14.32 but decreased to 13.04 in 2013 as Apple’s receivable were increased in 2013 as compared to 2012. It means Apple’s management has reduced its efficiency at collecting outstanding sales.
On the other hand Samsung receivable turnover ratio was half the ratio of Apple in 2012. It was 7.65 in 2012 but showed a slight increase in 2013 and went to 8.22 increasing its efficiency in collecting receivables.
FY (2013-2014)
A sharp decrease in ratio of Apple Inc is seen as it went to 10.47. It is not a good sign for business as it shows less liquid debtors. It can also reduce liquidity position of business.
Samsung ratio decreased to 7.3 in 2014. Constant decrease in efficiency in collecting receivables can cause cash flow problems.
Apple’s receivable turnover ratio is decreasing year on year but it is still better than Samsung electronics but both companies are facing problems and are losing efficiency in collecting receivables.
Supporting statement: Reduced efficiency in collecting receivables is affecting current and quick ratios of Apple especially in 2014 as evidenced in analysis of current and quick ratio of Apple.
Figure: 10
Debt to equity ratio
Source: Financial statements of Apple and Samsung
FY (2012-2013)
0.49 of debt to equity shows that company uses half as many liabilities as equity to finance the assets. In 2012 both companies were at 0.49 which is a good ratio but in year 2013 Apple raised its ratio resulting in 0.675. It means Apple is taking on more debt. And the debt is used to finance the payout to share holders. Taking on debt is also believed to improve stock performance of Apple (Lattman and Peter, 2013)
Samsung debt to equity ratio decreased in 2013, moving down to 0.43 it shows Samsung has financially stable business than Apple it has lower level of risks. And equity holders are funding the operations more than debt holders.
FY (2013-2014)
Apple’s debt to equity ratio increased even further and went to 1.078 times. It means more of company’s operations are financed by debt as compared to equity. The main reason for taking on more debt is to finance stock buybacks and paying dividends. It seems a new strategy from CEO Tim Cook as it is a noticeable increase in debt as compared to the period when Steve Jobs was CEO of the company (Krantz, 2015)
Samsung is more dependent on equity to run its business as decreasing its debt/equity ratio even more to 0.37. Decrease in Debt/Equity ratio means less risky and more stable business but at the same time it shows it is not taking advantage from leverage to enhance its business. As evidenced earlier 2014 was not a good year for Samsung so maybe they should include more debt in business and find out ways to increase its profits.
Samsung seems better in managing business through equity and apple is becoming more dependent on debt financing as compared to equity and debt financing is more risky. Apple seems to have changed its strategy and started to take advantage from leverage.
Supporting statement: Apple is selling debts for the first time in two decades and it is taking the advantage of cheap debts. As according to Bill Larkin of Cabot money management it is very cheap to borrow money those days (Krantz, 2013) and it seems that Apple is going to take advantage from this opportunity by taking more and more debt.
Business Analysis
SWOT Analysis on Apple Inc
Strengths of Apple Inc
1: Brand name: Its brand name is considered to be the key for its success. As instead of higher prices charged people are still buying its products due to its brand and quality.
Supporting statement: According to a report by WPP PLC Apple became the world’s most valuable brand (Culpan, 2011)
2: Innovations: Apple always made highly innovative products. It is dragging the market share of competitors through its capability to innovate and launch new products. Apple innovate products and competitors follow their products.
Supporting statement: According to the annual report, on the world’s most innovative company, of the Boston consulting group Apple has been ranked no.1 in year 2014 (Barba, 2014)
3: Customers loyalty: Apple has got strong customer loyalty. People who use Apple’s products stick to it and buy new Apple’s product in case they need upgraded products and they are not willing to switch to other products by their rivals and other companies
Supporting statement: Iphone users are admitting they are blindly loyal to Apple, according to a report by The Telegraph (The Telegraph, 2015)
4: Cash Reserves: Apple has lots of cash reserves to invest and expand its business. Cash reserves are very important in smooth running of business and Apple has got advantage over its competitors by having large amount of cash reserves which can be used anytime to increase its efficiency.
Supporting statement: According to figure calculated by the US Trust Apple has got the largest cash reserves with £95 billion that are even greater than cash held by some states (Murray-Morris, 2014)
Weaknesses of Apple Inc
1: higher prices: Higher prices of iphones are resulting in decreased demands and lower incomes. Consumers (except the customer who are loyal to Apple) are switching towards other brands as they are offering cheap products.
Support statement: Apple Inc is under pressure to decrease prices of phones to increase its sales (Reuters, 2014)
2: Criticism due to discrimination: Apple is facing pressure and criticism from members and shareholders to increase number of women in board. As it will be able to take advice from both sex and its decision will not be considered as biased. Apple is giving wrong message to the world that it discriminate even if it do not intend to do so.
Support statement: Shareholder want Apple to add more women in Board of Directors as currently Apple has got just 1 woman in 8 member board (Satariano, 2014)
3: Decreasing profits margins: Apple is facing profit margins problem due to decreasing sales and increasing competitions. Apple’s products have shown slight decrease in prices but they are unable to decrease their costs Samsung looked better in doing it.
Support statement: CEO Tim cook admitted that Apple growth is slowing down and its sales too and it will cause continuous fall in margins in near future (CNN money, 2013)
4: Breaching rights of workers: Undercover investigation in an Apple’s factory in china showed Apple being caught breaching rights of workforce. This is not the first time for Apple to face criticism about the breach of rights of its workforce.
Support statement: As seen in the video made by a worker, workers looked exhausted as they were forced to work even 18 consecutive days without a single day off (BBC, 2014)
Opportunities for Apple Inc
1: Smart watch launch by Apple: It is a great opportunity for Apple to revive its decreasing sales, profits and growth. It can gain back its market share from rivals including Samsung. And Apple is taking advantage from this opportunity as it is working on including more apps in this product.
Support statement: CCS insight forecasts sales of 20 million units in FY 2015. While other analysts forecasted different sales level ranging between 8 million to even 60 million units in 2015 (Kelion)
2: Business Acquisitions: Acquisitions of small companies can greatly benefit Apple to enhance in technology and launch new products. It will definitely help Apple to enhance its capability to innovate. It is also a great opportunity for Apple to gain expertise of smaller companies.
Support statement: According to CEO Tim Cook Apple acquired 20 companies in 2014 to get their expertise and beat the rivals (Clover, 2014)
Threats to Apple Inc
1: Wrong perception for customer preferences: Apple is being pressurized from people to include large screen phones in its range. Former CEO Steve Jobs believed in small screen phones but it looks like it is time for a change as people are getting attracted towards big screen phones from Samsung and other rival companies.
Support statements: Apple admitted that it has made a huge mistake about people’s choice for big screen phones and not making any big screen phone competitive to other rivals (Edwards, 2014)
2: Pressures from competitors: Apple is facing great pressure from Samsung and other rivals to reduce prices as they are taking market share from Apple by offering cheap phones.
Supporting statements: Samsung is increasing market share by decreasing prices (Kim, 2014)
Porter’s five forces analysis
1: Threats of new entrants: Apple inclusive has low threats for any new entry because
•Apple has got strong loyalty from its customers
•High levels of initial costs and expenditure is required to enter competition against Apple
•Apple has patents as barriers to entry
Supporting statement: Apple won a case for two patents against its rivals Samsung. These are Steve Job Patent (Touch screen technology) and patent related to the audio socket on devices (BBC, 2013)
2: Bargaining power of buyers: Apple is facing high bargaining power of buyers as
•Consumers are forcing Apple to reduce prices
•Samsung and other rivals are making products that are substitute for Apple’s products
•Consumers are more aware of prices
Supporting statement: Apple and other companies in industry are under pressure to reduce prices to make their products affordable (Reuters, 2014)
3: Bargaining power of suppliers: Bargaining power of supplier for Apple seems high too as Apple select suppliers according to their product requirements. Switching suppliers for Apple does not look that easy.
Support statement: Hon Hi precision industry Co. Ltd (also known as foxconn) handles most of the assembly for Apple’s product. Pegatron is second supplier for assembly purposes. Quanta computers are assembler for Mac (Jones, 2013) Switching its selective suppliers will not be easy.
4: Threats for substitutes: Apple has got high level threat from threat of substitutes as
Many substitute products are available with attractive prices
Substitutes have variety of products that consumers can choose between according to their taste (like big screen or small screen phones) Samsung is taking its market share by making big screen phones.
Supporting statement: Apple admits it has made huge mistake by misunderstanding the choice of customers for big screen (Edwards, 2014)
5: Rivalry and competition: Apple has great competition from rivals especially by Samsung. Samsung is reducing prices to increase its market share making Apple’s sales to go down and decrease its margins.
Supporting statement: CEO Tim Cook admitted margins are decreasing due to reduced sales (CNN Money, 2013)