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Essay: A Comparative Study of Apple and Samsung’s ROCE & other financial metrics

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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.

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