I have choose Apple and Debt/ Equity Ratio. Below are several screen shots that

Question

I have choose Apple and Debt/ Equity Ratio. Below are several screen shots that have to do with the question. a.You will need the same ratio for the company and its industry. What does the Debt/ Equity Ratio tell you about the company compared to its industry? Be sure to convey the meaning of the ratio in your answer – don’t merely say “it’s better than the industry”. And be sure to compare to the industry. b.Based on the ratio you chose. Does the financial ratio information you reported above tend to support your purchase of this stock, or does this ratio raise some questions in your mind in retrospect? Don’t force the answer (it’s perfectly okay to say that the ratio is not favorable for your company – the key is to explain why).

FINANCIAL HEALTH TRADING STATISTICS MANAGEMENT EFFECTIVENESS Industry Consumer Electronics Financial Ratios Company Industry 32.00 Debt/Equity Ratio 0.73 0.72 27.00 Current Ratio 1.28 1.27 23.00 13.00 Quick Ratio 1.09 1.08 14.00 Interest Coverage 28.59 28.62 9.00 Leverage Ratio 2.80 2.84 5.00 0.00 Sep08 09 10 1 2 3 I Debt/Equity Ratio I Book Value/Share

Explanation / Answer

a)

Debt to Equity ratio signifies the amount of leverage that a company employs in the financing of its assets. Higher the ratio, higher the leverage. In this case, D/E ratio of Apple is 0.73. A D/E ratio less than one implies that the shareholder’s equity contribution in the financing of the company’s assets is higher than the contribution from debt. This is generally a favourable aspect for shareholders as larger part of the cash generated by the business can be distributed among them. However, D/E ratio, in isolation, doesn’t tell you much. One has to compare it with the D/E ratio of the industry the company operates in to see where it stands as compared to its peers. Here, in case of Apple we can notice that its D/E ratio is almost equal to the industry. Which implies that Technology industry in general has lower debt than some other debt intensive industries. Thus, looking at the D/E ratio alone it can be said that Apple represents an average Technology company and does not warrant ant favourable treatment compared to other firms in the technology industry.

b)

As discussed earlier, the D/E ratio alone is not sufficient to make even a preliminary judgement about the investment decision in Apple. Its D/E ratio is neither better nor worse than industry. An analyst will need to do further assessment to decide whether Apple stock would make for a good investment.

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