Profitability Ratios Benefits for Apple Company Forecast Model for Sales

Profitability Ratios Benefits for Apple Company Forecast Model for Sales

Financial ratios are the critical items of determining the performance of an organization by analyzing the equity, liquidity, and profitability (Investopedia, 2019). Analyzing the investment is essential in determining the survival of an institution in the market by its ability to pay the incurred debts and have a working that is beneficial for the day to day activities. The income statement determines the profits or losses that could have been committed by a firm. Hence, it is of significance in forecasting the total sales by setting target revenue which would give a higher and reasonable operating income. Therefore, more concentration will be the gross margin ratio, the research and development to total profit ratio, and the profit margin.

Gross Margin Ratio

Gross margin is the amount an organization remains with after the incurring of direct costs which are from the production of products and services (Investopedia, 2019). It is the total per cent of the amount obtained after subtracting the cost of goods sold from the total revenue. Thus, it represents the amount of gross profit made for every dollar of revenue. It is obtained by dividing the gross profit with the revenue multiplied by a hundred per cent.

(101,839,000/265,595,000) x 100 = 38.34% (For FY2018)

A profit margin of greater than forty per cent of forty per cent face less competition but will less than forty per cent. Still, higher than twenty per cent, the company is in a highly competitive environment. Moreover, if the company has less than twenty per cent, it faces very fierce competition (7 Important Income Statement Ratios And How To Use Them). Therefore, the company is on the competitive side of the market, according to the year 2018.

The Research and Development to Gross Profit Ratio

Technology is dynamic; therefore, a company should be alert on improving its product which is very expensive but advantageous for them to remain competitive. Hence, the ratio will help in determining the amounts used on researching developing products to the profit gained. It is obtained by dividing the amount used for researching and developing products by gross profit multiplied with a hundred per cent.

(14,263,000/101,839,000) x 100 = 14% (FY 2018)

(11,581,000/88,186,000) x 100 = 13.13% (FY 2017)

(10,045,000/84,263,000) x 100 = 11.92% (FY 2016)

(8,067,000/93,626,000) x 100 = 8.61% (FY 2015)

The results obtained show an increase in the four years. During the fiscal year of 2015, the profit was higher than the two consecutive years. Therefore, the company had to use a lot of research and development to increase its profitability which was evident in 2018. Therefore, it has used a lot of money compared to the profit gained in the years after 2015.

The Net Profit Margin

It shows the amount of income a company has gained compared to the revenue. It is usually obtained by dividing the net income by revenue then multiplied with a hundred per cent. If the per cent obtained is greater or equal to twenty per cent, the company has some competitive advantage. If it is less than twenty per cent but equal to ten per cent, the company is in a highly competitive environment. At the same time, if it is less than ten per cent, it is facing fierce competition (7 Important Income Statement Ratios And How To Use Them).

(59,531,000/265,595,000) x 100 = 22.41% (FY 2018)

According to the fiscal year of 2018, the net profit margin was greater than twenty per cent making it profitable.

In conclusion, according to the three ratios, the company is very profitable, and it has increased its profitability ever since 2015. Therefore, the sale of the company very lucrative.

References

7 Important Income Statement Ratios And How To Use Them. (n.d.). Retrieved from INVESTING ENGINEER: https://investingengineer.com/income-statement-ratios/

Investopedia. (2019, July 15). What Are the Main Income Statement Ratios? Retrieved from Investopedia: https://www.investopedia.com/ask/answers/102714/what-are-main-income-statement-ratios.asp