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Alphabet Inc. and Apple Inc. Financial Analysis

Introduction

Alphabet Inc. and Apple Inc. are multinational corporations operating in the technology sector. Both companies are listed on the American Stock Exchange. The purpose of this Financial Analysis is to examine, analyze, and make comparisons between Alphabet Inc. and Apple Inc.’s financial performance over the past years.  Evaluating companies through the use of financial statements is resourceful in making some paramount investments decisions (Blocher et al., 2019).

Company Background- Apple Inc.

Apple Inc. specializes in the production of computer software, consumer electronics, and online facilities. By 2020, it was the largest technology organization with respect to net revenue and the most valuable organization (Li, 2020). The company was established in the year 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne and is headquartered in Cupertino, California, United States. Apple designs, manufactures & markets personal computers, accessories, smartphones, tablets, and sells different associated services. The product mix of the company constitutes of iPhone, Wearables, iPad, and Mac. The iPhone, a smartphone brand, is the company’s primary product known for its unique software, that is; the iOS operating system. Mac is a product line of personal computers based on the macOS operating system. Accessories, Wearables, and Home contains Airpods, Apple Watch, iPod touch, HomePod, Beats products, and other third-party or Apple-branded accessories. Its services contain Advertising, Payment Services, Digital Content, AppleCare, and Cloud Services (Aljafari, 2016). The target clients are mainly in the user, small & mid-sized business, enterprise, government, and education markets. By the end of 2020, Apple generated total net revenue of US$274.515 billion and a net income of worth around US$57.411 billion. In FY 2020, the population of its workforce was approximately 147,000. Apple receives important criticism with respect to the contractor’s labour practices, business ethics, and environmental practices, which includes materials sourcing and anti-competitive behaviour. Nevertheless, the company relishes a superior level of brand loyalty, & is placed as the most valuable brand around all over the world and as of 2021, there are almost 1.65 billion products of the company in active use.

Competitor’s Background- Alphabet Inc.

Alphabet Inc. is a multinational technology conglomerate headquartered in Mountain View, California. It was formed as a result of a Google realignment in 2015, and it became the holding company of Google and numerous previous Google affiliates (Ahmer, 2016). Alphabet generates revenue by selling advertising and different service fees through its search, web surfing, mobile operating systems, and cloud computing services (Wild, 2019). The majority of money is generated by advertising; however, Google Cloud revenues are fast increasing. The yearly gross profit of Alphabet, Google’s parent corporation, has been expanding year after year, reaching virtually unimaginable levels for the common individual. The overall sales in 2019 were $173.86 billion, up from $147.72 billion in 2018. The gross profit was astronomical in 2019, at $90.16 billion.

Alphabet’s revenue for the 2020 financial year was 178.79 billion US dollars. Its sales largely accrued from advertisements, constituting 156.80 billion US dollars out of the USD 178.79 billion. Alphabet’s competitive advantage is its fast speed, which keeps customers bouncing back. The search results may differ, but because of the great speed, a customer can look for another keyword with minimal compromise and thus be less likely to transfer to a competitor (Seven & Coskun, 2016). Google’s initial project was to develop an algorithm that could assist consumers in effectively sorting through the constantly rising volume of stuff being posted online. Google has become the Internet’s “go-to search” engine in a matter of years because it started strongly and just kept getting better (Rocha, 2017). However, the corporation is currently confronted with issues such as a heavy reliance on internet technologies and lack of control over consumer gadgets that run the Android operating system.

Market Prices (Including % Changes of Shares)

For the period ending 31/12/2016, Apple’s closing stock price was valued at $ 32. 66. Apple’s market prices increased rapidly between 2016 and 2020 to approximately $142.69 for the period ending 31/12/2020. Apple has a long history of invention and focuses on developing high-quality electrical devices. Its brand equity has enabled the company to obtain a competitive advantage over rivals like Alphabet Inc. while also maintaining client confidence and loyalty (Tidhar & Eisenhardt, 2020). The “Apple Ecosystem” has grown over time, gaining more and more customers from all around the world.

Apple’s stock increased by 4.40 % in the year ending 2017 when the company released its earnings report results, suggesting increased revenues due to increased demand for its latest MacBooks and iPhone model (Li, 2020). It should be noted that previous years’ sales were decreasing but at a constant rate. According to this financial analysis of the two companies, it is notable that Apple Inc. outperformed Alphabet Inc. in terms of market prices over the last five years. Apple Inc.’s stock price has risen by 3.55 %, while the broader market index has risen by 5.52 % (Pawar, Jalem & Tiwari, 2019). For the year ending 2017, market prices increased by 11.22 %, owing to long lines of customers as sales exceeded expectations. Stock prices for Apple reached a new high of 20.62 % ending 2018, just after the release of third-quarter earnings results, in which revenue increased by 22% year on year and earnings per share increased by 39%, boosting share repurchases (Vasilaki & Tsakalidisi, 2019).

For the next two fiscal years, 2016 and 2017, market share prices began to fall as the next quarter failed to meet market expectations, causing market prices to fall by 19.23 % and 12.36 %, respectively, in 2018. However, stock prices rose 17.5 percent in April 2020 after the company announced that it was speeding up its transformation to generate chips for its products internally (Aljafari, 2016). Both Alphabet Inc. and the ordinary index also saw a rise of 18% that time around 2018.  However, throughout the year 2020, the company’s stock expanded successively by 18 %, 24.05 %, and 29.41%, respectively, because of the additional factor of customizable product lines.

Apple Inc.

Alphabet Inc.

According to the above analysis of market prices and % changes of the shares of the two companies that is Alphabet Inc. and Apple Inc. together with their respective indexes values for the past 5 years as demonstrated in the two tables shows that Apple Inc. seems to be having high market prices as compared to Alphabet Inc. even though they are differences in terms of % Change in market prices throughout the 5 years. According to Alphabet Inc. its %change of the market share prices are increasing from the period year 2016 to 2018 but started to decrease from the period year 2019 to 2020 as indicated (Seven & Coskun, 2016). This shows that the company lost the quantity market demand due to the COVID-19 pandemic that affected most of the businesses making the index values of the company to also decrease. A decrease index value of a given company will always cause a decrease of the %change of the market prices.

Apple Inc. has higher index values as compared to Alphabet Inc. which means that there are higher market demand and many potential buyers that could purchase the Apple products in the market even though the company has set higher prices as compared to the Alphabet Inc. in the same market demand. In both of the companies have recorded the lowest % change share market prices in 2019 as compared to any other years (Li, 2020). This shows that the two companies were greatly affected by the COVID-19 pandemic in 2019 that affected both the company to decrease their respective prices in both low and high market prices. For both Apple Inc. and Alphabet Inc. to gain their stability during the pandemic period, they had to reduce the market prices in order to increase their various sales in the market (Dyreng & Markle, 2016). However, Apple Inc. records the lowest %change of market share prices in 2019 as compared to the other company which means that the company was badly affected and seems to undergoing through financial distress.

Income Statements for the Two Companies

Table 2.1. Alphabet Inc. Income Statement for the Year Ending 2016, 2017, 2018, 209 & 2020 (In Millions)

  2016 2017 2018 2019 2020
Total Sales/Revenues 110,320 127,891 137,761 167,853 184,520
% Sales Growth 5.35% 15.93% 7.72% 21.84% 9.93%
Cost of Sales/Revenues (47,305) (51,356) (59,607) (69,702) (88,704)
%change in Cost of Sales 8.04% 8.56% 16.07% 16.94% 27.26%
Gross Profit 63,015 76,535 78,154 98,151 95,816
% Change of Gross Profit 16.75% 21.46% 2.12% 25.59% (2.38%)
Total Operating Expenses (42,213) (48,941) (51,753) (54,302) (56,717)
%change in Operating expenses 19.33% 15.94% 5.75% 4.93% 4.45%
Total Operating Income 35,196 27,594 26,401 43,849 39,099
% Change in Operating Income 13.43% (21.60%) (4.32%) 66.09% (10.83%)
Net Non- Operating Interest 978 871 1,211 1,215 1,026
Pretax Income 36,174 28,465 27,612 45,064 40,125
%Change in Pretax Income 4.05% (21.31% (3.0%) 63.20% (10.96%)
Interest Income 1,302 1,417 1,502 2.412 1,816
Interest Expense (100) (109) (116) (104) (135)
Net Interest Income 1,202 1,308 1,386 2,308 1,681
% Change of Net Interest Income 7.01% 8.82% 5.96% 66.52% (27.17%)
EBITA 36,274 28,574 27,728 45,168 40,260
% Change EBITA 6.63% (21.23%) (2.96%) 62.90% (10.87%
Total Depreciation (4,123) (2,314) (1,321) (1,009) (978)
%Change in Dep (44.13%) (43.87%) (42.91%) (23.62%) (3.07%)
Tax Rate
 Net Income 32,151 26,260 26,407 44,159 39,282
%Change in Net Income (13.12%) (18.32%) 5.55%^ 67.22% (11.04%)

 

Table 2.2. Apple Inc. Income Statement for the Year Ending 2016, 2017, 2018, 209 & 2020 (In Millions)

2016 2017 2018 2019 2020
Total Sales/ Revenues 247,341 253,617 264,121 268,213 274,567
% Sales Growth 1.34% 2.53% 4.14% 1.55% 2.37%
Cost of Sales (109,200) (120,328) (127,678) (136,903) (142,347)
% change in Cost of Sales 5.34% 10.19% 6.11% 7.23% 3.98%
Gross Profit 138,141 133,289 136,443 131,310 132,220
% change in Gross Profit 4.66% (3.51%) 2.37% (3.77%) 0.69%
Total Operating Expenses (67,906) (69,514) (71,302) (73,606) (74,321)
% Change in Operating Expenses 1.52% 2.37% 2.57% 3.23% 0.97%
Total Operating Income 70,235 63,775 65,141 57,704 57,899
% Change in Operating Income 7.54% (9.20%) 2.14% (11.42%) 3.38%
Net-non operating Income 1,302 1,408 1,447 1,563 2,307
Pretax Income 71,537 65,183 66,588 59,267 60,206
% Change of Pretax 6.78% (8.88%) 2.16% (10.99%) 1.58%
Interest Income 2,314 2,446 2,487 2,567 2,608
Interest Expenses (978) (998) (1,008) (1,103) (1,000)
Net Interest Income 1,336 1,448 1,479 1,464 1,608
% Change of Net Interest Income 3.56% 8.38% 2.14% (1.01) 9.84%
EBITA 72,515 66,181 67,596 60,370 61,206
% Change in EBITA 5.66% (8.73%) 2.14% (10.69%) 1.38%
Depreciation (3,451) (2,702) (2,561) (2,443) (2,201)
% Change in Dep (22.01%) (21.70%) (5.22%) (4.61%) (9.91%)
Tax Rate
Net Income 69,064 63,479 65,035 57,927 59,005
% Change in Net Income (7.81%) (8.09%) 2.45% (10.93%) 1.86%

 

Based on the above calculation, it can be seen that the current year 2020 has a slight increase of 1.38% as compared to the previous year 2019. During the period 2020, Apple’s business was negatively affected by the Covid-19 which led to the closure of numerous company’s core businesses (Wild, 2019). This even made some of the potential employees to start operating at home thereby bringing more challenges to the company since some goods could not be distributed to the customers in time. As a result, the company has reopened the majority of its offices and retail stores, improving the security and health of customers and employees, and it continues to work on reopening its remaining retail stores and offices, subject to local regulations and rules (Blocher et.al, 2019). Total net sales increased by $13.66 billion in 2020 compared to 2019, primarily due to higher sales of products and services. A greater EBITA indicates that the corporation can manage its basic operational effectiveness on a day-to-day basis without incurring the costs of expensive structures. In this comparison, Apple Inc. has a higher EBITA than Alphabet Inc. and therefore will be able to manage its operations easily as compared to Alphabet Inc. throughout the years.

Sales revenue determines a firm’s net income worth, and in this situation, Apple Inc. has had more sales revenues over time than Alphabet Inc., implying that the company will have higher net income or returns than Alphabet Inc. In order to produce greater net income than Apple Inc., Alphabet Inc. needs to expand its product sales for it to achieve a higher net income throughout the years. Alphabet Inc. can Increase its sales by lowering the prices of each and every product to attract more customers in buying their goods. (Ahmer, 206). Equally increasing the price of a given products can also increase the sales of that particular products depending on that type of product being produced by the Alphabet Inc. Since luxury products such as Apple phones does not obey the law of demand in the market when the Apple Inc. decides to increase their prices, still will attract more potential customers into buying the products hence increasing the sales and revenues for the entire period years as compared to Alphabet Inc. (Aljafari, 2016).

Analysis of Profitability Ratios of the Two Companies

Table 3.1. Profitability Ratios of Alphabet Inc. for the Period Ending 2018, 2019 & 2020

Profitability Ratios Formulas 2018 2019 2020
Profitability Net Income/ Sales * 100% 19.17% 26.31% 29.21%
Gross Profit Ratio Gross Profit/Net Sales * 100% 56.73% 58.47% 61.21%
Net Profit Ratio Net Profit/ Net Sales * 100% 17.23% 21.33% 22.47%
Operating Profit Ratio EBIT/Net Sales * 100% 23.34% 24.18% 26.71%
Return on Capital Employee (ROCE) EBIT/ Capital Employee * 100% 18.12% 14.22% 11.51%
Return On Investment (ROI) Final Value of investment – Initial /Net Return * 100% 21.79% 18.10% 16.71%

 

Table 3.2. Profitability Ratios of Apple Inc. for the Period Ending 2018, 2019 & 2020

Profitability Ratios Formulas 2018 2019 2020
Profitability Net Income/Sales * 100% 21.33% 24.34% 26.11%
Gross Profit Ratio Gross Profit/ Net sales * 100% 63.23% 64.11% 60.29%
Net Profit Ratio Net Profit/ Net Sales * 100% 18.71% 20.05% 24.31%
Operating Profit Ratio EBIT/Net Sales * 100% 23.21% 19.13% 13.76%
Return on Capital Employee (ROCE) EBIT/ Capital Employee * 100% 9.41% 11.51% 15.67%
Return on Investment (ROI) Final Value of Investment –Initial/ Net Return * 100% 14.08% 16.42% 12.43%

 

It is evidence that in both the company that is Alphabet Inc. and Apple Inc. Profitability ratios especially the gross profit ratios and the net profit ratios are increasing yearly which means that both the company are doing great in terms of their yearly expenditures. The gross profit ratio illustrates how much Alphabet Inc. and Apple Inc. sales revenue they maintain after they pays for all of their direct operating expenditures (Blocher et.al, 2019). A higher gross profit ratio shows that the company has enough cash at hand to cater for indirect and various charges like interests and expenses. In comparison, it is very evidence that Apple Inc. have a greater gross profitability margin ratio as compared to Alphabet Inc. This means that Apple Inc. will be able to pay for all its direct operating expenditures since it has more cash at hand to cover for the indirect charges within the company business without undergoing financial distress as compared to Alphabet Inc. (Dyreng & Markle, 2016).

Operating profit ratio of Alphabet Inc. are increasing yearly while for the Apple Inc. are decreasing yearly as shown in the above 2 tables. This shows that Alphabet Inc. will be very successful in keeping its prices to generate more income as compared to Apple Inc. (Philips & Libby, 2019). By comparing a company’s total operating expense to net sales, the ratios determine how the management is handling the company efficiency. The operating ratio measures how successful a company’s management is maintaining its prices and at the same time generating income equal to its overall expenses.

A greater operating profit shows that the company is earning enough profit from operations to cover all of the costs associated with running that business. An operating margin of more than 15% is regarded good in most businesses (Rocha, 2017).

Liquidity Ratios of the Two Companies

Table 4.1. Liquidity Ratios of Alphabet Inc. for the Period Ending 2018, 2019 & 2020

Liquidity Ratios Formulas 2018 2019 2020
Current Ratio Current Assets/ Current Liabilities 0.83 0.91 1.11
Quick Ratio Current  Assets + Inventory/ Current liabilities 0.65 0.79 0.93

Table 4.2. Liquidity Ratios of Apple Inc. for the Period Ending 2018, 2019 & 2020

Liquidity Ratios Formulas 2018 2019 2020
Current Ratio Current Assets/ Current Liabilities 0.72 0.77 0.96
Quick Ratio Current  Assets + Inventory/ Current liabilities 1.61 1.68 1.73

The liquidity ratios in this analysis will be used to analyze a company’s capability to pay for its annual obligations. The above calculations will determine which company is suitable for paying their short-terms debts in time (Seven & Coskun, 2016). Therefore, according to these two companies that is Apple Inc. and Alphabet Inc. they both have increasing liquidity ratios but Alphabet Inc. has greater current ratio that will enable the company to pay its short term obligations in time as compared to Apple Inc. Any figure greater than 1.0 is a good quick ratio (Tidhar & Eisenhardt, 2020).

A Quick ratio of 1.0 or higher indicates that a company is healthy and capable of meeting its obligations (Wild, 2019). In this scenario, the higher the number, the better for the company. Therefore, Apple Inc. has got the best quick ratio since its quick ratios are above 1.0 throughout the 3 years which will enable the company to meets its obligation in time without going through financial distress as compared to Alphabet Inc. in this financial statement analysis.

How Alphabet Inc. and Apple Inc. Are Managing Assets Using Efficiency Ratios

Table 5.1. Efficiency Ratios of Alphabet Inc. for the Period Ending 2018, 2019 & 2020

Efficiency Ratios Formulas 2018 2019 2020
Inventory Turnover Ratio Cost of goods sold/Average inventory * 100% 11.22% 13.89% 15.22%
Accounts Receivable Turnover Ratio Net Credit Sales/Average accounts receivables * 100% 5.33% 7.51% 10.88%
Accounts Payable Turnover Ratio Net Credit Sales/ Average Accounts Payable * 100% 10.00% 11.12% 11.67%
Asset Turnover Ratio Net Sales/ Average Total Assets * 100% 23.44% 28.94% 32,65%
Fixed Asset Turnover Ratio Net Sales/ Average Fixed Assets * 100% 12.89% 14.41% 16.34%

  

Table 5.1. Efficiency Ratios of Apple Inc. for the Period Ending 2018, 2019 & 2020

Efficiency Ratios Formulas 2018 2019 2020
Inventory Turnover Ratio Cost of goods sold/Average inventory* 100% 19.08% 24.91% 26.97%
Accounts Receivable Turnover Ratio Net Credit Sales/Average accounts receivables 9.02% 11.23% 14.34%
Accounts Payable Turnover Ratio Net Credit Sales/Average Accounts Payable  * 100% 17.81% 23.44% 31.51%
Asset Turnover Ratio Net Sales/ Average Total Assets *100% 34.32% 36.23% 42.41%
Fixed Asset Turnover Ratio Net Sales/ Average fixed Assets * 100% 13.23% 18.27% 23.41%

 

Efficiency ratios assess a company’s capacity to effectively use its assets and manage its liabilities in the present or short term. These ratios assess a company’s capacity to manage its assets and how well it uses its assets to produce revenue. As a result, both Apple Inc. and Alphabet Inc. have used all of the conceivable efficiency ratios to manage their respective assets, as seen in tables 4.1 and 4.2.

The calculated turnover ratios in this analysis will helps in determining how Apple Inc. or Alphabet Inc. efficiently collects their receivables in time. The efficiency ratios also explain how often a company’s efficiency ratios are turned into cash over time. A high inventory-to-receivables turnover ratio implies that a corporation collects money it owes effectively (Apple Inc. V. Pepper, 2019). The inventory turnover ratio is a useful indicator of a company’s ability to convert inventory into sales. The ratio also indicates when management is effectively controlling inventory expenditures and whether they are purchasing less or more inventory (Almeheiri, Hosani & Saif, 2021).

Therefore, in this analysis, Apple Inc. seems to be having higher efficiency ratios especially the asset turnover ratio which are increasing throughout the consecutive 3 years as compared to Alphabet Inc (Li, 2020). The higher Asset turnover ratio of the Apple Inc. shows exactly how well the management is promoting sales with the assets at its disposal as compared to the Alpha Inc. in this analysis. Generally, both the companies have managed to use Asset turnover ratio to determine how productive a company’s assets are. So, between Apple Inc. and Alphabet Inc. it is very accurate to say that Apple Inc. Assets are more productive as compared to Alphabet Inc. due to the fact that it has higher Asset turnover ratios. For Alphabet Inc. to increase its asset turnover values then it has to increase its revenues for each and every year.

According to accounts payable turnover ratio, again Apple Inc. has got a greater payable ratio as compared to Alphabet Inc. In comparison to Alphabet Inc., a greater accounts payable turnover ratio illustrates how effective Apple Inc. is at paying its suppliers and short-term loans on schedule. In this scenario, if the Accounts Payable (AP) turnover ratio is 8 instead of 6 and below from the two tables above, the assets’ Day Payable will decrease (Pawar, Jalem & Tiwari, 2019). Lower accounts payable turnover in days is better if the turnover ratio is high. As a result, Alphabet Inc. has a lower accounts payable turnover ratio than Apple Inc., which suggests it will take longer to pay for its assets.

 

 

Return of Equity of Alphabet Inc. & Apple Inc.

Table 6.1. Return of Equity of Alphabet Inc. for the Period Ending 2018, 2019 & 2020

ROE Formula 2018 2019 2020
Return On Equity ( ROE) Net Profit/ Equity * 100 18.72% 22.32% 27.25%

 

Table 6.2. Return of Equity of Apple Inc. for the Period Ending 2018, 2019 & 2020

ROE Formula 2018 2019 2020
Return On Equity ( ROE) Net Profit/ Equity * 100 26.23% 31.45% 36.51%

Return on equity (ROE) is a metric used to evaluate how successfully a firm manages the capital it has received from its shareholders. The greater the return on equity (ROE), the better a company’s management is at creating earnings from its equity investment (Rocha, 2020). Therefore, it is very evidence from the above table 6.1 and 6.2 about the Alphabet Inc. and Apple Inc. that in this case, Apple Inc. has got higher Return On Equity (ROE) which is increasing yearly for the 3 Years as compared to Alphabet Inc. that has lower Return on Equity (ROE) but they are also increasing yearly. Apple Inc. having a greater Return On Equity as compared to Alphabet Inc. means that Apple Inc. is capable of selling more of its stocks even in the subsequent years to come. Furthermore, Apple Inc. will be able to manage various capitals that it has received from the shareholders hence better management which will end up creating more earnings from the equity investment of the company (Wild, 2020).

Alphabet Inc. needs to make more sales and minimizing the cost of its entire expenses in order to increase its net profit throughout the years which will influence its Return On Equity to be greater as illustrated in Apple Inc. (Seven & Coskun, 2016). By doing this the company will be able to manage more capitals that it will receive from its potential shareholders and creates more of the earnings from its entire yearly of equity investment.

How Alphabet Inc. and Apple Inc. Managing Debts Using Interest Expenses Coverage

Table 7.1 Interest Expense Coverage for Alphabet Inc. for the Period Ending 2018, 2019 & 2020

Interest Expense Coverage Formula 2018 2019 2020
IEC Net Income/ Interest expenses 1.23 2.34 3.61

 

Table 7.2 Interest Expense Coverage for Apple Inc. for the Period Ending 2018, 2019 & 2020

Interest Expense Coverage Formula 2018 2019 2020
IEC Net Income/ Interest Expenses 3.33 3.71 5.74

Interest Expense Coverage (IEC) is the number of times a company’s earnings can be used to cover its liabilities. The smaller the ratio, the more debt expenses stress the corporation and the less resources it has to invest elsewhere. The higher the ratio, the better the company’s ability to pay its debts. Philips & Markle, 2016). Lenders might use the ratio to determine whether or not to lend to the business in the future. It aids in determining the current risk of a company to which a bank is considering lending money. The higher a borrower’s Interest Coverage Ratio is, the less able it is to service its debt.

An interest expense coverage ratio (IEC) of (+ 3) and above is always favorable for a corporation in any examination. A coverage ratio of less than one (+1), on the other hand, implies that a corporation is unable to meet its present interest payment obligations and, as a result, is in poor financial condition (Vasilaki & Tsakalidis, 2019). In the above companies Interest Expenses Coverage ratio, it is evidence that Apple Inc. has got the best Interest coverage expenses ratios since throughout the 3years the company has recorded (IEC) of +3 which means that in the entire periods between 2018 to 2020 the company was able to meet its present interest payment obligations and therefore has the healthiest financial status as compared to Alphabet Inc. (Li, 2020).

According to the Apple. Inc. in the periodic year 2020, the company recorded the highest Interest Expense Coverage which means in 2020, the company could manage its debts and this could have come as a result of increasing the net sales throughout the year. (Ahmer, 2016). However, Alphabet Inc. has got the lowest Interest coverage expenses throughout the year but in 2020 it recorded the best Interest coverage expense ratio that could enable the company to meets its present interest payment obligations. In 2018, Alphabet Inc. recorded the lowest interest coverage expense as compared to the subsequent years (Ahmer, 2016).

Moreover, this shows that Alphabet company was straining when it comes to paying some of its liabilities or debts since it has less money in terms of cash to pay for the company lenders like the bank loan and amongst others (Rocha, 2017). This will make the lenders of the company to shy away from lending company and therefore making the company to face some of the financial distress to manage some of its day to day activities. Alphabet Inc. need to increase its net sales in the entire periodic years in order to improve its Interest Expense Coverage (IEC).

Capital Structures of Alphabet Inc. and Apple Inc.

When the debt equity ratio optimizes the amount of the company’s equity share, the capital structure is optimal. A corporation with a high debt equity ratio, on the other hand, has a risky capital structure and poses a bigger risk to investors. However, this danger could be the main driver of the company’s expansion.

Alphabet Inc. Capital Structure and how it Finances its Assets

Table 8.1. Alphabet Inc. Capital Structure for the Period Ending 2018, 2019 & 2020 (In Million)

2018 2019 2020
 Total Assets 120,000 140,000 150,000
Total Liabilities (20,000) (40,000) (50,000)
Total Alphabet Inc. Equity 100,000 100,000 100,000
Capital Structure = Total Liabilities/Total Equity 0.20 0.40 0.50

Alphabet Inc. Capital Structure and how it Finances its Assets

Table 8.2. Apple Inc. Capital Structure for the Period Ending 2018, 2019 & 2020 (In Million)

  2018 2019 2020
Total Assets 280,000 300,000 320,000
Total Liabilities (200,000) (235,000) (237,000)
Total Apple Inc. Equity 80,000 65,000 83,000
Capital Structure = Total Liabilities/ Total Equity 2.50 3.60 2.86

In 2018, the capital structure of Alphabet Inc. is such that for every 20 cents of debt, the company will make $1 of equity, for every 40 cents of debt, $1 of equity in 2019, and for every 50 cents of debt, $1 of equity will be made, which will be utilized to finance the company’s assets (Dyreng & Markle, 2016). As a result of this study, it is reasonable to conclude that Alphabet Inc. has a lower-leverage value, implying that it poses a lesser risk to the firm than Apple Inc. As a result, this is a good example of a corporation with a low-leverage, or low-risk, equity capital structure.

Conversely, according to this capital structure, Apple Inc. is deemed heavily leveraged. In 2018, Apple Inc. had $1 in equity for every $2.5 in debt, whereas in 2019, Apple Inc. has $1 in equity for every $3.6 in debt, which is even greater. In comparison to 2019, its capital structure has shrunk in 2020 (Blocher et.al, 2019). This means that, in this approach, not only Apple Inc. must boost its returns to be able to finance its debt. As a result, future lenders will consider Apple Inc. to be a bigger risk than Alphabet Inc., which has a low risk in our analysis. The cost of capital is minimized and the company’s value is maximized under an optimal capital structure with a specific debt-to-equity ratio (Wild, 2019). When Apple Inc. and Alphabet Inc. decide to seek funds, they will be able to pick between debt and equity. Using largely stock to fund the acquisition of assets is referred to as lesser leverage, whilst using mostly debt is referred to as higher leverage.

Dividend Policy and Dividend Yield of Alphabet Inc. & Apple Inc.

Table 9.1. Dividend Yield of Alphabet Inc. for the Period Ending 2018, 2019, & 2020 (In Millions)

Year Last Stock Price AVG. Stock Price Amount Dividend Yield (at Average Price) Yield(at last Price) EPS Payout Ratio
2018 252 132 3.0 1.91% 0.84% 12 16%
2019 267 157 3.0 1.70% 0.91% 17 14%
2020 289 178 4.0 1.62% 0.96% 19 12%

 

Table 9.2. Dividend Yield of Apple Inc. for the Period Ending 2018, 2019, & 2020 (In Millions)

Year Last Stock Price AVG. Stock Price Amount Dividend Yield (at Average Price) Yield(at last Price) EPS Payout Ratio
2018 278 176 2.0 4.58% 0.71% 10 22%
2019 269 186 2.0 5.45% 0.82% 14 21%
2020 342 223 6.0 4.53% 1.12% 18 20%

 

According to the above calculations of (Dividend Yields) will show how much a company was paying out its annual dividends. A healthy dividend yield varies depending on interest rates and economic factors, but a yield of 4 to 6% is generally regarded desirable (Philips & Libby, 2019). Investors may not be able to justify buying a stock just for the dividend income if the yield is lower. Dividend stocks with greater production generate more income, but they also come with a larger risk. Dividend stocks with a lower yield provide less income, but they are frequently supplied by more reliable corporations with a track history of steady growth and payments (Wild, 2019).

According to the above table, it is very obvious that Apple Inc. is generating a better dividend yield as compared to Alphabet Inc. throughout the 3 years since its dividend yields are constantly between 4% to 6% throughout the 3 years (Seven & Coskun, 2016). This means that Apple Inc. is generating more income as compared to Alphabet Inc. The only issue that Apple will face with the above higher periodic dividends yield rates is the fact that highest dividend yield rates will always face larger risk as compared to companies such as Alphabet Inc. that produces lower dividend yield per year (Vasilaki & Tsakalidis, 2019). For Alphabet Inc. to improve its dividend yield per years then it needs to put more of its effort on the company revenues and sales. Increasing its sales and revenues will automatically correct the situation in this case.

A very high dividend yield, on the other hand, is not always a positive indication for Apple Inc., because the business is returning so much of its profits to investors rather than growing the company (Li, 2020). Dividend yield, in combination with total return, can be a key component, as dividends are frequently used to boost an investment’s total return. As a result, in this financial analysis, I recommend that Apple Inc. to keep its dividend yield under control in order to maintain an equilibrium rate. In order for Alphabet Inc. to obtain the recommended 10% to 15% tax rate on dividends yield in this analysis then its management must retain the stock for a minimal number of days. That minimal period can range from 60 to 65 days within the 121-day period surrounding the ex-dividend date. The 121-day period begins 60 days before the ex-dividend date (Blocher et.al, 2019).

The amount of cash returned to shareholders is determined by the dividend policy. When considering whether or not to pay a dividend, a firm must consider its profits and determine how much should be held in the business to finance growth prospects and how much should be distributed to investors (Wild, 2019). Both Apple Inc. and Alphabet Inc. have established their dividend policies by providing returns to equity owners in order to earn the capital spent by both companies in this analysis. While making such judgments, both the company in this study will need to maintain a correct mix of debt and equity.

Price Earnings Ratio for Alphabet Inc. and Apple Inc.

Table 10.1. Price Earnings Ratio for Alphabet Inc. for the Period Ending 2018, 2019 & 2020 (In Millions)

Year Formula Stock Price Per Share ($) Earnings Per Share ($) Price Earnings Ratio
2018 Stock Price Per Share/ Earnings Per Share 2,946.22 105.71 27.87
2019 Stock Price Per Share/ Earnings Per Share 2,763.34 101.27 27.29
2020 Stock Price Per Share/ Earnings Per Share 2,567.42 95.66 26.84

 

Table 10.2. Price Earnings Ratio for Apple Inc. for the Period Ending 2018, 2019 & 2020(In Millions)

Year Formula Stock Price Per Share Earnings Per Share Price Earnings Ratio
2018 Stock Price Per Share/ Earnings Per Share 192.43 6.33 30.40
2019 Stock Price Per Share/ Earnings Per Share 164.88 5.24 31.47
2020 Stock Price Per Share/ Earnings Per Share 147.90 5.16 28.66

The Price Earnings (P/E) ratio reflects the share price of a corporation to its earnings per share. A higher P/E ratio may indicate that a corporation’s stock is overvalued, or that speculators anticipate rapid growth in the future. The P/E ratio, often known as the price-to-earnings ratio, is a fast way to determine if a stock is undervalued or overvalued. According to general analysis, the lower the P/E ratio, the healthier for the business and possible investors will make more income (Ahmer, 2016). The metric for a company’s is stock price divided by its Share earnings price. A price-to-earnings ratio of 30 and above is considered high by historical stock market norms. This type of valuation is typically assigned to only fast growing companies by investors in the company’s early phases of development. As a corporation matures, its growth rate slows and its earnings per share tend to drop in this case (Tidhar & Eisenhardt, 2020).

In this Price Earnings ratio analysis, it is evident in the above 10.1 table and 10.2 table that Apple Inc. has got higher Price Earnings ratios as compared to Alphabet Inc. This means that Apple Inc. has overvalued its stock prices which has resulted to the higher Price Earnings Ratios (P/E) which are above 30 in 2018 and 2019 as calculated (Almeheiri, Hosani & Saif, 2021). Alphabet Inc. has got lower Price Earnings Ratios (P/E) which is below 30 throughout the 3 years as calculated. This means that, the company has undervalued its stock prices in order to generate low (P/E) as shown in the above tables. In comparison, Alphabet Inc. having lower Price Earnings ratio (P/E) means that it has cheaper stock prices which are good for the potential investors in the market to make more profit in this analysis.

 

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