Fundamental Analysis Investment

Fundamental Analysis Investment Payback

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Fundamental Analysis Investment Payback
Introduction
The evaluation of a firm’s financial performance is important to an investor, especially when making a decision on the best firm to invest in. Financial ratios provide insight into the attractiveness of investment options, and an investor can determine whether or not to invest in the firm due to its inherent financial characteristics. On the other hand, an investor faced with the option of selecting a firm to invest in from among a number of attractive firms can compare their financial ratios in order to determine the firm that has the highest rates of returns and the lowest risks. Below is an analysis of financial ratios that would be used by a credit rating company such as Moody’s or Standards & Poor’s. Financial information pertaining to Apple, a technology giant, is used to exemplify how the ratios are assessed.

Financial ratios
Earnings per share
Earnings per share is the amount of profits earned by a single share. It is derived by dividing the company’s profits by the number of shares (Hoskin, Fizzell, & Cherry, 2014). As at 2015, Apple’s net income amounted to $53. 40 billion and the number of shares were 5,753,421 (Apple Inc. annual report, 2015). As a result, its earnings per share amounted to $9.28. 
Price to earnings ratio
It measures the projected future earnings. A high price to earnings ratio denotes that investors expect future growth in earnings. It is calculated by dividing the firm’s current share price against its earnings per share (Hoskin, Fizzell, & Cherry, 2014). Apple currently trades at $114.06 and its earnings per share as at 2015 was $9.28 (Apple Inc. annual report, 2015). As a result, the price to earnings ratio is 12.2%. The ratio is high, and it showcases that investors expect the company’s financial performance to continue growing.
Price to sales ratio
It defines the number of times an investor is paying for every dollar of the company’s sales. It is calculated by dividing the price of the share by the revenue per share (Hoskin, Fizzell, & Cherry, 2014). Apple’s share trades at $114.06 while its sales amounted to 233.7 billion (Apple Inc. annual report, 2015). The number of sales has to be divided by the number of shares in order to determine the amount of sales attributed to one share. As a result, its price to sales ratio was 2.8%. 
Debt to equity
Debt to equity assesses how much the company owes creditors and lenders versus how much shareholders have committed. A high debt to equity ratio is risky as it suggests that in the event that the company closes down, the stockholders’ investments will be minimal as most of it will go towards paying debt (Hoskin, Fizzell, & Cherry, 2014). Apple’s total debts amounted to $55,963, while its total equity was $119,355 million (Apple Inc. annual report, 2015). Its debt to equity therefore amounted to 0.46. This indicates that the firm has lower debts when compared to equity, which is improves the attractiveness of the investment. 
Dividend yield
This is the annual cash dividend per share divided by the current price of the stock (Brigham & Ehrhardt, 2013). Apple’s cash dividends declared per share amounted to $1.98 (Apple Inc. annual report, 2015). when compared with the $114.06 price of the stock, the firm’s dividend yield amounts to 1.73%. this amount should be compared with the dividend yield provided by other companies in order to select the company with the highest dividend yield.
Return on equity
It is one of the most important financial ratios, as it measures the returns that shareholders can expect from the overall earnings. An investor can compare the ROEs for different companies so that the highest returns can be selected (Brigham & Ehrhardt, 2013). 15 to 20% of ROE is an acceptable figure. Apple reported a net income of $53,394 billion on $119,355 of shareholder’s equity (Apple Inc. annual report, 2015). Its return on equity therefore amounts to 44.7%. its return on equity is favorable as it is higher than the acceptable rates.
Discounted cash flow
The discounted cash flow assesses the attractiveness of an investment opportunity by assessing the future cash flow projections and discounting them in order to determine the current value estimate. An attractive opportunity has to have a higher future value than the current value (Brigham & Ehrhardt, 2013). Based on cash flow projections for 5 years, the intrinsic value of Apple’s common stock amounted to $1,182,216 million (Apple Inc. annual report, 2015). Divided by the number of shares, the intrinsic value per share amounts to $219.58. when compared to its current share price of $114.06, investing in Apple is determined as an attractive opportunity as the discounted cash flows forecast that the company’s share price will increase in future, and the investors will get higher values for their investments.

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