EARNING POWER OF APPLE INC.

2014 2015 2016 2017

FINANCIAL LEVERAGE RATIO 1.867 2.262 2.472 2.657
FINANCIAL LEVERAGE INDEX 1.991 2.568 1.517 1.770
TOTAL DEBT RATIO 0.519 0.589 0.601 0.643
DEBT TO EQUITY RATIO 1.078 1.434 1.508 1.800
DEBT TO TANGIBLE NET WORTH 1.170 1.551 1.617 1.914
TIMES-INTERESTS EARNED RATIO 139.271 98.93 42.03 27.62
6 4 5
OPERATING CASH FLOW TO TOTAL DEBT 0.496 0.349 0.309 0.247

Computation of Earning Power:

Formula: Earnings Before Income Taxes (EBIT)
Total Assets
(IN BILLIONS)

2014 2015 2016 2017

Earnings Before Income Taxes $ 53.48 $ 72.52 $ 61.37 $ 64.09
Divide: Total Assets $ 321.69 $ 290.48 $ 231.84 $ 207.00
Basic Earning Power 16.62% 24.97% 26.47% 30.96%
Earning Power ratio is a measure that calculates the earning power of a business before the
effect of the business’ income taxes and its financial leverage. It is calculated by diving earnings
before interest and taxes. It is similar to return on assets ratio as both have the same
denominator i.e. total assets. However, unlike return on assets which measures the net earning
power, the basic earning power ratio calculated the operating earning power i.e. their
numerators are different.

When analysts look at earnings power, they typically look for long-term earnings power – that is,
the ability to survive for a long time. In this case, there’s an increasing trend in the earning
power of Apple which means, the company was able to generate profit from conducting its
operations.

RETURN ON ASSETS 2014 2015 2016 2017

Net Income $ 39.51 $ 53.39 $ 45.69 $ 48.35
Divide: Total Assets $ 321.69 $ 290.48 $ 231.84 $ 207.00
ROA 12.28% 18.38% 19.71% 23.36%

The difference between the Earning Power ratio and Return on Asset ratio is equal to the
amount expensed out as interest expense and taxes.
It appears that Apple is better at converting its investment into profits. In 2017, the ROA is
23.36% meaning every dollar that the company invested in assets generated 23-cents of net
income.

Return on assets (ROA) is not the only way to measure earnings power. Earnings per share and
return on equity (ROE) are also popular measures.

It only makes sense that a higher ratio is more favorable to investors because it shows that the
company is more effectively managing its assets to produce greater amounts of net income. A
positive ROA ratio usually indicates an upward profit trend as well. Depending on the economy,
this can be a healthy return rate no matter what the investment is.

RETURN ON EQUITY 2014 2015 2016 2017

Net Income $ $ 53.39 $ 45.69 $ 48.35
39.51
Divide: Total Shareholder's Equity $128.24 $119.355 $111.547 $123.549
9
ROE 30.81% 44.73% 40.96% 39.13%
 2014 2015 2016 2017
BASIC EARNINGS PER SHARE 6.49 9.28 8.35 9.27
EPS Growth 13.49% 42.99% -10.02% 11.02%

1. Is it a good decision to invest in that company?

Answer: Yes,

2. Is it a good company to join?

3. Would it be a good decision to lend fund to the company?