operatingcashflowsshouldcoincide

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Unformatted text preview: creasing gross and operating profit margin trends bode well for future earnings sufficiency Low gross profit and operating profit margins indicate insufficient earnings Decreasing gross and operating profit margin trends do not bode well for future earnings sufficiency EARNINGS QUALITY EARNINGS QUALITY (CONT.) Recurring and nonrecurring earnings (Exhibits 12­3 and 12­4) Correlation among the various profit margins indicate recurring earnings or high earnings quality Lack of correlation among the various profit margins provide evidence of nonrecurring earnings or low earnings quality EARNINGS QUALITY EARNINGS QUALITY (CONT.) Operating cash flows should coincide with operating income (Exhibit 12­5) Strong correlation between operating income and operating cash flows indicates high earnings quality Strong correlation between operating income and operating cash flows indicates high earnings quality EARNINGS QUALITY EARNINGS QUALITY (CONT.) Operating income should coincide with net income Constant difference between the two income numbers over time, which is attributable to a constant tax rate, indicates high earnings quality Variable differences between the two income numbers over time indicate low earnings quality Strong Correlation $140 $120 ($-000s) $100 $80 $60 $40 $20 $0 2005 2006 Operating Income 2007 2008 Operating Cash Flows 2009 ($-000s ) W eak Correlation $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 ($10) 2005 2006 Operating Income 2007 2008 Operating Cash Flows 2009 ANALYSIS OF THE PC ANALYSIS OF THE PC INDUSTRY A relationship exists between market share and earnings Apple’s decreased market share contributed to a decline in earnings, threatened profitability, and raised doubt about earnings sufficiency Dell’s rapid increase in market share paved the way for greater earnings Market share does not ensure profitability, as Compaq demonstrated in 1998 PC Industry Relative Market Share 1993 and 1998 1993 1998 9.2% 13.1% 10.4% 10.6% 42.2% 21.7% 54.8% 38.0% Apple Compaq Dell Gateway Apple Compaq Dell Gateway ANALYSIS OF THE PC ANALYSIS OF THE PC INDUSTRY (CONT.) Earnings sufficiency Apple’s failure to generate sufficient earnings towards the end of the period analyzed was the result of An erosion of its technological superiority Decrease in market share Diminished technological superiority A lower revenue base with which to cover fixed costs Research and development costs that exceeded industry norms Apple Computer Operating Income and Cash Flow 1993-1998 $1,000 $750 $500 $ in Millions $250 $0 ($250) 1993 1994 1995 1996 1997 ($500) ($750) ($1,000) ($1,250) ($1,500) Operating Income Operating Cash Flow 1998 ANALYSIS OF THE PC ANALYSIS OF THE PC INDUSTRY (CONT.) Earnings sustainability Industry growth contributed to variable profit margins throughout the industry and over time Earnings varied among the four companies analyzed ANALYSIS OF THE PC ANALYSIS OF THE PC INDUSTRY (CONT.) Data indicate that Apple’s earning were less sustainable that its competitors because the company Did not conform to industry manufacturing standards Had an unfavorable cost structure (Exhibits 12­10A and 12­10B) Could not differentiate its products from those of its competitors Exhibit 12-11A PC Industry Research and Development Expenses 1993-1998 9% 8% % of Sales 7% 6% 5% 4% 3% 2% 1% 0% 1993 1994 1995 Apple 1996 Compaq 1997 Dell 1998...
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This document was uploaded on 03/24/2014.

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