Question

Key comparative figures for Apple and Google follow.

Apple Google

Current Prior Current Prior

\( millions Year Year Year Year

Total liabilities…….. \)171,124 \(120,292 \) 27,130 $ 25,327

Total assets ……….. 290,479 231,839 147,461 129,187

1. What is the debt ratio for Apple in the current year and for the prior year?

2. What is the debt ratio for Google in the current year and for the prior year?

3. Which of the two companies has the higher degree of financial leverage? What does this imply?

Short answer

Apple: 0.59 (current) and 0.52 (prior)

Google: 0.18 (current) and 0.19 (prior)

Apple is having higher financial leverage

Step-by-step solution

Debt ratio for Apple

$\begin{array}{c}\mathbf{Debt}\mathbf{}\mathbf{ratio}\mathbf{(}\mathbf{Current}\mathbf{}\mathbf{Year}\mathbf{)}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Liabilities}\mathbf{\left(}\mathbf{Currentyear}\mathbf{\right)}}{\mathbf{Total}\mathbf{}\mathbf{Assets}\mathbf{\left(}\mathbf{Currentyear}\mathbf{\right)}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{171}\mathbf{,}\mathbf{124}}{\mathbf{\$}\mathbf{290}\mathbf{,}\mathbf{479}}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{59}\end{array}$

Debt ratio for Google

$\begin{array}{c}\mathbf{Debt}\mathbf{}\mathbf{ratio}\mathbf{\left(}\mathbf{CurrentYear}\mathbf{\right)}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Liabilities}\mathbf{(}\mathbf{Current}\mathbf{}\mathbf{year}\mathbf{)}}{\mathbf{Total}\mathbf{}\mathbf{Assets}\mathbf{(}\mathbf{Current}\mathbf{}\mathbf{year}\mathbf{)}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{27}\mathbf{,}\mathbf{130}}{\mathbf{\$}\mathbf{147}\mathbf{,}\mathbf{461}}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{18}\end{array}$

Financial leverage analysis

A company with a higher debt ratio would have higher financial leverage. So in the given case, Apple is having higher debt ratio so it would have higher financial leverage.

Higher financial leverage implies that the company is financing a larger portion of its assets with liabilities or borrowings and thus having more risk.