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Financial Analysis on Apollo Group

By:   •  November 16, 2014  •  Essay  •  3,773 Words (16 Pages)  •  1,940 Views

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Contact Information

Name Phone Email

Will Berry 803-413-3376 wwberry0621@limestone.edu

Danielle Enrico 561-339-7198 dmenrico0818@limestone.edu

Raymond Guédez 864-347-8883 rguedez1016@limestone.edu

Todd Nakasuji 864-425-6777 tbnakasuji0624@limestone.edu

Brooke Shears 864-425-0018 bsshears0327@limestone.edu

John Wilson 864-314-6013 jwwilson12@yahoo.com

Purpose of Report

This report will be analyzing the financial situation of Apollo Group Inc. It will include Apollo Group Inc's income statement, balance sheet, common sized income statement, and ratio analysis. The report will also cover the company's earnings and how they have affected share price. It will conclude with the company's strengths and weakness based on the analysis

Income Statement and Balance Sheet

Within the industry, the trends stated are within the last few years are in the Apollo Group and the DeVry University that there are several changes that happened within 2011-2013. In Exhibit 1, it shows that the Apollo Group has higher numbers than its rival, DeVry. The total revenues of Apollo Group are decreasing each year due to external factors such as low retention rates and government regulations on the educational systems. In 2010, Apollo Groups earnings dropped by $1,008,715 and by the following years slow down the progress, but still loss over $900,000 within the last three years. The following became a trend for DeVry as well which in Exhibit 4 shows the average of $900,000 lost within the last year. After viewing these accounts, this shows that the Apollo Group has higher revenues, so when both of these companies lose the same amount of revenue that the Apollo Group will be better off. Another trend that is leading the income and balance sheet on both of these industries is the minimal or zero long term debt because of high profit returns. The balance sheet in Exhibit 2 shows that debt in 2010 was $168,039. After two years, the long term debt decreased by almost 3% in 2012. This later contributed to a 48% increase in revenues and profits. The DeVry had little to no debt within the last few years as well. Shown in Exhibit 3, shows 0% long term debt in the last three years in the balance sheet. This echoes the profitability that these schools receive in this industry and retaining their stature of being a for-profit school. There is only a few concerns to be worried about due to the high regulations and high drop-out rates, but can maintain profitability and assets due to strong investors and little debt. The level of concern should not be of concern because of high earnings and turnout rate which increases from year to year.

Common Sized Income Statement

There are many concerns when looking at Apollo Group's common sized income statements over the past five years. The company's revenues and income have been decreasing, while costs and expenses have been increasing. As seen in Exhibit 5, Apollo Group's net revenues have decreased 10.13% from 2011 to 2012, largely due to the fact that enrollment dropped 13% during the year (Gamm). This is a negative trend in the for-profit universities industry as government regulations have caused admissions standards to increase, in hopes that the number of loans defaulted on decreases and graduation rates increase. Also shown in Exhibit 5, Apollo Group's total costs and expenses have increased by 4.41% in the past year because of a large spike in instructional costs, meaning Apollo Group is having to pay its professors and advisors more money than in past years. Marketing expenses and admissions advisory costs have also arose in the past two years. Marketing is now a necessity for for-profit universities as demand and enrollment have decreased, and admissions standards have increased because of government regulations, as a result, costs are much higher than in the past. These increases in costs and expenses have also caused Apollo Group's operating income to decrease proportionately by 4.41%. Furthermore, from 2011 to 2012, Apollo Group's net income has decrease 1.52%, which is made even more concerning as it has decreased 5.37% in the past five years. Clearly, the ability to make profits in the for-profit universities industry is decreasing. Apollo Group's top competitor, DeVry, is having the same issues with these negative changes in the industry. As seen in Exhibit 6, DeVry's net income has decreased 4.69% in the past five years. Similarly to Apollo Group, this is a result of decreased revenues and increased costs and expenses. Over the past five years, the changes in Apollo Group's common sized income statements have been negatives ones and raise many reasons for concern.

Ratio Analysis Report

Exhibit 7 shows Apollo Group company ratios vs. Industry SIC # 8221 Ratios for the past five years. It also compares third quarter ratios for Apollo for years 2012 and 2013. Exhibit 8 is a list of companies that are included in the industry averages on Exhibit 7.

Profitability Ratios

As seen in Exhibit 7, Apollo's ROE for the last 5 years has been staggering compared to the industry, so there seems to be no structural flaws in the company. Apollo's ROA is also head and shoulders above its industry average. Over the past three years Apollo's ROE has hovered between 14-17% whereas the industry has fluctuated between 0.10 % - 10.90 %. In 2012, it had 14.70% return on assets as compared to the industry's 3.8% and although is currently trending downward at 3.30% compared to second quarter 2012 at 5.90% it should still outpace the industry at year end.

The Apollo Group's "gross profit margin for the second quarter of year 2013 is essentially unchanged when compared to the same period a year ago. Sales and net income have dropped, although the growth in revenues underperformed the average competitor within the industry, the net income growth did not" (The Street Ratings: Apollo Group Inc.). Apollo's net profit margin has trended downward in the past five years from 15% down to 10%; however, its profit margin is high compared to its industry average of 6.2% over the past five years, so it handles expenses better than its competitors.

Asset Management Ratios

Compared to the industry average Asset turnover of 1.2, Apollo's asset turner is 1.5. However, Apollo's working capital turnover has significantly decreased in 2013 as compared to prior years. Apollo's collection period has trended downward for the past five years from 24 to 17.8 in 2012, whereas the industry started to trend downward from 38.9 to 23.9 (2008 through 2011) but spiked up to 25.3 in 2012. Therefore, the company collects receivables from its students sooner than its competitors.

Liquidity Ratios

In reviewing Apollo's liquidity ratios over the past five years as compared to its industry it appears they are averaging around 1.2 to 1.4 whereas the industry as a whole is and has been a solid 1.4 over the past three years. The second quarter 2013 shows a Quick Ratio of 1.6, which means that technically this company has the ability to cover short-term cash needs. The company's liquidity in the second quarter 2013 has increased from second quarter 2012, indicating improving cash flow.

Debt Management Ratios

Their debt to equity has increased over the past five years to 2.1 compared to the industry holding steady at 1.2. Apollo Group has also increased the amount of debt used to finance assets in the past year. This has dramatically decreased their times interest earned ratio. "Apollo reports having $821 million in unrestricted cash in second quarter 2013 vs. $91 million of debt. With a long term debt/equity ratio of less than 0.10 and an interest coverage ratio of over 50, the company is not at any risk of financial problems. That gives the company the flexibility to restructure quickly and buyback more shares, which they have done consistently over the past 5 years" (Dow, Apollo Group: This Unloved Company Is Significantly Undervalued).

Problem Areas

The second quarter 2013 conference call results showed a continued rapid deterioration of student enrollment. In the third quarter 2013 University of Phoenix enrolled about 39,000 new students and ended the quarter with a total enrollment of 288,000 students. However, this was a 25% decline in new enrollment over the last quarter so it is trending downward. Without students their net sales decline and net income deteriorates. "Another weakness is that Apollo relies on The University of Phoenix which in 2012 constituted 89% of revenues and 100% of operating profits" (Dow, Apollo Group: This Unloved Company Is Significantly Undervalued). Only 11% of revenue came from Apollo Global, which consists of a few small universities in Latin and South America.

Competitive Advantage

Apollo Group has some competitive advantages over its

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