Financial Statements of Apple - Case Study Example

RUNNING HEAD: Finance - Apple Finance - Apple of Introduction Apple, Inc. (or “Apple”) got incorporated in 1977 and is presently into the business of designing and manufacturing and marketing a range of personal computers, portable digital music players, and mobile communications and media devices. The company is also into selling a range of related software, networking solutions, services and peripherals, and third-party digital content applications. Some of the companys well known products and services include Macintosh (Mac) computers, iPhone, iPad, iPod, Apple TV, Xserve, a portfolio of consumer and professional software applications, the Mc OS X and iOS operating systems and a range of accessory, third-party digital content applications through the iTunes Store, service and support offerings. Apple makes its products globally via retail stores, online stores, and direct sales force and third-party cellular network carriers, retailers, wholesalers, and value added resellers (Reuter, 2010a). The company is known for its innovations in software and hardware and its unique ability to design and develop its own operating systems, application software and services to serve its customers with changing needs and wants (Apple, 2010a). This paper seeks to analyze financial statements of Apple from its annual reports for the past three years by looking at the company’s financial ratios of performance, liquidity and solvency position as well its market ratios and dividends conditions for the past three years. This paper will also look into current events and their possible on income statement and balance sheet. In addition, this paper will look into the company’s stock price performance and condition in relation to competition. 2. Analysis and Discussion 2.1 Financial Analysis Financial analysis requires the use of relevant financial ratios to evaluate the company’s record for the past three years. 2.1.1 Profitability and Management Efficiency Three -year average return on equity (ROE) of 28% of Apple shows less superiority about its past performance in relation to the industry average of 16.82%. An average of about 28% return on equity definitely attracts investors, as it would mean that for every 100 US dollars, the investors expect returns of about 28 dollars. An independent observer could view this as something extraordinary for a company like Apple given the present condition of the economy. See Appendix I for resulting ratios based on the summary of income statement and balance sheet for the last three years. Apple’s return on equity uses the formula where net profit is divided by the total stockholders’ equity (Helfert, 2001) as a way to relate how much profit should compensate the amount of investments made by investors. When this 28% ROE is compared to an average rate of 0.25%, assuming the same money was invested in a bank, a hundred times higher rate is obvious and this should be something tough to find for investors. The 0.25% benchmark is the US base rate of the Federal Reserve Bank (Housepricecrash, 2010) that could represent the risk-free-rate investment in the US and could be assumed as an earning that one could get by just sitting alone and doing nothing. Analyzing profitability goes with knowing whether the company management is efficient as well or not. To measure management efficiency, this paper uses return on assets (ROA), which divides net profit to total assets this time, not total equity. Apple’s average ROA for the last three years was 18% and was still higher than the industry average of 7.57%. ROA undoubtedly indicates a profitability measure but the same may also tell how efficient management the company was in terms of profits in relation assets employed in business. ROE on the other hand measures how much management gives back resources invested by stockholders. By comparing the two ratios, it appears that Apple is both more profitable and efficient than industry. To confirm this deduction made, further study in the company’s average net operating margin and net profit margin should reveal the same. With operating margins for the last, three years averaging at 26% as against the industry average of 5.04%. To get to net profit margin, on the other hand, the computed operating margin would still some additions or subtractions including interest income, interest expense and other non-operating items. Non-operating items may increase or decrease profitability depending on management used the company’s resources. The higher comparative average net profit margin than industry conclusively decides the issue by confirming better profitability and efficiency Apple than the industry since. The profitability ratios such as return to equity, operating profit margin and net profit margin however have some limitations, as they would show the capacity of the company from a historical perspective. Whether past profitability and efficiency would continue may be subjected to different factors. The company has acknowledged some risk factors in its annual reports and decision makers like investor should be made aware of these factors. Profitability and efficiency should also be able to influence liquidity, which should now be discussed next. 2.1.2 Liquidity Apple’s liquidity is its ability to meet its currently maturing obligations. It can be measured using the current ratio and the quick asset ratio. The information in Appendix I summarizes some of the information for the purpose of this part. Current ratio computation uses current assets to be divided to current liabilities while quick assets ratio is almost the same except that the inventory and prepaid expenses are being removed from the current assets to have a new numerator but the denominator is the same (Helfert, 2001). Quick assets are stricter current assets and normally include only cash, marketable securities, and accounts receivable. This makes quick asset ratio an improved measure than that of the current ratio. As applied now to Apple, its computed current ratio is 2.46 as against industry average of 1.5. Quick ratio of the company on the other was reflected at 2.00 as against industry average of 1.13. Both ratios for the company are lower than industry averages, indicating poorer liquidity. Normally, a current ratio of at least 1.0 is generally considered liquid since current liabilities is still matched by current assets of the company and the company may be presumed to have an excess working capital. See Appendix I. 2.1.3 Financial leverage Financial leverage or solvency measures Apple’s long-term capacity to keep up it stability over the long term. Normally measured by the debt to equity ratio (Helfert, 2001), with the formula of having the total debt of the company divided by its total equity, solvency should assure investors that the company a long life for Apple to recover long-term investments which takes years to produce the needed returns. The debt to equity ratio of Apple is 0.57 as against industry average of 0.58. The solvency ratio of Apple is slighter better or almost the same as the industry average and this means the value the company investments from stockholder is as strong or even stronger as against its competitors. It is therefore an evidence of a-low leverage capital structure for Apple, as the company would be considered as highly able to make further expansions in the future without falling to be further riskier than present competitors were. It means, in simple terms, that the company could easily be able to continue its risky product innovations as a way manage its long terms risk. Its profitability would be enough to provide funds to pay currently maturing obligations and to provide good amount of dividends annually to investors. If the company wants make future expansion further debts would not make company necessarily riskier. 2.2 Market ratios Market ratios indicate how well the stocks of the company are valued by the stockholders. As Apple management tries to maximize the wealth of stockholders (Brigham and Houston, 2002), there must be a way to measure the same. Some measures of attaining the objective include knowing how valuable are the stocks of the company in relation to its earnings and its book values of the company or the P/E ratio. The information in Appendix B summarizes the market ratios for the company as against is competitors in the industry. Using said P/E ratio, the company is definitely better at 20.9 for the latest twelve month as against industry average of 15.98. Even using the low and high average of price-earnings ratios for the past five years, the company is ahead over other players in the industry. These higher valuation ratios mean that investors would risk more in buying the company’s stocks than competitors. This stock performance appears supported with profitable and efficient financial performance and generally liquid condition of the company in relation to its competitors in the industry. Performing above the major indices like Dow and FSTE 100 is a stunning proof of what Apple has achieved in delivering wealth to stockholders. See Appendix C. 2.3 Impact of most events to income statement and balance sheet Apple, like any other company, operates within the context of both internal and external environments. It is affected by developments in the economy such as changing macroeconomic variables like interest rates, inflation, unemployment level and GDP level (Ando, 2010). Changes on these things may affect the supply and demand for its products and/or in terms of its cost of capital (Brigham and Houston, 2002). Slower demand due to depressed markets may affect the revenues of Apple in the coming reporting period when income statement and balance sheets are prepared. Slower revenues therefore could drive profits to be lower than expected. During slower demand, increased marketing cost could also affect profitability. The resulting lower profitability could eventually affect the balance sheet, as lower profitability would normally lower utilization of assets. However, an innovating company like Apple has survived the recent crisis on economy because of its produce innovations by causing shift in paradigms (Ando, 2010). No wonder its stock prices performance exceeded those of Dow and FTSE 100 (Reuters, 2010c) even during the crisis. See Appendix C. On the hand, the evolution of technology has caused changes that favour much those in technology sector where Apple is a part. A news item about this issue is on the cannibalization made on sales of physical newspaper by sales of newspaper applications for devices provided like the Apple iPad (Reuters (2010d). This is something that is favourable to the industry and may possibly increase revenues for the next reporting period. The resulting profitability goes also beyond the income statement and balance sheets. Stockholders of Apple also benefit from this latter news because it would mean higher stock prices and more wealth. 3. Conclusion Given Apple’s higher financial performance using profitability and management efficiency ratios, and better financial position in terms liquidity and financial leverage or solvency, all of which should be good reasons for investing with the stocks of Apple. The undeniably high profitability and efficiency of the company would help in maintaining good liquidity and financial leverage of the company that would keep the company stable. Keeping the company in shape both in the short term and long-term assure confidence to many of iss stakeholders. Given also Apple’s higher PE ratio and higher market to book values than industry average, the company could be inferred to have a good future. The higher than average increase in stock price of the company over the three-year period is supported by its internal strength in terms of financial performance. The company was able to maintain payment of dividends to stockholders, which is a good sign that the company is providing dividends while keeping the stock price of the company in proper shape. The stock performance is thus generally supported with increasing revenues despite problems in the economy for the past three years. The investments in research and development made by Apple sustained its continuing innovation is keeping the company above the ordinary performers. The company therefore is addressing the need of its stakeholders including its customers and stockholders. With assured financial health, this paper recommends buying the company’s stock for investment purpose and present stockholdings may be kept both in the short term and long term for more wealth. Other stakeholders must be happy also with Apple. Appendices Appendix A- Summary of Financial Data and Ratios; Sources: (Apple 2010a, 2010b, Reuters, 2010b) Appendix B – Summary of Market Ratios vs. Industry; Source: Reuter (2010b) Appendix C – Stock Price Graph of Apple vs. Dow and FTSE 100; Source (Reuters, 2010c) References: Ando, Ritsuko (2010). Cisco CEO comments key to igniting stock gains. Retrieved 16 November 2010 from http://www.reuters.com/article/idUSTRE6A93FE20101110 Apple (2010a). Annual Report 2010. Retrieved 16 November 2010 from http://services.corporate-ir.net/SEC/Document.Service?id=P3VybD1odHRwOi8vaXIuaW50Lndlc3RsYXdidXNpbmVzcy5jb20vZG9jdW1lbnQvdjEvMDAwMTE5MzEyNS0xMC0yMzgwNDQvZG9jL0FwcGxlSW5jLnBkZiZ0eXBlPTImZm49QXBwbGVJbmMucGRm Apple (2010b). Annual Report 2008. Retrieved 16 November 2010 from http://services.corporate-ir.net/SEC/Document.Service?id=P3VybD1odHRwOi8vaXIuaW50Lndlc3RsYXdidXNpbmVzcy5jb20vZG9jdW1lbnQvdjEvMDAwMTE5MzEyNS0wOC0yMjQ5NTgvZG9jL0FwcGxlSW5jLnBkZiZ0eXBlPTImZm49QXBwbGVJbmMucGRm Brigham, E. and Houston, J. (2002) Fundamentals of Financial Management, London: Thomson South-Western Helfert, E. (2001). Financial Analysis: Tools and techniques: a guide for managers. McGraw-Hill Professional Housepricecrash.co.uk. US Base rate, (2010). Retrieved 16 November 2010 from http://www.housepricecrash.co.uk/base-rates.php Reuters (2010a). Company Profile. Retrieved 16 November 2010 from http://www.reuters.com/finance/stocks/overview?symbol=AAPL.O Reuters (2010b). Industry Ratios. Retrieved 16 November 2010 from http://www.reuters.com/finance/stocks/financialHighlights?symbol=AAPL.O Reuters (2010c). Stock Price Graph vs. Dow and FTSE 100 . Retrieved 16 November 2010 from http://www.reuters.com/finance/stocks/chart?symbol=AAPL.O Reuters (2010d). James Murdoch says apps cannibalise newspapers. Retrieved 16 November 2010 http://www.reuters.com/article/idUSLDE6AB19P20101112?symbol=AAPL.O Read More