Financial Analysis of Apple Company - Essay Example

Apple Inc. financial analysis Apple Inc. financial analysis Apple Inc. whose ticker symbol is AAPL is a California corporation that was established in 1977. It designs, markets and manufactures media and mobile communication devices, personal computers and digital music players. It also sells software, services, network solutions and third party digital applications and content. Its major products and services include iPhone, iPad, Mac, iPod, Apple TV, accessories, software applications, the iOS and Mac OS X operating systems, iCloud, and support service (Report 2011, pg. 5). It sells its products worldwide either through its retail store, online marketing, direct sales, third party networks, retailer or wholesalers. It serves government consumers, individual consumers, small and midsized businesses, and education enterprises. Apple’s financial year ends on the last Saturday of September and has an approximate period of 52 or 53 weeks. In connection to this, the main aim of this paper is to take out Apple Inc. financial analysis. Financial Analysis refers to the assessment of the profitability, stability and viability of a business entity or project. It is based on information derived from the financial statements including the Balance Sheet, Statement of Cash flow and the Income Statement, a single financial statement cannot give full information about the firm but together they give useful information (Gibson 2012, pg. 6). It is useful in benchmarking that majorly involves comparison of different companies’ performance comparison or comparing the company’s performance over time. The information is also used by management and investors in decision making and forecast future performance. We analyze data as revealed by Apple Inc.’s annual Reports and also carry out ratio analysis that helps us discover more information about the business (Michelle 2012, pg. 45). Apple operates in different geographical areas including the Americas, Japan, Europe, Asia Pacific and retail operations, it is hence involved in segment reporting and all the information from various sources is consolidated and used as the company’s financial information from which the company’s performance is analyzed (Brooks 2012, pg. 86). This paper aims to analyze the financial statements of Apple Inc from 2011 to 2013 to determine which year was more profitable, that is, time series analysis. The results could also be useful in performing industrial analysis which involves comparing one company’s performance to another in order to determine which one is doing better. Short Tem Solvency; Liquidity Ratios Measure the ability of the company to meet its short term debt obligations. These ratios majorly focus on current assets and current liabilities (Denise 71). Investors always take a close look at the liquidity ratios of a firm in deciding which firms to invest in. Liquidity ratios are also used to determine whether a company will continue as a going concern, this is based on the fact that firms having trouble meeting their short term debts are at high risk of going bankrupt. Current Ratio is the ratio of current assets to current liabilities. It shows how many times the current liabilities are included with the current assets and, therefore, a higher ratio is more preferred since it shows that a firm has more current assets than current liabilities and is therefore able to repay its debts. (Siddiqui 2005, pg. 47). =Current Assets/Current Liabilities 2013 2012 2011 `=73,286,000 /43,658,000  =57,653,000 /38,542,000   =44,988,000 /27,970,000   =1.68 times =1.5 times =1.61 times In this case Apple’s, current liabilities are included 1.68 times in 2013 by its current Assets. A higher ratio is required, therefore; performance was better in 2013 with 1.68 times as compared to 2012 and 2011. Quick ratio- Also known as the acid- test ratio. Inventory is the least liquid asset which might end up damaged, lost or obsolete. In most cases, inventory may be overbought or overproduced and, therefore, a portion of the list may be tied up in the firm as slow moving inventory. We, therefore, reduce it in calculating quick ratio. To determine the quick ratio, we, therefore, reduce inventories from current assets. Like current ratio, a higher rate is preferred (Stephen 2010, pg. 132). = (current asset-inventories) /Current Liabilities 2013 2012 2011 = (73286 -1,764)/ 43,658 = (57,653 -791) /38,542   = (44,988-776) /27,970 =1.64 times =1.48 times =1.58times In this example, 2013 was still the most liquid since liabilities were included with assets 1.68 times that are higher than the rates in 2012 and 2011. Cash ratio-it is a ratio of cash and its equivalents as compared to current liabilities. It considers the assets used to pay short term debts. Receivables and short term investments cannot be used to pay the debt on time and have to be sold, and the firm might also not get the full amount and therefore cash and its equivalent are the timely means of repaying debts. A higher ratio is recommended since it shows that the firm has enough cash to pay for its short term obligations. =cash/ current liabilities 2013 2012 2011 14,259 / 43,658 10,746/38,542 9,815/27,970   =0.33 =0.28 =0.35 Indicate the percentage of current liabilities covered by cash in hand. In 2011, the company had enough cash to pay 35% of its shorter obligations. (Vishwanata 2007, pg. 78). Long term Solvency; Financial Leverage Ratios. It measures the ability of the business to meet its long-term debt obligations. Debt Ratio=total Liabilities/Total Assets 2013 2012 2011 =83,451/207,000 =57,854/176,064, =39,756/ 116,371 =0.40 =0.33 =0.34 In this example, 40% of every dollar of the company’s asset in 2013 is a debt. In this case, a lower percentage is recommended. Hence 2012 was a more favorable year with 33% as compared to 34% and 40% for 2011 and 2013 respectively (Denise 2013, pg. 90). Asset Management Ratios. Inventory turnover is the ratio of the cost of goods sold to inventory. It shows the number of times the company restocked its inventory. The higher the ratio, the better the performance since it shows that the company sales were high, inventories were fast moving and hence need for restocking (Gibson 2012, pg. 32) Cost of goods sold/inventory 2013 2012 2011 =106,606/1,764 =87,846/791 =64,431/ 776 =60.43 times =111.06 times =83.03times It was 60 times in 2013, 111 in 2012. A higher ratio is favorable and, therefore, financial performance was favorable in 2012. Day’s sales in inventory=365/inventory turnover 2013 2012 2011 =365/60.43 =365/111.06 =365/83.03 =6.04 days =3.29 days =4.4 days Gives the number of days stock staid in the shelves before it was sold. Lower times are favorable since they indicate continued sales and reveals fast moving inventories, therefore; 2012 is more favorable as compared to 2011 and 2013. Receivable turnover is a ratio of sales to the accounts receivable. It measures the number of times the company collects the payment on credit accounts. =sales/accounts receivable 2013 2012 2011 =170,910 / 24,094 =156,508 /21,275 =108,249/13,731 =7.09 =7.36 =7.88 A higher ratio is recommended, therefore, 2011 was favorable as compared to 2012 and 2013. Meaning the company collected debt 7.88 times a year which was higher as compared to the collection rates in 2012 and 2013 Day’s sale in receivables=365/receivable turnover 2013 2012 2011 =365/7.09 =365/7.36 =365/7.88 =51.48 days =49.6 days =46.32 days It gives the number of days taken by the customers to pay for their credit purchases. Fewer days are recommended, therefore, 2011 was more favorable with credit being paid back in 46 days as compared to 2012 and 2013 which took 49 and 51 days respectively to pay their debts. Total asset turnover is the ratio of sales to total assets and measures how well a company uses its assets to generate revenue. A higher ratio is more useful since it shows that the company is converting its assets to revenue at a higher rate. =sales/total assets 2013 2012 2011 =170,910/207,000 =156,508 /176,064, =108,249/ 116,371 =0.82 =0.89 =0.93 2011 is, therefore, the most preferred with 0.93 as compared to 2012 and 2013. Profitability Ratios It measures how well the company is converting assets and sales into income. It measures a company’s overall performance, its ability to generate income over and above its costs and expenses large values are better. Profit margin =net income/sales 2013 2012 2011 =37,037/170,910 =41,733/156,508 =25,922/ 108,249 =0.22 =0.27 =0.24 Apple Company generated 22 cents profit from a dollar sale in 2013. A higher ratio shows high profitability and, therefore, 2012 was more profitable. Return on assets (ROA) is the ratio of net income to net assets. It measures how efficiently the company is using its assets to generate income. A higher ratio is recommended since it shows that the firm is successfully generating income from its assets and it is also well managed. =net income/total assets 2013 2012 2011 =37,037/207,000 =41,733/176,064 =25,922/ 116,371 =0.18 =0.24 =0.22 Shows how well the assets are generating income and therefore 2012 was the most favorable year as compare to 2011 and 2013. Apple was hence more profitable in 2012. Return on equity (ROE) is the ratio of net income to the shareholders equity. This ratio shows how much profit the company makes for its owners. A higher ratio is recommended as it shows that the management is using shareholders investment efficiently. Investors will be interested in a high ratio since they are assured of a high return on their investments. Net income/total owner’s equity 2013 2012 2011 =37,037/123,549 =41,733/118,210 =25,922/ 76,615 =0.30 =0.35 =0.34 All rates are above 30%, and 2012 had the highest rate meaning 35% of the income in that year belonged to the shareholders. We can, therefore, conclude that Apple was more profitable in 2012. The Altman Z-Score The Altman Z-Score consists of five performance ratios combined into a single score. A higher ratio is recommended since it implies that the company is not prone to bankruptcy. A ratio above 3 indicates the firm is unlikely to go bankrupt, between 1.8 and 3 is a gray area and below 1.8 indicates that a firm is headed towards bankruptcy. The 5 ratios are weighted using the formula: Z-Score = 1.2X1 + 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5 Where: X1 = working capital (current asset-current liabilities) ÷ total assets-measures a company’s efficiency and also its short-term financial health. =29628/207,000 =0.14 X2 = retained earnings ÷ total assets-measures the extent to which a company relies on debt =104,256/207,000 =0.5 X3 = earnings before interest & taxes ÷ total assets-measures the firm’s ability to generate income from its assets =50,155/207,000 =0.24 X4 = market value of equity ÷ total liabilities-measures how much the market value can decline before liabilities exceed assets =19,293/83,451 =0.23 X5 = sales ÷ total assets (Asset turnover) – indicates a firms efficiency in generating sales from its assets. =170,910/207,000 =0.8 Z score= 1.2X1 + 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5 1.2(0.14) + 1.4(0.5) + 3.3(0.24) + 0.6(0.23) + 1(0.8) =2.6 2.6 falls in the gray area this means that the business is doing well and is unlikely to go bankrupt, but management should take precautionary measures and ensure a Z score of above 3 to improve the firm’s solvency. Market Value Ratios. These ratios measure the firm’s performance against its perceived value forms the number of shares or from the trading value. Earnings per share = net income/number of outstanding shares The year 2012 had the highest earning per share, but the cash dividend declared per common share was highest in 2013. Period Ending Sep 28, 2013 Sep 29, 2012 Sep 24, 2011 Earnings per share: Basic 40.03 44.64 28.05 Diluted 39.75 44.15 27.68 Shares used in computing earnings per share: Basic 925,331 934,818  924,258 Diluted 931,662 945,355 936,645 Cash dividends declared per common share 11.40 2.65 0.00 From Appendix 1 the Statement of cash flow we find that the company’s income from operating activities has been growing steadily from 2011 to 2012 and to 2013. From Appendix 2 the income statement we deduce that Apple Inc net sales have been growing steadily from 2011 to 2012 and to 2013. Its operating income increased from 2011 to 2012 but declined in 2013. Its income before tax increased from 2011 to 2012 but declined in 2013. Its net income also increased from 20111 to 2012 and also declined in 2013. Since there is no interest expense for Apple it then shows that the company is not involved in debt financing. From the above analysis, it is evident that Apple Inc. Performance was better in 2012 as compared to 2011 and 2013. Sales as shown by the income statement where there is an increase year after year, this is an indicator of positive performance. References Apple Inc. Annual Reports; Form 10-K Annual Report. 2011. [Online]. Available from: http://investor.apple.com/SECFilingNav.cfm?FilingID=1193125-11-282113&CIK= Gibson, C. H. 2012. Financial Reporting and Analysis, 13 Ed, South-Western Cengage Learning, New York. Michelle R., Martin S., and George H. 2012. Corporate Finance: A Practical Approach, John Wiley & Sons, New York. Brooks, R. M. 2012. Financial Management, 2nd Ed. Prentice Hall, California. Denise, R. 2013. Financial analysis made very easy, 2 Ed. Alphadore Publishing, Chicago. Siddiqui, S. A. 2005. Managerial Economics and Financial Analysis, New Age International Publishers, Michigan. Stephen A. R. 2010. Corporate Finance, 9 Ed., Mc Graw-Hill Irwin, New York. Vishwanath S. R. 2007. Corporate finance: Theory and Practice, 2nd Ed., Sage Publications Inc, Chicago. Appendix 1 Apple Inc., Consolidated Statement of Cash Flows USD $ in millions Period Ending Sep 28, 2013 Sep 29, 2012 Sep 24, 2011 Net income 37,037 41,733 25,922 Depreciation and amortization 6,757 3,277 1,814 Share-based compensation expense 2,253 1,740 1,168 Deferred income tax expense (benefit) 1,141 4,405 2,868 Loss on disposition of property, plant and equipment – – – Accounts receivable, net -2,172 -5,551 143 Inventories -973 -15 275 Vendor non-trade receivables 223 -1,414 -1,934 Other current and non-current assets 1,080 -3,162 -1,391 Accounts payable 2,340 4,467 2,515 Deferred revenue 1,459 2,824 1,654 Other current and non-current liabilities 4,521 2,552 4,495 Changes in operating assets and liabilities 6,478 -299 5,757 Adjustments to reconcile net income to cash generated by operating activities 16,629 9,123 11,607 Cash generated by operating activities 53,666 50,856 37,529 Purchases of marketable securities -148,489 -151,232 -102,317 Proceeds from maturities of marketable securities 20,317 13,035 20,437 Proceeds from sales of marketable securities 104,130 99,770 49,416 Purchases of other long-term investments – – – Payments made in connection with business acquisitions, net -496 -350 -244 Payments for acquisition of property, plant and equipment -8,165 -8,295 -4,260 Payments for acquisition of intangible assets -911 -1,107 -3,192 Other -160 -48 -259 Cash used in investing activities -33,774 -48,227 -40,419 Proceeds from issuance of common stock 530 665 831 Excess tax benefits from equity awards 701 1,351 1,133 Taxes paid related to net share settlement of equity awards -1,082 -1,226 -520 Dividends and dividend equivalent rights paid -10,564 -2,488 – Repurchase of common stock -22,860 – – Proceeds from issuance of long-term debt, net 16,896 – – Cash generated by (used in) financing activities -16,379 -1,698 1,444 Increase (decrease) in cash and cash equivalents 3,513 931 -1,446 Cash and cash equivalents, beginning of the year 10,746 9,815 11,261 Cash and cash equivalents, end of the year 14,259 10,746 9,815 Source: Apple Inc., Annual Reports Appendix 2 Income Statement USD $ in thousands Period Ending Sep 28, 2013 Sep 29, 2012 Sep 24, 2011 Total Revenue 170,910,000   156,508,000   108,249,000   Cost of Revenue 106,606,000   87,846,000   64,431,000   Gross Profit 64,304,000   68,662,000   43,818,000   Operating Expenses Research Development 4,475,000   3,381,000   2,429,000   Selling General and Administrative 10,830,000   10,040,000   7,599,000  Non Recurring - - - Others - - - Total Operating Expenses - - - Operating Income or Loss 48,999,000   55,241,000   33,790,000   Income from Continuing Operations Total Other Income/Expenses Net 1,156,000   522,000   415,000   Earnings Before Interest And Taxes 50,155,000   55,763,000   34,205,000   Interest Expense -   -   -   Income Before Tax 50,155,000   55,763,000   34,205,000   Income Tax Expense 13,118,000   14,030,000   8,283,000   Minority Interest -   -   -   Net Income From Continuing Ops 37,037,000   41,733,000   25,922,000   Non-recurring Events Discontinued Operations -   -   -   Extraordinary Items -   -   -   Effect Of Accounting Changes -   -   -   Other Items -   -   -   Net Income 37,037,000   41,733,000   25,922,000   Preferred Stock And Other Adjustments -   -   -   Net Income Applicable To Common Shares 37,037,000   41,733,000   25,922,000   Source: Apple Inc., Annual Reports Appendix 3 Balance Sheet USD $ in thousands Period Ending Sep 28, 2013 Sep 29, 2012 Sep 24, 2011 Assets Current Assets Cash And Cash Equivalents 14,259,000   10,746,000   9,815,000   Short Term Investments 26,287,000   18,383,000   16,137,000   Net Receivables 24,094,000   21,275,000   13,731,000   Inventory 1,764,000   791,000   776,000   Other Current Assets 6,882,000   6,458,000   4,529,000   Total Current Assets 73,286,000   57,653,000   44,988,000   Long Term Investments 106,215,000   92,122,000   55,618,000   Property Plant and Equipment 16,597,000   15,452,000   7,777,000   Goodwill 1,577,000   1,135,000   896,000   Intangible Assets 4,179,000   4,224,000   3,536,000   Accumulated Amortization -   -   -   Other Assets 5,146,000   5,478,000   3,556,000   Deferred Long Term Asset Charges -   -   -   Total Assets 207,000,000   176,064,000   116,371,000   Liabilities Current Liabilities Accounts Payable 36,223,000   32,589,000   23,879,000   Short/Current Long Term Debt -   -   -   Other Current Liabilities 7,435,000   5,953,000   4,091,000   Total Current Liabilities 43,658,000   38,542,000   27,970,000   Long Term Debt 16,960,000   -   -   Other Liabilities 20,208,000   16,664,000   10,100,000   Deferred Long Term Liability Charges 2,625,000   2,648,000   1,686,000   Minority Interest -   -   -   Negative Goodwill -   -   -   Total Liabilities 83,451,000   57,854,000   39,756,000   Stockholders Equity Misc Stocks Options Warrants -   -   -   Redeemable Preferred Stock -   -   -   Preferred Stock -   -   -   Common Stock 19,764,000   16,422,000   13,331,000   Retained Earnings 104,256,000   101,289,000   62,841,000   Treasury Stock -   -   -   Capital Surplus -   -   -   Other Stockholder Equity (471,000) 499,000   443,000   Total Stockholder Equity 123,549,000   118,210,000   76,615,000   Net Tangible Assets 117,793,000   112,851,000   72,183,000   Source: Apple Inc., Annual Reports Read More