Financial Analysis of Apples Inc - Research Paper Example

APPLE’S INC.’S FINANCIAL ANALYSIS Introduction Apple Inc. is an American multinational corporation whose headquarters is located at Cupertino, California. The company designs, develops and sells computer software, consumer electronics, personal computers and online services. The company’s best known hardware products include the iPod media player, Mac line of the computers, iPhone Smartphone, and the iPad tablet computer. Founded in1976 by Ronald Wayne, Steve Wozniak, and Steve Jobs, the company has since evolved into becoming one of the leading and successful computer company in technological areas. Apple, Inc. is the second-largest information technology corporation in the world by revenue after Samsung Electronics and also the third-largest mobile phone maker in the world (Ximénez, & Sanz, 2014) Why Invest in Apple, Inc. (Rationale) As the financial manager, I have made the decision to recommend to my investor that he/she invest heavily in the stock of the Apple Inc. There are a number of reasons behind my decision for the investor to consider investing in Apple. First, Apple is the best investment option owing to the fact that by the end of 2012, according to Bernstein analyst, Toni Sacconaghi (2012), the company alone was responsible for 17% of the gains of the whole Standard and Poor’s Five hundred. Secondly, Apple’s long-term performance over the last ten years has been outstanding. Since 2002, the company’s stock soared 7,800% compared to S&P Five hundred (Birger, 2013). In my opinion, this performance/strength over the past ten years proves that the stock of Apple Inc. is a reliable investment at present and in the future. Additionally, while in the previous periods Apple has been considered specifically as the growth stock company, presently I would consider Apple as not only the growth stock company but also the value play company. The reason behind my consideration is that according to Birger (2013), the company experienced “66% growth in earnings in the past four quarters, a 1.8% dividend yield as well as a price/earnings ratio of 13.3 , which is lower than S&P 500’s 16 P/E” in 2012. All of the aforementioned reasons indicate that even though the company’s stock has significantly dropped by almost 33% since the company’s historic high of $ 700 (September 18th, 2012), Apple is still a strong investment option for the investor (Rich, 2013). Additionally, in August 2013, Carl Icahn (American businessman) invested quite a large amount shares in Apple saying that he thinks the shares are extremely undervalued. Lastly, Apple is famous for its excellent innovation. For instance, in the recent years, the company has been refreshing its current product line, and has continued to maintain and even grow in value. Apple Inc. is currently considering refreshing its product line in order to bring an entirely new product on the table. If this happens Apple’s products will no longer be found at a low price. This will make the company rise incredibly in its value leading to an increase in price of its shares. All these factors indicate that this is the perfect time for an investor to board the Apple train owing to the fact that the company is currently undervalued, a circumstance that is likely to change in future. Investor’s Profile for Apple Inc. An investor profile is something that defines the investor’s individual preferences in the investment decisions. As a financial manager (in the case of my investor), I will consider several things in their profile that would make the company a good option for investment. One part of Apple’s investors profile is that they are slow, methodically, and analytically. These investor’s traits allows Apple’s investors to invest in the company for the long haul. In other words, investors do not buy the stock and then sell it after a short period of time (active management) but can buy the stock and hold it for a long period of time as it increases in value. Additionally, my investor in this case has a substantial large amount of capital to fall back on in the event of loss. This allows my investor to be risk tolerant rather than risk averse. This is an important part that cannot be overstated because Apple Inc. is a long haul investment and, therefore, the investor could not flinch at the earliest signs to dump his/her stock investment. Lastly, part of the investor’s profile that makes the Apple Inc. a good fit for the investors is that they would be interested in both the growth and value of stocks. This is because Apple Inc. has its stock that is currently considered to be undervalued making it the best value stock option. Moreover, Apple Inc. takes a leadership role in the technology industry in terms of innovation (Rich, 2013). This is a good indicator implying the company has ability to generate a large amount of revenue compared to other companies in the industry. This explains more as to why the investment in the incorporated stock is considered in my case as the growth stock and thus the best option for any investor. All of the fundamental features of the investor’s profile that makes a good fit for the Apple Inc. fit perfectly well with the potential investor’s strategy as well. In this case, the investor’s strategy would be Aggressive Investment Strategy. This is because Aggressive Investment Strategy’s aim is capital growth. With this in mind, the investors usually bear relatively a higher risk than the usual amount of risk. Additionally, the Aggressive Investment Strategy would exist for years before the investors are able to access the funds. This investment strategy aligns quite well with the investor’s profile of the long haul. Lastly, since this strategy’s aim is capital growth, it perfectly fits well with the investor’s objective of wealth building. Apple’s Financial Ratios When it comes to trying to find out the company’s financial health, one has to look at the financial documents that are sometimes hard to understand and confusing. Additionally, just having numbers to look at without other numbers to compare can be at times meaningless. In such a situation, the financial ratios come into play. Financial ratios are important for making vital financial information easier for the investors to understand. Additionally, according to the Auerbach (2005), the financial ratios are used “to learn more about a company’s current financial health as well as its potential.” After the analysis of the Apple’s financial statements, I have decided that the best financial ratios to use include quick ratio, current ratio, earnings per share ratio, total assets turnover ratio, and fixed assets turnover ratio. The current ratio is defined as the measure of a firm’s ability to pay its short term obligations. The ratio is important in that if the company is unable to pay the short-term obligations, it’s an indicator of poor financial health of the company. Additionally, the ratio shows how efficient the company is in terms of turning their products into cash. Most of the investors avoid investing in companies that have bad financial health. The formula for calculating the current ratio is the total current assets divided by the total current liabilities. As of Sep 28th, 2013 Apple Incorporated’s total current assets were totaled at $73,286,000 and the current liabilities at $43,658,000. Using the current ratio formula, this makes it to be 1.68. On Sep. 2012 and Sep. 2014 the current ratios were 1.50 and 1.08. The reason why the current ratio is lower in 2014 than the previous two years is because Apple has a higher amount of the accounts payable (Ximénez, & Sanz, 2014). Looking at current ratio, it’s important to note that if it’s below one, the company will have a problem meeting its obligations. In this case, Apple’s average current ratio is above one (1.42) something that shows that Apple Inc. is able to meet its financial obligations. Taking the current ratio for 2014 and comparing it with other companies in the industry such as Microsoft and Dell whose current ratios are 2.81 and 1.18 respectively, it shows that Apple is in the middle of the industry. It also shows that Apple Inc. do not have the unnecessary build-up of inventory or cash compared to Microsoft. With the average current ratio figure above one for the previous three fiscal years and the industry comparison, it shows that Apple is in good financial health. While the Quick ratio is almost similar to the current ratio, the difference is that the quick ratio excludes inventories from the current assets. This is due to the fact that sometimes it takes time in converting the company’s inventories into cash. When a company wants to pay off the obligations quickly, it’s forced to accepting less money for its inventory so as to sell quickly. The quick ratio is usually concerned with the company’s ability in paying the short-term obligations as they fall due with its most liquid assets. Additionally, the quick ratio is vital as it shows whether or not the company is struggling to maintain the sales or grow. The formula for the quick ratio is the current assets minus inventory divided by the current assets. As of Sep. 28th, 2013, Apple’s current assets totaled at $73,286,000, its current liabilities were $43,658,000 and its inventory was $1,764,000. Taking these figures and plugging them into the formula, you get the quick ratio to be 1.64. The quick ratio for 2012 and 2014 were 1.24 and 0.82. This makes the average quick ratio to be 1.23. This average quick ratio can be interpreted that for every one dollar in the liabilities, the Apple Inc., has $1.23 dollars in the liquid assets. This is specifically important as it shows that Apple has the access to the quick cash allowing it to pay the obligations without having to sell the inventory off. The quick ratio therefore confirms that Apple is in the good financial health. The earnings per share ratio is used as the indicator of the company’s profitability. This ratio is particularly important when it comes to the determination of the company’s financial health. However, care must be observed of the low quality EPS that can be misleading at times. The formula for the calculation of the EPS is the net income minus the dividends on the preferred stock divided by the average outstanding shares. As of the September 28th, 2013, Apple’s net income was $37,037,000, its dividends on the preferred stock were $0 and the average outstanding shares were 899.21m. Plugging the figures into the formula you get $8.31 dollars per share. For the last three years (2012, 2013 and 2014), Apple’s P/E ratio is 16.71. This figure shows that for every share that Apple made just over $16.71. The P/E ratio allows the investor to see how the Apple Inc. is profitable while also showing the good financial health of Apple. The Asset turnover ratio shows the amount of the revenues or sales that are generated per dollar of the assets. The ratio is usually an indicator of how efficient the company is in the deployment of its assets. The formula for the calculation of the asset turnover ratio is the sales or revenues divided by the total assets. As of Sep. 29th 2012, Sep. 28, 2013 and Sep. 27th 2014 the total assets turnover ratios for Apple Inc. was 0.89, 0.83 and 0.79 respectively. Judging from this, it’s therefore clear that Apple’s total asset turnover plummeted in 2012-2013 and the 2013 to 2014 period. However when compared to the industry’s (technology) total asset turnover ratios over the past three periods that were 0.72, 0.70, and 0.66 for 2012, 2013, and 2014 respectively its therefore clear that though the ratio has been on the decrease, its better in the utilization of its assets in the industry. This is therefore a concrete proof that the financial health of the company based on the industry comparison is good. The Fixed assets turnover ratio is the ratio of the sales to the value of the fixed assets. The ratio usually indicates how well the business is using its fixed assets in the generation of the sales. As of Sep.29th, 2012, Sep.28th, 2013 and Sep.27th 2014 Apple’s net fixed asset turnover ratio was 10.13, 10.30 and 8.86 respectively. This shows that Apple’s fixed asset turnover improved well from 2012 to 2013 but worsened in 2013 and 2014. The industry (technology) net fixed asset turnover ratio was 6.74, 6.42 and 6.08 respectively in 2012, 2013 and 2014 (Ximénez, & Sanz, 2014). Apple, compared to the industry shows that the company is using its property, equipment and plant very efficiently because the higher the number, the less the amount of the money that the company has tied to the fixed assets. Compared to its competitors such as Microsoft, is managing the financing of their fixed assets a bit more efficiently. Over the past three fiscal years, Apple’s fixed assets turnover ratio is generally decreasing because more money is going to the PPE as compared to the total revenue. Apple is probably expanding in order to increase the production due to the high demand. This is a good sign of the excellent financial health condition of the company. Financial Review When dealing with the investment, risk is defined as the chance that any investment actual return can be different from the expected. When an investor considers investing in a company, it’s important for him or her to understand the risks that may be accompanied. After the determination of the five financial ratios that shows the financial health of Apple, the risk level from the investor’s point of view would be moderate. There are various reasons why the investor feels that by investing in Apple Inc. it comes with moderated risks. Primary among the several reasons is that a lot of the Apple’s earning power lies in its innovation. Presently the company has been able to maintain their profitability through updating of the current product lines. If Apple doesn’t undertake innovation then it’s expected that its profits will decline significantly. Additionally, the investor has already determined that Apple Inc. is the moderate risk owing to the fact that they understand that even though the five financial ratios used have given quite a relatively large picture of the company’s financial health, there are still other variables that have been not been accounted for. Additionally, the investor realizes the drawbacks of using the current ratio in determination of the financial health of the company. For instance, the investors know that the current ratio is unable to tell anything about the profitability of the company or the production cost of the production high that may result into the company recording loss? Moreover, the investor realizes that the quick ratios do not provide information on the level and the timing of the cash flows. Lastly, the investor feels that their risk is moderate and that not high because the investor plan on investing on the long-tem. Therefore, the investor does not intend in the active trading of the stock that they would purchase in the Apple but rather keep the stock for years helping to lower the risk to moderate. Now that the investor has determined that the Apple Inc. would be the moderate risk, it’s therefore vital to come up with the strategies that can help in the mitigation of the risks that the investor sees. While there exists a lot of strategies available for the investor to help in the risk mitigation, one best strategy is the diversification. Diversification is the idea of having the multiple investments so as to reduce the level of the risk. This allows the investor in spreading the investments so as to reduce the risk level due to the Apple stock dropping drastically in level unexpectedly. Diversification will also help with the potential lack of the innovation at the company that may cause it to fail. Additionally, in helping to reduce the level of the risks, as a financial manager I would advise the investor that they invest in the wide range of the varied kind of the investments that are not similar. This is because it would prevent the investor from having their entire in one sector such as technological. Therefore, I will have my investor invest in the different industries such as the automotive so that in the event that Apple and the entire technological sector fail, the investor can at least not lose all of its investments. Recommendations My recommendation to the investor regarding Apple Inc.’s stock is that the investor should invest in it. For instance in the article in Fortune, Elmer-DeWitt (2013) the company’s shares (Apple Inc.) closed up 37.7%. This therefore shows that the Apple Inc. is the best buy as the shares continue to increase. Additionally, in the recent periods, according to Reeves (2013) “Apple was the runaway winner among mobile shoppers, iOs based devices drove more than $543 million dollars in online sales, with the iPad taking 77% share.” Reeves further asserts that Apple Inc. is the cash cow with the “stunning stockpile of $146 billion in cash” This give the company the ability do great deals in the future. Additionally, according to Ross Gerber (2013)-the contributor to the Forbes magazine believes that Apple is the must-buy stock for the holiday season. Stating that “Apple still has the best products around and must have devices.” In addition to that, another business analyst William Meade from the Forbes Magazine states that, “Apple has a higher dividend (2.27%) than both the S&P 500 Index (1.93%) and Dow Jones Industrial Average (2.25%). Therefore Apple is not only a value stock but also an income stock as well” (Gerber 2013). Lastly, my defense for the recommendation of the Apple Inc. as the best option for the investment is the fact that billionaire investor and activist Carl Icahn recently did the purchase of 4.7 billion shares in the Apple Inc. (Hesseldahl, 2013). This should be an encouragement for the investors to buy the Apple Inc., stock because Carl Icahn will continue pushing Apple Inc. to create the shareholder value. In conclusion, with the backing of the several business analysts and the promising good financial health of the Apple Inc. (as shown from the financial ratios), I believe that Apple’s stock is a great buy for the investor and that any investment in the Apple Inc. can fit well with the investor’s profile as well. References Auerbach, A. (2005) How to Analyze your Business using Financial Ratios. Business Builder. 6 1-15 Birger, J. (2013) Why Investors Are Right to be Obsessed With Apple Stock. Fortune. 166 (10) 90-95. Elmer-DeWitt, P. (2013) Apple shares are in the black for 2013, still down year-to-year. Fortune. 1-1. Gerber, R. (2013) Apple and Four More Stocks for Holiday Cheer. Retrieved on Dec. 11, 2013 from http://www.forbes.com/sites/greatspeculations/2013/11/26/apple-and-four-more-stocks-for-holdiay-cheer/ Hesseldahl, A. (2013) Carl Icahn Makes a Large Investment in Apple. Retrieved on Feb. 18, 2015 from http://allthingsd.com/20130813/carl-icahn-makes-a-large-investment-on-apple/ Nicolás Marín Ximénez, J., & J. Sanz, L. (2014). Financial decision-making in a high-growth company: the case of Apple incorporated. Management Decision, 52(9), 1591-1610. Reeves, J. (2013) 10 Reasons to buy Apple Stock Now Opinion: The company has changed-so have expectations. Retrieved on Dec. 11, 2013 from http://www.marketwatch.com/story/10-reasons-to-buy-apple-stock-now-2013-12-11?pagenumber=2 Rich, B. (2013) 10 Reasons Apple Will Hit $700 Again. Retrieved on Dec. 11, 2013 from http://www.forbes.com/sites/greatspeculations/2013/11/22/10-reasons-apple-will-hit-700-again/ Read More