The Financial Health of Apple Inc - Case Study Example

Executive Summary

Apple Inc is one of the most established corporations in the global markets. Its presence is manifested across the globe with subsidiaries in Pacific Asia, Europe and its domestic market which is the US. Apple realized immense profits in the last three years. This report aims at establishing the financial health of the company and if it is a viable stock for investment. The report examines various ratios such as current ratio, earnings per share, price earnings ratio and quick ratio to determine the financial and economic stability of the company. The report concludes by providing recommendations as to why an investor should invest in the company.

Apple Inc Background and Profile

Apple Inc is one of the most prominent and valuable companies in the US. Today, Apple is a publicly traded company that engages in the manufacture, design, and sales of media devices, mobile communication gadgets, portable digital music appliances as well as media devices. Moreover, the company offers to the market services and products under iPad, iPhone, Apple Watch, Mac and the Apple Tv brands. Additionally, Apple provides professional and consumer software applications under X, OS, iOS as well as the watchOS brands (Sander & Bobo, 2015). The company is spread on a planetary scale with its subsidiaries in China, Europe, Japan and certain countries in the Asia Pacific. Apple's workforce has grown tremendously since 2011. For instance, in 2011 the company had close to sixty-three thousand employees and in the following year the number increased by about thirteen thousand (Sander & Bobo, 2015).

In 2015, the company's human resource directorate reported that their workers had increased to about a hundred and ten employees across the globe. Since its inception in 1977, the company has registered exemplary results in the market and is by far the most valuable business entities in America and to some extent in the World. A collective majority of the US citizens uses the products from Apple (Sander & Bobo, 2015). The unique products it offers and the value proposition has made it possible for the company to expand its customer base. Even though the company's profit fell for the first time in the first quarter of 2016, it is projected that it will continue to be buoyant in the market (Sander & Bobo, 2015).

Rationale for Choosing Apple Inc

The rationale for choosing the company for investment is based on the profitability index of the corporation for the last five years. The understanding of the financial and economic establishment of a particular company can only be understood based on the trends over a particular period. An in-depth analysis of the company's revenues indicates that there has been an incline in the sales and the revenue. For instance, in 2011 Apple's revenues and sales amounted to about 108.6 billion dollars (Apple Inc 2016). In the following year, the company registered a tremendous increase in its profit to the extent that the financial year ending 2012 saw the company announce a profit of 155.97 billion dollars (Apple Inc 2016). 2013 was another year that the company continued with its positive establishment in the market by registering a profit of 170.87 billion dollars.

Apple announced a profit increase from the previous year and reported a profit index of 183.24 billion dollars (Apple Inc 2016). 2015 was Apple's biggest year because the profitability index increased by a bigger margin. Apple registered a 231. 28 billion dollars. This increase was by far the biggest since the inception of the company in the late 1970's. The steady profitability that Apple has exhibited over the last five years is one of the reasons why the company has been chosen as the best entity to invest in at the moment. Another reason for choosing Apple is the fact that the company's stock prices are very competitive in the market. Moreover, due to the consistent market prices and stability in the market, the company has managed to pay dividends to its shareholders. For example, in May 2016, the average price per share ranged between 94 and 100 dollars. Throughout that season, the market closed with the prices reporting higher prices averaging to about 98 dollars. The volume of shares in the month of May was relatively high in the sense that it ranged between 30,000 to 50, 000. The company paid shareholders a dividend of about 0.57 dollars (Apple Inc 2016).

Throughout the trading sessions, Apple has managed to reward its customers with dividends. Investing in Apple is a positive step because there is a guarantee of returns on investment. Moreover, Apple does not depend on wholesale on the micro-economic environment in the sense that while the domestic market in the US is a critical foundation of its business, it attracts revenues from other global entities. This strategy implies that if a particular segment plummets, it may not have far-reaching implications on the revenues. The negative impacts may be minimal, and that cannot affect the stocks or the well-being of the business. The financial and economic establishment of Apple is relatively sound and, therefore, a good enterprise for investment. Even though there are market volatility and uncertainty, Apple will continue to register great numbers in the future. The stock market is relatively stable in the US, and that is a good economic indicator for the giant company.

Ratio Analysis

Apple's Current ratio

Current ratio refers to the ability of a company to meet its obligations both in the short and long term. The current ratio manifest in the organization determines the total present assets either illiquid or liquid. It is imperative to underscore that current ratio incorporates all the liabilities and assets. Apple's current ratio has indicated positive trends even though there has been a decline in some instances. In 2013, the company's current ratio was 168% and 18% percent increase from the previous year (Nasdaq, 2016). Ideally, this indicated that the company had a profound financial health because of its leverage of paying debts with relative ease and comfort. Moreover, the current ratio was a manifestation that in 2013 the company had a bigger proportion of the assets relative to the total liabilities. In 2014 the current ratio dropped to about 108% (Nasdaq, 2016).

Even though the decline was registered, it did not have a negative impact on the ability of Apple to meet its debt obligations. In fact, the company was still best placed to repay its debts with a superior margin. In 2015, the current ratio increased by three points to 111% (Nasdaq, 2016). The increase was a manifestation of Apple's efficiency when it comes to operating cycle. The liquidity establishment of the company was depicted by the increase. Based on the current ratio of the company in the last three years, it can be stated that Apple has been on a sound financial health in the last three years.

Quick ratio

The quick ratio refers to the indicators of an organization's short-term liquidity. Apple's quick ratio is an indicator that determines the ability of a corporation to meet its short debts or obligations with the liquid assets. Apple's quick ratio has been on a decline in the last three years even though the figures have remained positive to a greater extent. In 2013, the company's quick ratio stood at 164%, and this was an increase from 2012 when the same was 148% (Nasdaq, 2016). Ideally, this implies that Apple was capable of meeting its short-term obligations with ease because the quick ratio was in excess compared to the previous year. 2014 the quick ratio slammed to 105%. Even though the quick ratio dropped, it was considered minimal in the sense that the company could still meet its obligations. The quick ratio points saw an increase of 3% in 2015 bringing the value to 108% (Nasdaq, 2016). This increase was a good gesture because the ability of the company to meet the short-term obligations went up by positive margins. The financial health of the company based on the established results indicates stability.

Cash ratio

Cash ratio is the amount of capital, invested funds or cash equivalents that a company has at its disposal to offset the liabilities. This capital covers both the quick and the current ratio. In the last three years, Apple has registered mixed results in so far as cash ratio is concerned. For instance, in 2013 the cash ratio for the company was 93%, followed by 40% in 2014 and 52% in 2015 (Nasdaq, 2016). The ability of the company to meet its obligations declined, but steadied in the last year of financial analysis. The significance of this ratio in determining the financial health of the company is limited because companies do not have enough capital meet its obligations in totality. The fact that Apple has high figures is a manifestation of sound financial health.

Apple's Cash Ratio

Earnings per share

Apple has experienced immense profitability in the last few years. The earnings per share has been higher except for the first quarter of 2016 when there was some slight decline. In 2014, the earnings per share was 6.45 dollars. In that same year the company's revenue amounted to 182,795 million dollars (Nasdaq, 2016). In 2015, the company had the revenues increase significantly to 233, 715 million dollars (Nasdaq, 2016). The earnings per share was 9.22 dollars in the same year. However, in 2016 the company registered low returns with the revenue standing at 126, 429 dollars. The earnings per share dropped to 5.19 dollars. The decline in earnings per share is attributed to global financial crisis in some of the major economies.

Price Earnings ratio

The price per earning ratio indicates that the numbers have remained relatively positive in the last three years. For instance, in 2013, Apple's price-earnings ratio stood at 12.75 while in 2014 the figure rose to 15.60. However, in 2015, there was a decline and the P/E stood at 12.45 (Nasdaq, 2016). An accurate valuation of Apple's F/E cannot be determined without a comparative analysis with its peers. When examined in isolation, the figures may not provide the correct assessment of the company's valuation. Apple's P/E (TTM) and P/E (Forward) stands at 17.03 and 14.89 respectively (Nasdaq, 2016). On the other hand, the same indicators show Google at 26.68 and 24.38 (Nasdaq, 2016). From a price earnings point of view, Apple has a better value than a collective majority of its peers. The share prices have increased significantly over the past few years, and that makes Apple a valuable entity.

Stock Price Analysis

Apple has been the biggest story in the market in the last few years. Its numbers have gone up tremendously, and that has made it an influential entity in the market. Despite the good run that Apple has had in the past few years, there are critical risks that could threaten stock prices to a greater extent. The biggest risk that is facing Apple in the current dispensation is the fact that it lacks diversification in so far as revenue is concerned. A collective majority of the revenues generated comes from iPhone sales. The sale of iPhones has dominated the revenues for the giant enterprise to the extent that other products have played an insignificant role in their contributions.

Over-reliance on a single product is risky because when the sales fall, the practical outcome is that the revenues will slam. The Smartphone market is very competitive, and Apple dominates the league. However, if the competitors begin to venture into this territory, then the company will lose its market share. Apple's stock multiple will be knocked down if the other established enterprises challenge their space. Throughout the ages, Apple has been known for growth as well as innovation to the extent that they have managed to capture the attention and imagination of the consumers. The risk lies in the ability of the company to maintain its customer base and establishing new ones. The introduction of a new product in the market rejuvenates the customer base.

The mitigation of these risks is essential if the company wants to prevail upon the reduction of multiple and stock prices. One of the strategies the company should employ in dealing with the emerging issues is diversification (Hitt et al., 2014). The company should not overemphasize on the sale of iPhones as a major source of revenue. Apple should establish new products and employ the appropriate market entry approaches as a consequence of ensuring that it the product command some sales. The price penetration strategy is one of the methods they could use in introducing a product in the market. The new product will ease pressure on iPhones, and the revenues and sales will be enhanced. Moreover, the company should embark on innovation as the platform of ensuring growth (Ganguly, 1999). Apple should focus most of its resources on research and development because through this strategy they can come up with new products that entice their customer base and draw new ones (Ganguly, 1999).

Recommendations

My recommendation is that the Apple is a viable investment opportunity. The recommendation is based on three different areas that include stock prices, intrinsic value, and enterprise value. The stock prices for the company have been competitive and bullish in the market based on the analysis over the last three years. The sale of iPhones have gone up and has penetrated other markets such as China. Moreover, the company is also exploring other ventures with an aim of generating more revenue. For instance, the company now has live streaming services, game consoles, and watches. These are indicators of growth and the company will enhance its stock with such initiatives.

Apple's intrinsic value makes the company a viable stock for investment. Apple can meet its obligations with relative ease, and this is because it has an expansive asset base both liquid and illiquid. In most instances, the company does not have outstanding debts that could affect its establishment. The intrinsic value of a company gives a clear picture of the financial health of a company (Van, 2006).

Apple is a great investment stock because its enterprise value is above average. When looking for a viable investment destination, it is important to employ market capitalization as a measure of determining the value of the company (Hafer & Hein, 2007). Enterprise value provides an opportunity for assessing or evaluating a stock that might be a candidate for a takeover or buyout. This tool takes into account the company's debt and its ability to meet its obligations. Apple has a superior enterprise value and cannot be bought or taken over. The ability of the company to meet its obligations is stable, and the asset base is advanced. An investor is guaranteed a return on investments if they invest in the company (Hafer & Hein, 2007).

I recommend Apple as a viable stock because it has established a capital return program that focuses on the dividend and repurchase increase with an aim of rewarding its shareholders (Sander & Bobo, 2015). Apple has a great cash position as manifest in its balance sheet, and this is an indication of growth and elevation of share repurchases (Periasamy, 2009). A company that has a proper capital return program is a good investment stock. Ideally, an investor planning to buy shares in the company stands a better chance of realizing profits. There is an overwhelming certainty that investing in Apple as a stock will derive profits. Based on the indicators mentioned above, Apple is recommended for investment because it has a sound financial health, better price per share, its intrinsic and enterprise value are superior, and the company is on a path for growth.