The Key Points of Financial Health Analysis of Apple - Case Study Example

Apple financial health analysis

Introduction. The key points of financial health analysis

The financial success of the company is a prerequisite for the preservation and compounding of the competitive position on the market. Financial success (often the term “financial health” is used) is determined by the company's ability to manage money resources (ability to generate them, attract from external market and distribute by the centers of responsibility and settle accounts with the owners of capital). At this, not only the operational management of cash flows is taken into account, but the strategic ability to manage capital (to select the correct ratio of debt to equity, which allows growing effectively; to determine the dividend policy to suit the interests of different groups of owners and not to loss opportunities for growth, etc.).

The financial success is the target of the interests of many stakeholders: managers (mainly CEOs and CFOs), whose work is often measured by the achievement of key financial indicators; owners (equity holders), lenders, investors (potential future owners of capital). Each of these groups conducts its own financial analysis (taking into account the available information and the purposes of interaction with the company). The financial success of the company is a prerequisite for preserving and strengthening the competitive position in the market. However, analysis of the long history of ups and downs of the North American and European companies shows that the traditional financial indicators (for example, lined up on the basis of accounting standards) are often late with diagnosing problems. Alarm signs for analysts often are not financial performance but quality drop and deterioration of the company's reputation in the market, leaving of competent personnel, the frictions among the leadership and among the owners. In connection with the above, it is interesting to analyze the financial health of one of the giants of modern business - the Apple company.

Is this a healthy company?

2015 financial year was the most successful year in Apple's history; annual revenue grew 28% and reached almost 234 billion dollars. Growth was caused by record iPhone sales, the expansion of Apple Watch availability geography, as well as the best in the history of Mac sales and income from services (Kerr, 2016). It is interesting to note that the quarterly net Apple profit is more than the net profit in the whole history of Amazon (Kerr, 2016).

iPad has brought Apple 7.6 billion dollars. For a “tablet” business of the company it was falling, but it does not make the figure less impressive. During the same period, Facebook earned only $2.5 billion, and over the last 12 months - $8.9 billion (Kerr, 2016).

Weighted Average Capital Cost (WACC) and Return on Invested Capital (ROIC) for Apple are shown on the Fig.1 below.

Fig.1. Apple Inc: WACC and ROIC.

Source: Kerr, J. (2016). Apple Inc. (AAPL). Henry B. Tippie School of Management, 2016.

PE ratio is presented on the Fig.2:

Fig.2. Apple Inc. PE ratio

Source: Kerr, J. (2016). Apple Inc. (AAPL). Henry B. Tippie School of Management, 2016.

How does the company compare with the rest of its industry?

It is interesting to consider absolute and relative indicators in comparison. As among the US representatives the closest Apple’ competitor is a company with more than 50 times smaller capitalization, comparison can be made taking into account the closest world competitor - South Korean Samsung.

With capitalization of $ 166.88 bln, and the company value of $127.88 bln, Samsung overtook Apple in the amount of annual income ($205.82 bln), the amount of accumulated cash and cash equivalents ($49.05 bln), has less debt ($10.04 bln). At the same time, however, due to a much smaller margins (13.32%) and return on equity (22.45%), gross profit and EBITDA in absolute values are not up to Apple indicators ( 27.42 bln and $47.02 bln) (Kerr, 2016). From the EBITDA ratio to gross profit it is evident that the interest expense, taxes and amortization in Apple are less in percentage.

Which way is the company moving?

Due to the lower capitalization and comparable earnings, P/E ratio at Samsung is much lower (6.09) (Kerr, 2016). This suggests that either Apple is overvalued or Samsung is undervalued. However, for a correct assessment the average index for the sector is needed. At this, it should be said that Apple has a mid-point P/E among its smaller competitors.

Financial leverage characterizes the degree of risk, dependence on the borrowed funds, it shows the financial stability. Here Apple wins Samsung, showing that the company is less dependent on external factors.

The number of shares on the market is almost equal to the total number of shares. This means the maximum transparency of the company's activity and the absence of external influence on the dynamics of stock prices. However, it should be noted the gap between stock market indices and statistical indicators in the USA is expanding all the time, and this is a risk factor both for Apple, and for the remaining shares in S & P 500.

The popularity of iPhone models appeared in 2014, with a larger screen, ensured the growth of smartphone sales in 2015. However, in the new models there were no notable innovations, and they did not cause enthusiasm among consumers. In addition, Apple business has suffered due to the strengthening of the dollar and the deteriorating global economic situation. The company recognized that in China, which is the largest overseas market for it, “there have been signs of economic weakening” (Academia portal, 2016).

iPhone accounts for about two-thirds of all of Apple's revenue, and slowing growth in sales of these devices poses a threat to business growth as a whole. Sales of iPad tablets are declining for two years in a row, and in the last quarter of 2015 decline also affected the traditional Macintosh computers (Academia portal, 2016). Launching of the long-awaited Apple TV service was unsuccessful. The company is also working to develop an electric vehicle, but a commercial implementation of this project will take several years.

In an interview with WSJ, Apple CEO Tim Cook said that he is still optimistic about the prospects of the company, in particular, he expects improved iPad sales and the growing popularity of services like Apple Music. “We do not work in terms of individual quarters and do not plan investments on quarters, - said Cook. - I am fully convinced that we are doing right and that our capabilities are enormous” (Academia portal, 2016).

Undoubtedly, the business potential of Apple is big – here are TV, electric vehicles, innovative clocks, etc. But the problem is that the company will have to conquer new niches and markets. At this, one can never predict in advance how successful will be launches in a particular region, and how quickly sales will increase. Among other things, the company's top management is not protected from the strategic and tactical errors; however, the majority of investors believe that the company is brilliant and cannot be mistaken.

How has the capital marketplace responded to the company?

Traditionally, immediately after the release of the new iPhone, there is a moderate correction of Apple quotations. Such dynamics was traced after each release of a new iPhone (Academia portal, 2016). But after the start of the first sales of the new devices increase of investors’ optimism can be expected, that will lead to a rise in quotations in the medium term. Based on the historical behavior of Apple shares to such an event, the medium-term growth outlook is 5-6 months.

Apple has so far had the greatest weight within the index - about 3%. It almost does not matter, when stock prices are rising, but in the case of reducing price, the maximum weight only aggravates the financial consequences for the company in the market. In this light, Apple is in a dangerous position, because its shares have fallen in price by about 1% over the past year (Academia portal, 2016).

Who is the auditor?

KPMG LLP conducted audit of Apple since in 1997. Ernst & Young LLP is Apple Inc.'s independent auditor since 2009. Apple said that it made the decision to change auditors after a process of competition, in which it invited to participate several firms including KPMG (Academia portal, 2016). According to Apple spokesman, “in accordance with good corporate governance, Apple's board recently adopted a policy to review the appointment of its independent auditor every five years” (Academia portal, 2016).