Financial Analysis
The following financial analysis looks at financial ratios in three different areas – liquidity, leverage and
profitability. For further information, Appendix B shows Apple’s quarterly balance sheet from their fiscal
years 2007 to 2009. Appendices C to E contain Apple’s quarterly income statements from the years
2007, 2008 and 2009 respectively.
Liquidity Ratios
The financial analysis begins with a look at the liquidity ratios for Apple. The liquidity ratios examine
Apple’s ability to pay their short-term debts (debts due within one year), using only their current assets.
In other words, liquidity ratios show the ability of the company to convert their current assets to meet
all of their cash requirements. Current assets include cash, temporary investments, inventory and
accounts receivable (amounts due from customers). The liquidity ratios are based on the information
found in Appendix B, Apple’s quarterly balance sheet from the years 2007 to 2009.
Table 2 below shows the liquidity ratios for Apple for their last three reported financial years. A current
ratio of 1 means that for every dollar of debt, a company has $1 to pay that debt; in comparison, for
2009, Apple has a current ratio of 2.98 – meaning that Apple had almost $3 of current assets to pay $1
of debt. This is especially strong when this ratio is compared to the industry average of 1.51 (Reuters,
2010).
Table 1: Liquidity Ratios (Apple Inc, 2010 a)
Industry
Average
2009
2008
2007
Total Current Assets
$ 126,177
$ 108,148
$ 73,014
Total Current Liabilities
$ 42,341
$ 38,174
$ 28,707
2.98
2.83
2.54
1.51
$ 83,836
$ 69,974
$ 44,307
N/A
Current Ratio
Working Capital
Source: Moore, 2010
In Table 2 on the previous page, the working capital amount is shown in millions of US dollars. Working
capital is simply a company’s current assets, minus their current liabilities. Therefore a positive working
capital ratio shows that a company has more than enough current assets to cover their current
liabilities. Apple has a positive working capital amount which indicates that Apple is more than capable
of paying off their debts. This figure is an indicator of Apple’s operational efficiency.
Leverage Ratios
Leverage ratios examine a company’s debt management policies. The first leverage ratio is the debt-toequity ratio, which compares what is owed by the company, to what is owned by the company. Using
the information found in Appendix B, Table 3 below shows that Apple has a debt-to-equity ratio of 0.13
which is significantly below the personal computer industry’s ratio of 30.84 (Reuters, 2010).
Table 2: Debt-to-Equity Ratio (Apple Inc, 2010 a)
2009
2008
2007
Long-Term Liabilities
$ 14,221
$ 8,854
$ 4,340
Shareholders’ Equity
$ 111,708
$ 77,121
$ 51,475
0.13
0.11
0.08
D/E Ratio
Industry
Average
30.84
Source: Moore, 2010
A high debt-to-equity ratio would reflect the high amount of debt used by the company to finance
operations. Apple has a very low debt-to-equity ratio indicating that they have been prudent on the
amount of debt they have undertaken to finance operations. A debt-to-equity ratio of less than 1
essentially means that a company’s assets are financed through shareholder equity, rather than long-
term debt. As seen in Table 3 above, the industry average of 30.84 (Reuters, 2010) clearly shows that
Apple has very little long-term debt compared to competitors within the personal computer industry.
With information found in Appendices C – E, Apple’s income statements from the years 2007 – 2009,
Table 4 on the next page examines Apple’s ability to pay their interest on their outstanding debt. The
interest coverage ratio shows how easily Apple can pay their interest. An interest coverage ratio below
1.50 would show a questionable ability to cover a company’s interest expense.
Table 3: Interest Coverage Ratio (Apple Inc, 2010 a)
2009
2008
2007
$ 11,740
$ 8,327
$ 4,407
Interest Expense
$ 326
$ 620
$ 599
Interest Coverage
36.01
13.43
7.36
Earnings before
Interest and Taxes
Industry
Average
0.39
Source: Moore, 2010
As shown Table 4 above, Apple is clearly above the industry average of 0.39 (Reuters, 2010), with a ratio
of 36.01 for 2009 which is a significant increase over 2008 and 2007. The interest coverage ratio of
36.01 means that Apple has the ability to pay the interest on their debit, 36 times; this ratio, combined
with the debt-to-equity ratio indicates that Apple has strong debt management policies in place,
enabling them to keep their debt and subsequent interest costs low with more than enough assets to
cover the debt owed.
Profitability Ratios
With the information found in Appendices C – E, Apple’s income statements from 2007 – 2009 were
used to calculate the profitability ratios. Table 5 on the next page shows that Apple has a gross margin
of 40.1 percent for 2009, which is a larger increase over 2008’s gross margin of 35.2 percent. This
means that for every dollar of revenue, Apple kept $0.40 to pay for other expenses, interest expense
and distribution to shareholders. The gross profit margin varies from the net profit margin in that it
eliminates the fixed costs carried by the company; the gross profit margin looks more at the relationship
of variable costs to sales.
Table 4: Gross Margin Ratio (Apple Inc, 2010 a)
2009
2008
2007
Gross Margin
$ 17,222
$ 13,197
$ 8,152
Net Sales
$ 42,905
$ 37,491
$ 24,578
40.1 %
35.2 %
33.2 %
Gross Margin Ratio
Industry
Average
9.56 %
Source: Moore, 2010
When looking at Table 5 above, Apple’s gross margin ratio is significantly higher than the industry
average of 9.56 percent (Reuters, 2010), further evidence of Apple’s strong operational efficiency and
strong management. The industry average shows that competitors on average have only $0.0956 for
every $1 of revenue to pay other expenses, interest and shareholder dividends. Apple’s gross margin
ratio is almost 4.5 times larger than the industry average.
When looking at the net profit margin ratio, as shown in Table 6 on the next page (based on information
from Appendix C – E), Apple has a net profit margin of 19.2 percent in 2009. Apple’s net profit margin
has steadily increased over the last three years, indicating continued success in managing Apple’s return
on sales. The net profit margin ratio shows that for every $1 of revenue, Apple keeps $0.19 as net
income. This figure represents the amount of income Apple has after all of the operating expenses,
other expenses, interest and income taxes have been paid.
Table 5: Net Profit Margin Ratio (Apple Inc, 2010 a)
2009
2008
2007
Net Income (after taxes)
$ 8,235
$ 6,119
$ 3,495
Net Sales
$ 42,905
$ 37,491
$ 24,578
19.2 %
16.3 %
14.2 %
Net Profit Margin Ratio
Industry
Average
3.50 %
Source: Moore, 2010
A strong net profit margin shows that Apple is effectively controlling their costs and demonstrates their
operational efficiency. As Table 6 above shows, Apple’s net profit margin is significantly higher than the
industry average of 3.50 percent (Reuters, 2010). Apple is able to cover all of their variable and fixed
costs with their sales, and offers significant return on investment to their shareholders.
Summary
Based on the financial analysis, Apple continues to steadily improve in terms of liquidity, leverage and
profitability. Over the last three years, Apple continues to strengthen their ratios and margins, and
when compared to the personal computer industry averages, Apple maintains a strong dominant
position within the industry. Apple’s net income has increased to $8.235 million in 2009, a strong
increase compared to $6.119 million in 2008 and $3.495 million in 2007. This increase is due in large
part to Apple’s ability to increase their gross margin while keeping operating expenses and long-term
debt low.