Chris Noonan
Financial Analysis Project
Apple Inc.
Company Overview: Apple
Today, Apple is seen as a revolutionary and innovative technology company. Apple leads
their respective market in almost every category. The company constantly improves their
products to make them more efficient. Additionally, Apple has paved the way for new consumer
electronics. For example, Apple’s iPhone has changed the mobile phone completely. Since the
release of the iPhone, every major cellular phone manufacturer bases their new products on the
iPhone’s interface. However, this is not all Apple has accomplished. With the development of
Apple TV, iTunes, iCloud, laptops, and their home computers, among other products and
services, Apple has proved time and time again that they are the pinnacle of consumer electronic
and technology products.
Apple’s main competitors are Microsoft, Hewlett-Packard, Google, and IBM. Apple is
involved in the computer hardware, computer software, consumer electronic, and technology
industries. Tim Cook has been with Apple since 1998 and is the new CEO of Apple Inc. He has
been the CEO of Apple Inc since August 24, 2011. Before Tim Cook, Steve Jobs was the CEO
of Apple for 14 years until he resigned due to medical problems. Apple started out in a garage in
California until it grew and finally went public on December 12, 1980. When it went public,
Apple generated more capital from any IPO since Ford Motor Company went public in 1956.
Apple is traded on the Nasdaq, S&P 500, and NYSE AmEx stock indexes. In terms of where
Apple operates, Apple conducts business in 115 countries in different regions all over the globe
that include: Africa, the Middle East, India, Asia Pacific, Europe, Latin America, and the
Caribbean, and lastly North America. Apple’s customers range from businesses to any electronic
consumer. Apple makes and provides several different products and services that make it
appealing to more than one type of consumers. Therefore, almost anyone interested in consumer
electronics is a potential customer for an Apple product.
Liquidity Ratio Analysis
Apple
Microsoft
Ind Avg
Liquidity Ratios
2011
2010
2009
2011
2010
2009
Current Ratio
1.608
2.01
2.74
2.60
2.13
1.82
1.4
Quick Ratio
1.58
1.96
2.702
2.56
2.10
1.79
6
.8
Current Ratio: Liquidity ratios consider a company’s ability to pay their short-term debts using
only their current assets. In general, a company wants to have a current ratio of 1. Apple has had
a current ratio of over 1 for the past 3 fiscal years. This means that, in 2009 and 2010, Apple had
the capacity to pay double their short-term debts. Also, in 2011, Apple has the capacity to pay
over one and a half times its short-term debts. The reason that the current ratio is considerably
lower in 2011 than the two previous years is because they have a higher amount of accounts
payable. One reason that Apple has had a large current ratio is because they keep their inventory
low due to the fact that they sell most of the products they manufacture and they have high
amount of short term investments. Also, Apple’s receivables and cash are higher than the
accounts payable for all three fiscal years. When compared to Microsoft, Apple has had a lower
current ratio in 2011 and 2010. This is due to the fact that Microsoft has a high short term
investments for the past two years and lower accounts payable than Apple as well. This shows
that Microsoft is able to pay most of their dealings in cash and is making the right investment
moves. The industry average is 1.4 which proves Apple is more than overachieving.
Quick Ratio: The quick ratio measures a company’s ability to meet its short-term obligations
with its most liquid assets. Also, inventory is excluded from this ratio because some companies
have difficulty turning their inventory into cash. Compared to the industry average of 0.8, Apple
is doing considerably well. In 2009, Apple has a quick ratio of 2.702 because Apple has a high
amount of current assets and a low amount of inventory due to the fact that they sell most of their
products and barely have any inventory left over. This same reasoning applies to 2010 because
Apple tends to keep low inventory due to the high demand of their products. The reason that the
quick ratio is lower in 2011 is because Apple has a higher amount of account payables which is
due to that fact that Apple is probably allowing a longer time for companies to pay their for their
products. Microsoft is showing an inverse relationship to Apple’s quick ratio because
Microsoft’s short-term investments are increasing substantially each year.
Asset Management Ratio Analysis
Asset
Management
Apple
Microsoft
Ratios
2011
2010
2009
2011
Inventory Turnover
139.496
62.06
94.3
50.97
Day Sale Outstanding
46.29
64.69
52.67
Fixed assets turnover
13.91
13.68
14.52
Total assets turnover
0.93
0.87
0.75
Ind Avg.
2010
81.5
11
88.78
83.72
4.8
8.56
8.18
7.75
26.75
0.64
0.73
0.75
.8
91.08
84.43
2009
Inventory Turnover: Inventory turnover is the measure of the number of times inventory is sold
or used in a time period such as a year. Over the past three fiscal years, Apple’s inventory
turnover is six to almost fourteen times the industry average. This means that Apple’s product is
in high demand and constantly being sold. Also, it shows how much better they are doing than
the its main competitor, Microsoft, and the rest of the competition. Apple’s high inventory
turnover is beneficial because it shows that they are in a strong position in the market, have
appealing products, and are managing inventory efficiently because they hardly have any leftover inventory which could eventually become a liability. Compared to the industry average of
11, Apple is moving through inventory much faster than the rest of the industry.
Days Sales Outstanding: Days Sales Outstanding (DSO) is calculation used by a company to
estimate their average collection period. A low number of days outstanding means that the
company collects its outstanding receivables quickly. Apple has a high DSO because they are in
good enough financial shape that they can afford to allow more time for retailers to pay them
back for their goods. Compared to the industry average of 4.8, Apple is allowing way more time
for companies to pay them back. This is because Apple has a decent amount of cash and cash
equivalents. The same reasoning applies to Microsoft because they believe that their retailers can
pay them back and because they have a healthy amount of cash as well. However, Apple has
been decreasing their DSO each year to collect their profits sooner. Apple is doing this because
they can use their profits for something else.
Fixed Asset Turnover: Fixed Asset Turnover is the ratio of sales to the value of fixed assets. It
indicates how well the business is using its fixed assets to produce sales. Apple, compared to the
industry average of 26.75, is not using its property, plant, and equipment very efficiently because
the higher the number, the less amount of money the company has tied in fixed assets. Apple
probably has a low fixed asset turnover because they are over investing in their fixed assets.
However, compared to Microsoft, Apple is managing the financing of their fixed assets more
efficiently. Over the past three fiscal years, Apple’s fixed asset turnover ratio is decreasing
because more money is going into the PPE relative to the total revenue. Apple is probably
expanding to increase production because of their high demand.
Total Asset Turnover: Total asset turnover is measures the efficiency of a company's use of
its assets in generating sales. Compared to the industry average of 0.8, Apple has applied their
assets to sales more efficiently than the rest of the market. Also, compared to Microsoft, Apple
has applied their assets to sales more efficiently. In 2011, Apple managed their assets very well
compared to their sales. If they would have had even half the total revenue in the previous two
fiscal years, they would have been able to increase their total asset turnover. Furthermore, they
can increase their sales by increasing advertisements or lowering prices thus increasing total
asset turnover.
Debt Management Ratio Analysis
Debt
Management
Apple
Microsoft
Ratios
2011
2010
2009
2011
Total Debt to Assets
34.16%
36.43%
33.39%
47.49%
Times Interest Earned
X
X
X
Ind Avg
2010
X
46.38%
X
2009
49.21%
59.9%
X
X
Total Debt to Assets: Total debt to assets is the measure of a company's financial risk by
determining how much of the company's assets have been financed by debt. Compared to
Microsoft and the industry average of 59.9%, Apple is doing very well. They are approximately
financing a third of their assets through debt. The reason that their ratio is very low is because
they have the capacity and ability to pay with cash or credit. In 2010, Apple had a higher total
debt to asset ratio because their total liabilities increased more proportionately than its total
assets. However, in 2011, Apple was able to bring their debt financing down by sharply
increasing total assets.
Times Interest Earned: Neither Apple nor Microsoft have interest expense. This is because they
have low total debt to asset ratios. This means that they both the ability to pay their debt
obligations, which is better than the industry average.
Profitability Ratio Analysis
Profitability Ratios
Apple
Microsoft
2011
2010
2009
2011
Operating Margin
31.6%
28.42%
28.12%
40.13%
Profit Margin
23.95%
21.48%
19.19%
33.1%
Return on Assets
22.28%
18.64%
17.34%
19.89%
Basic Earning Power
29.39%
24.66%
25.4%
Return on Common
33.83%
29.32%
26.03%
Ind Avg.
2010
40.03%
2009
33.92%
27.1%
30.02%
24.93%
23.5%
24.95%
30.67%
23.9%
25.82%
29.05%
25.45%
57.2%
40.55%
40.63%
36.83%
49.7%
Equity
Operating Margin: Operating margin is a measurement of what proportion of a company's
revenue is left over after paying for variable costs of production. Companies want this number
high because it shows how well they can pay their production costs. Compared to the industry
average of 27.1%, Apple was barely beating the average in 2009 and 2010, but significantly
improved in 2011. The increase came from an increase in sales and efficient production
management. In order to increase their ratio in 2009 and 2010, Apple needed to reduce their
variable costs by producing more efficiently.
Profit Margin: Profit margin measures how much out of every dollar of sales a company actually
keeps in earnings. In 2009 and 2010, Apple was below the industry average of 23.5%. This
means that they were not effectively managing their costs. However, over the past three fiscal
years, Apple showed an upward trend in its profit margin due to an increase in net income. In
2011, Apple jumped above average which means it became more efficient in handling costs.
Compared to Microsoft, Apple has work to do because Microsoft is considerably higher than the
industry average.
Return on Assets: Return on assets shows how profitable a company’s assets are in generating
revenue. Essentially, the ratio is indicating what a company is doing with what it has. The higher
the percentage, the more profitable the company’s investments are. In the past three fiscal years,
Apple has been below the industry average of 23.9%. However, they have had an upward trend
from 2009 through 2011. This is due to the fact that Apple’s net income has been increase from
year to year along with the value of its total assets. Additionally, compared to Microsoft, Apple
is showing an inverse relationship because Apple’s ratio is increasing with time while
Microsoft’s is decreasing.
Basic Earning Power: Basic earning power measures the raw earning power of the company’s
assets before the influence of taxes and debt. Apple, compared to the industry average of 57.2%,
is struggling because of its low EBIT and high total assets. However, of the past three fiscal
years, Apple has shown an increase in basic earning power because its EBIT has substantially
increased. Additionally, Apple is showing an inverse relationship with its main competitor
because Microsoft’s BEP is decreasing yearly due to a more growth in total assets rather and
EBIT.
Return on Common Equity: Return on common equity measures the rate of return on the
ownership interest of the common stock owners. Company’s want a high percentage because that
indicates that the company is producing profit for its investors. Apple is showing a below
average return compared to the industry and its main competitor, Microsoft. Apple’s below
average ROE ratio stems from a relatively low net income compared to a high stock holder’s
equity. A way Apple could increase their ratio is to buy back stock to decrease stock holders
equity. However, in the past three fiscal years, Apple has shown a growth in ROE due to an
increase in net income.
Market Value Ratio Analysis
Market Value Ratios
Apple
Microsoft
2011
2010
2009
2011
Price/Earning
14.60
19.30
20.08
9.67
Market/Book
3.22
3.17
3.45
Ind Avg.
2010
11.45
2
2.31
2009
14.67
11.8
2.71
4.3
Price/Earning: Price/Earning is the measure of the price paid for a share relative to the annual net
income earned by the company per share. P/E shows how much investors are willing to pay per
dollar of earnings and the higher the number, the better. Compared to the industry average of
11.8, Apple is doing considerably well compared to the market. Apple’s high number indicates
that it is a safe investment because they have been constantly showing profit over the past three
years. However, in 2011, Apple’s ratio dropped considerably for the year before. This is
probably due to the fact that Apple changed CEOs thus creating uncertainty with investors and
because their price per share has been increasing more rapidly than the earning per share. A way
to increase P/E in 2012 would be for Apple gain back investor confidence by buying back stock
resulting in the stock value to rise which would result in an increase in P/E. Compared to
Microsoft; Apple is a more profitable investment.
Market/Book: The market/ book ratio measures the market valued compared to the book value of
the stock which indicates how investors see the stock. Over the past three fiscal years, Apple has
had a market/book value that is lower than the industry average of 4.3. This is Apple is regarded
as a riskier because it is a tech stock. However, when compared to Microsoft, Apple is
considered a better investment because Apple has a higher Market/book ratio. A way for Apple
to increase its market/book ratio is for Apple to restore confidence in investors after the passing
of Steve Jobs.
Summary of Findings
Apple, as a whole, is dedicated to innovating current technologies to make them more efficient
and effective and also developing and manufacturing ground-breaking technologies. Compared
to Apple’s peers, they ranked the highest in net income, which means that they are the most
profitable company in their respective industry. Currently, they rank the highest in all of the
stock ratios, according to Morningstar. Apple, is growing because over the past fiscal three years,
Apple’s revenue has increased substantially. Also, they show more potential for growth based
purely on brand loyalty and consumer opinion of the brand. For example, people will buy new
Apple products just because it is an Apple product or because it is a newer version of an already
popular device, i.e. iPhone. Apple’s industry as a whole is growing because technology is
constantly changing and improving, which allows room for more companies to sprout up
(Facebook) and allow companies to develop new and innovative products (iPad). We feel the
industry as a whole is vital to investing because of all the opportunity for return it provides and
has a high opportunity cost if overlooked. We would be very interested in investing in Apple
because they show stability, growth, and portray high confidence in consumers because people
are constantly purchasing and are loyal to their products. Also, because Apple currently has a
high amount of cash in the bank, which they could use for a variety of things such as:
repurchasing stock, expansion, or mergers.
Recommendation
If we were analysts, we would put a buy on this stock for a variety of reasons. One reason is that
the stock shows room for growth. Another reason is because Apple has a low amount of risk due
its stability over the past couple of years. Additionally, Apple has potential in its newer products
that it is just releasing such as and iCloud and Apple TV. On top of that, there seems to be a
steady stream of consumers that are willing to pay for Apple products, even during a recession.
Furthermore, Apple has a highly respected and recognizable brand name which is due to its loyal
customers. Such loyalty is a profitable because it can be used to recruit new customers and keep
them.