Apple Inc. Financial Statement Analysis

Apple Inc. Financial Statement Analysis

Executive Summary

PacificCoast Technology is experiencing financial issues and the founder and the president, Maria Gomez, is willing to sell the company to a publically traded company. In this case, I chose Apple Inc. as the company of choice to buy PacificCoast Technology. This was after analyzing the financial analysis of Apple Inc. and identifying its fundamental financial strength and long-term benefits of investing in the company. However, the analysis identifies that the fiscal year 2019 was not all good to Apple Inc. However, the trend analysis and financial rations illustrate the strength of Apple and its promising potential to the success of PacifiCoast Technology. The analysis provides a conclusion that the fundamental history of Apple, its financial situation and the P/E ratio places it as the best company for PacificCoast to invest in.

Company Background

Apple Computer Inc. is an American multinational technology company founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in 1977. In 2007, the company was renamed Apple Inc. to illustrate its comprehensive product portfolio. Apple is ranked among the Big Four companies in technology alongside Facebook, Google, and Amazon.  The company is headquartered in Cupertino, California, United States with revenue of 265.6 billion USD by 2018 (NG et al, 2018). 

Apple Inc. manufactures, designs personal computers, media devices, mobile communications and sells several accessories, services, software, and third-party digital applications and content. Some of its products and services include HomePod™, Apple TV®, AirPods®, Apple Watch®, and Mac®. Some of the geographic segment of Apple Inc. includes Japan, Greater China, Europe, the Americas and other sections of Asia. Finkle and Mallin (2010) explains that Apple has maintained its global scale through its corporate culture which follows the aspect of creativity, secrecy, and innovativeness. The Ticker symbol for the company is AAPL and is headed by Tim Cook, the CEO.  Some of its competitors include Samsung, Google, Lenovo, Microsoft, Acer, HP, Sony, Dell, and Toshiba. 

Financial Analysis

Apple Inc. is ranked as one of the most successful companies in the world which innovatively provides the most sophisticated, luxurious and robust products. In the last quarter, Apple has experienced a reduction in revenue due to an extraordinary reduction in net income. This is an indication that the demand for Apple’s, product and services are reducing due to unfavorable market conditions. However, there was an increase in dividends from $1.26 to $1.46. Nevertheless, the value of basic earnings per share reduced from $7.18 to $6.70 (Stock Analysis on Net, 2019). The company generates high profits that give it a high cash flow that is open to investing with. Figure 1 illustrates the annual free cash flow of Apple as 2018:

Figure 1: Annual Free Cash Flow of Apple in 2018 (Macro-trends, 2019)

The figures above indicate the potential and the advantages that a business can enjoy from Apple. In our case study, Maria runs a technology-related business and Apple would be the ideal company to partner with. One aspect to note is that although Apple is a multi-billion organization, it runs under a relatively low valuation. This is stipulated in detail in the financial analysis below.

Financial Ratio Analysis

Current Ratio

Current ratio is defined as a liquidity ratio measuring the ability of an organization to measure and pay their short term obligation. The formula of current ratio is:

Current ratio = total current assets/ total current liabilities

For Apple, we will analyze its ratios based to either quarter ending December 2018 or that of March 2019. For the fiscal year that ended in 2018, the total current assets of the company were 1313339 while total liabilities was 116866

Therefore: the current ratio is 1313339/116866

1.112

However, as per March 2019, the current ratio increased as illustrated below

Current ratio (Q March) = total current assets / total current liabilities

123346 / 93772

1.32

The current ratio of 1.32 illustrates that the company have a good short-term financial strength. Following a trend of 13 years, the lowest current ratio was 1, median was 2.35, and the highest 3.39. 

Competitively, Apple is highly competitive in its industry in comparison to its competitors. This is illustrated on the current ratios on the table below

The table above illustrates in comparison to other companies in technology industry, Apple has a better financial strength and appropriate for the venture. Macro-trends (2019) explain that current ratio of a business provides the efficiency of the operating cycle of an organization. The acceptable current ratio is 1-3 meaning Apple is a healthy organization as for the last 13 years it has operated on the acceptable current ratio. 

The gross margin of Apple by end of the March quarter, 2019 was 37.61%. According to Gaur, Fisher, and Raman (2005), a company should retain a durable competitive advantage. Companies with a gross capital of less than 20% do not have a sustainable competitive advantage; with 21-39% gross profit the company competition is eroding the margins while that above 40% means that the company enjoys a durable competitive advantage. 

Quick ratio 

Saleem and Rahem (2011) explain that a quick ratio is applied by businesses to measure their ability to attain their short-term obligations by use of their most liquid assets. Although is similar to current ratio in terms of their role, quick ratio is measured using the Total Current Assets subtracting the Total Inventory and dividing with the Total Current Liabilities. For the Fiscal year ending Sep 2018, the quick ratio was:

Quick Ratio (Sep 2018) = (Total Current Assets – Total Inventories) / Total Current Liabilities

= (131339 – 3956) / 116866

= 1.09

Quick Ratio (March 2019) = (Total Current Assets – Total Inventories) / Total Current Liabilities

= (123346 – 4884)/ 93772

= 1.26

The two quick ratios provide that Apple has a good short-term financial strength. The liquidity position of a company is attained with a high quick ratio. 

Cash to Debt Ratio

Macro-trends (2019) explain that the cash to debt ratio illustrates the financial strength of a business. It measures the Marketable Securities, Cash Equivalents, the company’s cash to their debt

For Sep 2018, the Cash to debt ratio was

= Marketable Securities, Cash Equivalents, Cash / Total Debt 

= Marketable Securities, Cash Equivalents / (Short-Term Debt & Capital Lease Obligations + Long-Term Debt & Capital Lease Obligation)

= 66301 / (20748 – 93735)

0.58

For March 2019 = Marketable Securities, Cash Equivalents / (Short-Term Debt & Capital Lease Obligations + Long-Term Debt & Capital Lease Obligation)

= 80092 / (22429 + 90201)

= 0.71

Any company with Cash to Debt ratio of more than 1 has the ability to pay their debts with cash at hand but a less than 1 illustrates that the debt of a company is more than the cash at hand. 

Debt to Equity Ratio

The financial leverage of a business can be measured through debt to equity calculation. 

Sep 2018 Debt equity = Total Debt / Total Stockholders’ Equity 

= ((Short-Term Debt & Capital Lease Obligations + Long-Term Debt & Capital Lease Obligation) / Total Stockholders’ Equity

= (20748 + 93735) / 107147

= 1.07

March 2019 Debt equity = Total Debt / Total Stockholders’ Equity

= (22429 + 90201) / 105860

= 1.06

This is a high value which indicates that Apple is able to aggressively finance its growth with debt. 

Trend Analysis 

From 2015 to 2017, Apple has had increasing annual revenue from $215.639B in 2015, to $265.595B in 2017. However, in 2018, the revenue started declining to $258.490B at March 31, 2019. From 2015 to 2016, Apple had an increasing number of total assets which reduced by 2.56% in 2017 (10-K Report, 2018) and 6.94% in March 2019

The trend analysis for Apple for the past three years in terms of quick ratio illustrates an increasing quick ratio. Saleem and Rehman (2011) argue that an increasing quick ratio illustrates that a business has the ability to cover their financial obligations, quickly convert their receivables to cash, and have a solid top-line growth. Comparatively, a reducing quick ratio indicate that a business collects receivables too slowly, pays bills too quickly, struggles to grow or maintain sales, and that it is over-leveraged. Total liabilities which is explained as the addition of the carrying amounts of the balance sheet. As illustrated below, Apple Inc. have enjoyed an increasing total liabilities

Industry Average Analysis

The P/E ratio of Apple is lower than the P/E ratio of the industry. This is indicative that investing in Apple Inc. poses one to undervalued stock meaning one can buy stock from Apple to enjoy long-term income and growth. This is line with Shen (2000) argument that a lower P/E stock is more attractive than a higher P/E stock. 

Conclusion 

Through the financial analysis, it is clear that Apple Inc. is financially strong and with ability to pay its debt. However, it is crucial to note the decline of the total revenue from 2018 to 2019. However, the company still maintains an average financial strength as it has a rank of 6. Businesses with ranks lower than 3 are at risk of financial distress while those with rank 7 and above are unlikely to fall into a distressed situation (Macro-trends, 2019). Although Apple Inc. have not attained position 7, number 6 is not badly off. Additionally, the past history of Apple is promising and the company generally is financially strong. Based on the figures of the Gross margin, Apple is highly competitive as it exceeds the set margin. This company is highly suitable for investment and any investor particular from the technological industry wishing to sell their company and maintain their position as leaders should consider Apple Inc. Hence, if PacificCoast Technology invests in Apple, it will be a safe venture and will result to good returns in long term.

Recommendations 

I can recommend Apple for this scenario because

1. It has a good short-term financial strength.
2. PacificCoast Technology will benefit from the strong fundamentals of Apple Inc.
3. Apple should follow the recurring systemic income s they follow a very tight ecosystem this will help the company to continue pushing their innovative services to attain a higher margin income. 
4. Long-term profits will be boosted by building positions to increase profits

References

10-K Report (2018). Form 10-K Apple Inc Annual report [Section 13 and 15(d), not S-K Item 405]. 10-K Report.

Faulkender, M., Flannery, M. J., Hankins, K. W., & Smith, J. M. (2012). Cash flows and leverage adjustments. Journal of Financial economics, 103(3), 632-646.  Faulkender et al (2012)

Finkle, T. A., & Mallin, M. L. (2010). Steve Jobs and Apple, Inc. Journal of the International Academy for Case Studies, 16(7), 31.

Gaur, V., Fisher, M. L., & Raman, A. (2005). An econometric analysis of inventory turnover performance in retail services. Management science, 51(2), 181-194.

Macro-trends (2019). Apple PE Ratio 2006-2019 | AAPL. Macro-trends. [online] Available at: https://www.macrotrends.net/stocks/charts/AAPL/apple/pe-ratio [Accessed 14 Jul. 2019].

Ng, E. H., Nepal, B., Schott, E., & Keathley, H. (2018). TOTAL QUALITY MANAGEMENT & APPLE SUCCESS.

Saleem, Q., & Rehman, R. U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary journal of research in business, 1(7), 95-98.

Shen, P. (2000). The P/E ratio and stock market performance. Economic Review-Federal Reserve Bank of Kansas City, 85(4), 23-36.

Stock Analysis on Net (2019). Apple Inc. (AAPL). Stock Analysis on Net. [online] Available at: https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Financial-Statement/Adjustments-to-Financial-Statements [Accessed 14 Jul. 2019].