BUS 650 -Managerial Finance – Evaluation of Corporate Performance – Apple Inc

Apple Inc. is an American based Multinational Corporation with its headquarters in Cupertino, California.Its subsidiaries are FileMaker Inc., Braeburn Capital and Anobit. Stephen Paul Jobs, and Stephen Gary Wozniak (two college drop outs) founded the company on April 1, 1976. They made the first computer was assembled in a residential garage. Two weeks later, Ronald Wayne joined them for financial boost. After the introduction of Apple II on January 3, 1977, the company was incorporated in the state of California. It was given the name Apple Computer, Inc. However, the word computer was dropped on January 9, 2007 when the company introduced the iPhone to the market.

The corporation designs, develops and markets computers, consumer electronics and computer software. It has some of the best personal computers, software and consumer electronics in the market like Mac (Macintosh) computer line, iPhone smartphones, iPad and iPad mini tablets, ipod and Apple TVs. It is also sells safaris web browser, iTunes music browser, operating systems (OS X and iOS) and Creativity suites (iLife and iWork). In 2013, apple has been working on introducing an iWatch.  It provides services like iOS device backup and icloud where its customers can store data and information online.

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Apple Inc. went public on Dec 12, 1980 with IPO of $1.8 billion, and a $22.00 per share. Since then, the stock has had three 2-for-1 splits making the adjusted IPO share price$ 2.75 per share.  The company shares are traded on National Association of Security DealersAutomated Quotation (NASDAQ) stock market LLC under the stock symbol AAPL. 33yrs later, Apple has an estimated value of $415 billion making it the largest corporation in the world that trades publically.

Apple ranks the second largest information technology company with Samsung being on the lead and the third largest phone making company after Samsung and Nokia. It has a current stock price of  $521.14 as at November 21, 2013. With a 52 high of $ 594.59 and a low of $385.10, it is no surprise Forbes magazine ranked it the most valuable brand in the world.

Over the resent years, Apple has registered the highest rate of product innovation ever seen in the computer software, computer hardware, Digital distribution and consumer electronics industry. However, in order to protect its ferociously high profits, good quality products at a very high price. This has raised concerns that its market share may be lost to its competitors, Google Inc., BlackBerry Limited, Hewlett- Packard Company and Samsung Electronics Co.

Apple sells its products through its 415 retail stores located in fourteen different countries, its online store (Cornell, Bradford, $ Shapiro, 1987)) which is available in 38 countries and via phone 1-800-MY-APPLE (692-7753) and through Apple authorized resellers located worldwide.

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Its trademark is a bitten apple. To many, an apple symbolizes knowledge, wisdom and intelligence and the bite resembles having a share of that knowledge. It adopts very aggressive promotion methods. The main tool being advertising, an area it has invested heavily in. Apple has created many outstanding advertisements for its products and services on newspapers, magazines, on the Internet, and TV adverts. Its adverts focus on the use of their products and less on informing their customers about the product. Although some people have criticized the style, has been very successful. Their campaigns are characterized by slogans. Some of the popular slogans used by Apple are: “Bite into an apple” in 1970s, “soon there will be two kinds of people. Those who use computers and those who use apples” used in 198, “Computer for the rest of us” in 1984, “The power to be your best” in 1990, “Think different” from1997 to 2002, ‘”Switch” in 2002 and 2003, “Get a mac” from 2006 to 2010. The slogans are both catchy and appeal to many especially those who want to be different.

Apple also has many sales representatives who engage in personal selling, another promotional tool that it uses extensively. It ensures the sales representatives are well informed about all the products in the market and are equipped to offer quality customer service. They assist the consumers to keep up with their fast evolving technology. This hasn’t only promoted consumer’s trust but it has also given the company a good name.

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Apple Corporation issues financial reports quarterly with their financial year ending in September.Their financial report includes consolidated statements of: Operations, Comprehensive Income, Balance Sheets, Shareholder’s Equity and Cash Flows. Included in the report is selected quarterly financial information.

The corporation has $5 million authorized but unissued preferred shares. It has only issued common shares to the public, which as at Sept 28, 2013, were 899,213,000 (no per value) issued shares worth $19.764 billions. The company recorded a total divided pay out of $10.5 billion ($2.65 per share in the 1st quarter and $3.05 per share in the 2nd, 3rdand 4th quarters) in 2013 and 2.5 billion ($2.65per share in both the 3rd and 4th quarter) in 2012. In the year 2000 and 2005, divided were given in the form of 2-for-1 stork splits in both years. The company expects to keep making quarterly dividend payments of $3.05 per share in the coming years, a decision that is awaiting Board of Director’s approval.

The Board of Directors authorized a share repurchase program in 2012 allowing the company to repurchase common shares of up to $10 billion. Shares can be repurchased in either negotiated privately or transacted in the open market. In 2013, the authorized amount was increased from $10 billion to $60 billion. As at Sept 28, 2013, 10,438,000 common shares worth $22.9 billion had been repurchased.

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Apple issued floating notes and fixed rate notes in May 2013 worth $17 billion recognized at the value of $16.896 billion. The notes have varying maturities, between 2016 and 2043. Their interest is payable in arrears, semi annually for the fixed-rate and quarterly for the floating notes.

In the year ended Sept 28, 2013, Apple’s operating activities generated revenue of $53.666 billion while it’s investing and financing activities used $33.774 billion and $16.379 billion consecutively. There was a big increase in its inventories as compared to the previous years and a remarkable increase in proceeds from marketable securities as well. Proceeds from the long-term debt issued during the year increased the company’s cash inflows. A considerable amount of cash was used up in repurchasing shares and dividend payments.

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Over the last three years, Apple Inc. reported high net income values with the highest value being $41,733 billion in 2012,  $37,037 billion in 2013 and $25,922 billion in 2011. It recorded the highest sales of $108,249 billion in 2011, $170,910 in 2013 and $156.508 billion in 2012. The company’s current ratio for the year ended Sept 28,2013 was 1.68 (73,286/ 43,658). It’s profit margin of0.22% ($37,037/$170,910).

Future growth of the company is heavily dependent on its innovation ability. Having noted this, it continues to invest heavily on research and development, advertising and marketing. It has also invested in a knowledgeable sales team to ensure continued sales and to protect its ability to attract new customers and retain the existing ones. There are plans to expand its retail stores and its third party distribution network. It plans to enhance its online store as well. These will enable them to reach more customers effectively and facilitate high quality post-sales services.

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Apple being the richest company has many future opportunities open to it. It has most revenue comes from sales outside U.S with most of its profit coming from the sale of its new products. The company has reported its willingness to employ its staggering amount of liquid resources into opening more stores in strategic locations; this could be a great opportunity for growth. According to cook in a conference call held earlier in the year, Apple still has a significant opportunity in China (appleinsider.com). He pointed out that the company was targeting to double the number of stores in china in less than 2 years.

It is in a very fast growing industry that gives them opportunities to innovate and expand. It has been the leading company in the industry something that has helped it stay ahead of its competitors over the years.  Regardless of the extensive competition, their innovative power, high quality products and excellent retail strategy gives them added advantage.

The threat of substitute products is greatly reduced by their superior branding and very high quality products. They have royal customers who keep coming back. They have a wide range of products that creates an opportunity to widen its market and customer base.

The corporation is also using its resources to buy into new business. It has made a few small acquisitions already and has so far managed to keep them profitable. It has shown a trend of creating new businesses instead of merging with already established companies. It has managed this by producing high quality products. If that remains constant, they are likely to gain an even bigger market share.

From analyzing the financial position of Apple Inc., it is clear that good marketing, product promotion and advertising play a vital role in product’s success in today’s competitive market. Personal selling is also important as it helps cultivate consumers’ trust.

Long-term investments although they might lower a company’s current profits, they are of significant importance for a company’s on going concern. However, it is crucial to make sure that a company does not over invest and it remains liquid enough to fund itsday-to-day operations.

 

Apple Inc Profit and Loss Account

Currency in
Millions of US Dollars
Revenues 182,795.0
TOTAL REVENUES 182,795.0
Cost Of Goods Sold 112,258.0
GROSS PROFIT 70,537.0
Selling General & Admin Expenses, Total 11,993.0
R&D Expenses 6,041.0
OTHER OPERATING EXPENSES, TOTAL 18,034.0
OPERATING INCOME 52,503.0
Interest Expense -384.0
Interest And Investment Income 1,795.0
NET INTEREST EXPENSE 1,411.0
Currency Exchange Gains (Loss) -105.0
Other Non-Operating Income (Expenses) -121.0
EBT, EXCLUDING UNUSUAL ITEMS 53,688.0
Gain (Loss) On Sale Of Investments -205.0
EBT, INCLUDING UNUSUAL ITEMS 53,483.0
Income Tax Expense 13,973.0
Earnings From Continuing Operations 39,510.0
NET INCOME 39,510.0
NET INCOME TO COMMON INCLUDING EXTRA ITEMS 39,510.0
NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 39,510.0
2014
Sales  $183
Sales Growth 10%
Operating Income $53
Operating Income Growth 7%
EPS $6.45
EPS Growth 14%

Calculate Return on Equity (ROE) using the DuPont system.

DuPont System focuses attention on all critical financial conditions of the financial condition of a company: the operating management, management of assets and the capital structure. The DuPont Formula demonstrates the association between major financial ratios.

Return on equity (ROE) = net income  total equity

If we multiply ROE by sales, we get:
Return on equity = (net income sales)  (sales  total equity)
ROE = net profit margin  return on equity


Operating Margin
Net Margin Return on Assets Return on Equity
28.8% 21.64% 18.26% 31.56%

ROE= net profit margin  return on equity

=21.64% X 32.56%

=7%

Margins % of Sales TTM
Revenue 100.00
COGS 60.34
Gross Margin 39.66
SG&A 6.16
R&D 3.35
Other
Operating Margin 30.15
Net Int Inc & Other 0.45
EBT Margin 30.61
Profitability TTM
Tax Rate % 26.38
Net Margin % 22.53
Asset Turnover (Average) 0.91
Return on Assets % 20.47
Financial Leverage (Average) 2.02
Return on Equity % 38.37
Return on Invested Capital % 30.71
Interest Coverage 128.58

Calculating accounting ratios

Liquidity Ratios:

Cash ratio= cash + marketable securities/Current liabilities.

14259 + (106,215 +26,287) /43,658= 0.93

Current ratio (working capital ratio) = Current Asset/ Current Liabilities

73,286/43,658 =1.68

Operating cash flow ratio= Operating cash flow/ Total debt.

53,666/83451=0.64

Quick ratio (Acidity test ratio) = Current Assets-Inventory/ Current liabilities

73,286-1,764/43658 =1.64

Activity Ratios:

Inventory turnover= Cost of goods sold/Inventory

106,606/1,764

Asset turnover=Sales/Total assets

170,910/207,000=0.83

Accounts receivable turnover= Sales on credit/ Account Receivables.

Shareholder ratios:

Earnings per share= Net income /Number of outstanding shares.

37,037/889,213= 0.04

Dividend payout ratio=Dividends/ Earnings.

Dividends per share=Dividends paid/ Number of outstanding shares.

Price earnings ratio= Market price per share/ Earnings per share.

Profitability ratios:

Operating profit Margin= Operating income/ Sales. (Revenue)

48,999/170,910=28.66%

Gross profit margin= Gross income (profit)/ sales. (Revenue)

64,304/170,910=37.24%

Return on assets= Net income/ Total assets

49,564 /207,000=19.34%

Profit margin= Net profit/ Sales (revenue)

49,564/170,910= 23%

Efficiency Ratio= Non interest expenses/ revenue (sales)

Return on investment (ROI) = Gain form investments –cost of investment/ cost of investment

Operating Cycle ratios:

Number of days of receivables = Account receivable/Average days of credit sales. (Accounts receivable/365days)

13,102/ (13102/365) = 364.9

Number of days of payables = Accounting payable/Average day’s purchases (purchases/ 365 days).

22,367/ (22,367/365) =365.0

Number of inventory days= Inventory/ average days cost of goods sold (cost of goods sold/365 days)

1,764/ (1,764/365) = 4.8

Apple Inc. Financial report incorporating and interpreting accounting ratios

The apple Inc. company provides statements that meet all the required standards. The accounts were audited and published in September 28, 2013. The board of directors gave a vote of confidence that they believe that the statements gave a true and fair representation of the company’s financial position (United States Security and Exchange Commission, 83).

Cash ratio, this ratio considers the liquid assets that the company has control over. The closer the value is to 1.0 the better for the company. However any value that is above 0.5 is considered healthy. Apple Inc. has a very healthy figure and thus there are no concerns that it might be unable to repay its short-term liabilities. The company should not rush into cashing its securities to repay debt.

The quick ratio refines the current ratio. A company might not be in a position to forecast when its inventory will be sold with certainty. This ratio does not hate to necessarily be as high as the current ratio. A quick ratio of 1.0 and above indicates that the company can sufficiently service its current liabilities. Apple Inc. has a quick ratio that indicates that it will be able to repay its current liabilities. When the ratio is compared to current ratio it shows that although the company might need to increase its current asset value, increasing the quick ratio might be unhealthy since it will mean that the resources are being under utilized. It is advisable to invest more on inventory so as to raise the current ratio without raising the quick ratio.

The gross profit margin reduced from 43.9% in 2012 to 37.6% in 2013. This is as a result of the reduction in profits. It might also be a reflection of poor management. Foreign exchange rates fluctuation affects the company greatly. This is because of its multinational trade. The company might profit from price hedging. This will reduce the amount of losses made on currency exchange thus increasing its profitability.

The current ratio measures the ability of an entity to repay its short-term debt. Assessing the value of its assets that can be converted into cash within a year does this. A ratio above 2.0 means the company has sufficient resources to cater for its debts. If the ratio is below 1.0, it means the level of current liabilities is higher than the current assets. The company is likely to struggle or it might fail to sufficiently repay its short-term debts. Apple Inc. has a healthy current ratio although it would not be considered excellent. Although the ratio cannot be termed as problematic, there might be instances where it is likely to struggle to meet its current liabilities. The management should therefore try to increase the current assets figure.

The company’s ratios reflect that the company’s financial performance is good. The ratios also indicate that the company is in a position to pay off all its debts and it has not been over financed. However, the company liquidity seems to be high which raises questions about how well it’s resources are being exploited.  As compared to the 1st and 2nd quota of the year, apple Inc. did not perform very well on the 3rd and 4th quarters. Both the quick and current ratios were better in the first two quarters of the year.

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The company capitalizes on software development more than the tangible non current assets. Although this might be a good strategy for Apple Inc. Company, it poses a potential danger as well. In today’s world where software evolves at a super speed, the future value of software is very unpredictable. Their tangible fixed assets have very short lives with machinery and equipment having less than five remaining useful years (Apple Inc., 1).

The company has invested heavily on research and development; this will help it stay a step ahead of its competitors in the coming years. Their aggressive advertising and marketing strategy combined with excellent personal selling and opening stores in strategic locations to maximize their customer base strategies are a great way to ensure that their already huge market will continue growing. They are likely to maintain their market share continue being among the richest companies in the world.

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