Apple Inc. is a designer and marketer of consumer electronics based in California. Although the U.S. is by far its biggest market, it operates in a number of markets around the world. The company's current product segments include computers, tablets, smartphones, software and music players. Apple faces a wide range of competition, often different competitors in each business segment. The company has enjoyed considerable success in recent years, making market share gains and seeing its stock price to over $640 at one point (MSN Moneycentral, 2012). This paper will analyze Apple from the perspective of both its qualitative strategy and its financials. Some of its competitors will also be analyzed. The objective of the report is to make a determination about Apple's financial health. It is expected that, given the run of success that Apple has had, that the company is in good financial health.
There are a few different methods for analyzing financial statements. These include trend analysis, common size analysis and ratio analysis. The trend analysis involves looking at trends in the financial figures, and this technique can be applied both to the raw data and to the ratios or common size analysis as well. The most prevalent trend in the income statement's raw data is growth. Apple's revenues last year were $108 billion, up 65.9% from FY2010. The company's revenues were $24.5 billion in FY2007, so it has grown 304% in the past five years. For a company that has been in business for over three decades, this has to be considered exceptional growth.
It is important to note whether the growth in the top line is matched by growth in other line items. Cost of revenue grew 62.9%, a rate slightly lower than the growth in revenue. In the past five years, cost of revenue has grown 292%. This means that Apple's revenue growth has outpaced its COGS growth, indicating a slight improvement in the margins. As Apple grows, it is expected that the company would be able to leverage those economies of scale to produce more efficiently and to squeeze better prices from its suppliers. As such, this improvement is expected.
Selling, general and administrative expenses grew 37.7% last year, and 156% over the past five years. This indicates that the company may well be reaping the benefits of scale in these overhead costs. This improved managerial efficiency is a positive for the company, and should result in improvements to the bottom line that are superior to improvements in the top line. Net income improved 84.9% last year, and over the past five years has improved 641%. As expected from the analysis of the above, Apple's profits are growing more rapidly than its revenues. This is directly attributable to the company leveraging its scale. The trend analysis of the income statement, therefore, is positive. Apple is on a strong growth trajectory, and this growth is higher at the bottom of the income statement, two trends that are very encouraging for the impact that they are likely to have on the company's balance sheet and cash flow.
The company's total assets grew 54.7% last year, not unexpected given the strong revenue and profit growth. The biggest growth items on the asset side of the ledger were in long-term investments (119%) and intangibles (933%). The growth in long-term investments is particularly interesting. Five years ago, the company did not have long-term investments on the balance sheet, but began acquiring them four years ago. Today, Apple has $55 billion in long-term investments on its balance sheet. Notable as well is that the company has grown plant, property and equipment. As befits a growing company, this line item grew 63% last year, and has grown 324% in the past five years.
Current assets have not grown as rapidly. The company has maintained a steady cash position for the past year couple of years, between $22-26 billion. Current assets only grew 7.9% last year. In general, the cash position is excellent, and clearly the company is funneling its growth into long-term investments. This is interesting, because it implies that the company is growing its wealth faster than it can find opportunities to spend it. A company growing this rapidly undoubtedly has a high hurdle rate for new projects, but arguably these long-term investments do not meet this hurdle rate. Thus, the inability of Apple to find good investments for its capital most likely represents a drag on its ability to return wealth to shareholders. It would not be surprising to see the ROA decline over the past five years.
On the liabilities side of the ledger, Apple has no long-term debt. Its biggest long-term liability is deferred income tax. Total liabilities grew 42% last year, and have grown 267% over the past five years. Most of these are current liabilities. Accounts payable grew 21.7% last year, and over the past five years has grown 194%. In total, current liabilities increased 34.9% last year and 201% over the past five years. All told, Apple's liabilities are not growing all that rapidly, in relation to the size of the company. It would be a red flag if the company had rapidly growing liabilities but that is not the case. Apple's lack of long-term debt, combined with the growth in liquid and investment assets is a good indicator of financial health.
As expected for a rapidly growing, highly profitable company, Apple's equity has improved significantly over the past five years. Equity growth was 60.3% last year, and has been 427% over the past five years. Most of this has come in the form of retained earnings growth, which was 69% last year and 590% over the past five years.
Cash Flow Statement
Apple's cash flow statement supports the findings of the income statement and balance sheet. The latter revealed that Apple has not grown its cash position much in the past four years, despite the growth in the size of the company. Cash flow from operations, however, has grown rapidly. The company generated $37.5 billion from operations last year, an increase of 101% over the previous year, and 586% growth over the past five years. The cash is primarily being used for investing activities. Cash flow to investments was at nearly $33 billion last year, and capital expenditures increased 251%, resulting in the sharp increase in plant, property and equipment on the balance sheet. Not surprisingly, a company that does not pay dividends -- or did not until announcing one the other day (Goldman, 2012) -- and does not have long-term debt had a low number for cash flow from financing. The buyback it announced - $10 billion over the next three years (Ibid) is significantly larger than the stock buybacks it has conducted over the past three years. These were in the amount of $2.227 billion in total.
The first set of ratios that should be calculated are the liquidity ratios. The current ratio for Apple is 1.6, which is fairly healthy. So much of the company's current assets are in cash, which means that the cash ratio is 0.9. Two years ago, the company's current ratio was 2.7. This does not mean, however, that Apple's liquidity position has declined. The company is not growing the cash on its balance sheet, much, but is instead investing it. That money may be "long-term" on the books, but if Apple did not choose to invest it, in all likelihood the company's current ratio would have improved over the past few years rather than declined. With those investments included, the current ratio would have been 3.6, so Apple's liquidity ratio decline is not indicative of declining liquidity at Apple, but a reflection of the company's decision to invest its cash rather than have it sitting around not earning anything.
Based on the analysis of the income statement, it is expected that the profitability ratios will have improved over the past few years. The gross margin is currently 40.4%, compared with 33% five years ago. This figure is not only healthy but improving, something that bodes well for Apple. The operating margin is currently 31.2% and the net margin is 23.9%. Five years ago, the operating margin was 18% and the net margin was 14.2%. This situation shows that the company is indeed improving its margins, and as noted most of the improvement comes at the operating level, hinting strongly that economies of scale are contributing to bottom line growth.
The company's return on equity is 45%, its return on assets 29% and its return on capital is 39%. All of these figures are higher than the company's five years averages, and they are all very strong figures. It was speculated above that the ROA might be declining because the company's long-term investments are not likely to return more than its internal operations. However, this has not proven to be the case. The ROA four years ago was 20.2%. The improvement is because the net income is growing faster than…