This paper is about Apple's financial condition. As part of a larger work, the paper is strictly focused on a nominal analysis and a common size analysis of Apple's income statement and its balance sheet for the past three years. Findings are noted, and there is a brief explanation of what a common size statement is.
Apple
Analysis of Nominal and Common Size Statements
In terms of nominal figures, Apple's financial statements indicate that the company has experienced an exceptional run of success. In the past three years, the company's revenues have increased by 152%, from $42.9 billion in 2009 to $108.2 billion in 2011. This rapid escalation in revenue derives primarily from two products, the iPhone and the iPad, both of which have sold tens of millions of units in the past three years and driven the phenomenal growth in the company.
The growth in other line items on the income statement has mirrored the growth in revenue. Cost of goods sold has increased from $25.6 billion in 2009 to $64.4 billion in 2011. Selling, general and administrative expense has increased from $4.1 billion in 2009 to $7.6 billion in 2011. Research and development expense has increased from $1.3 billion to $2.4 billion over the same period. The company's bottom line has increased from $8.2 billion in net profit in 2009 to $25.9 billion in 2011, an increase of 214%. It is worth noting that the increase in net income is much higher than the increase in the revenue over the same period. Earnings per share have increased from $9.22 to $28.05 in that span, driving a massive increase in the value of the company's stock.
This dramatic improvement in the company's income statement has created some interesting balance sheet effects. For example while the company is kicking off cash at a tremendous rate, the actual cash holdings have only increased 11% in the past three years, from $23.4 billion to $26 billion. It appears that Apple has targeted this as a comfortable level to keep in cash and short-term investments. The rest of the free cash flow that Apple has generated in the past three years has been put into long-term investments. These have increased from $10.5 billion in 2009 to $55.6 billion in 2011.
Operating line items within the balance sheet have increased more in line with the increase in revenue. For example, total receivables have increased from $5 billion in 2009 to $11.7 billion in 2011. Inventory, however, has not followed the linear growth trajectory that other line items on its financial statements have followed. Inventory increased in 2010 from $455 million to $1.05 billion, but then declined in 2011 to $776 million. Apple appears to not only have a low level of inventory relative to its sales, indicating probably that it sells most of what it makes, but also that the company works hard to manage its inventory levels. This is something that the company does not need to do, given its financial condition, but it is encouraging from an asset management standpoint that Apple continues to monitor inventory levels even when there is little need to -- it is not losing its good habits just because it has been wildly successful. Liability and equity line items have seen the some linear growth pattern as revenues over the past three years.
The common size statements reinforce the conclusions of the nominal analysis. The common size statements start with a baseline -- revenue for the income statement and total assets on the balance sheet (NetMBA, 2010). Much of the discussion with respect to the last three years at Apple is that the company's revenues have grown significantly, with most line items experiencing broadly the same trend. Cost of goods sold has grown at a very stable rate relative to the growth in revenue -- between 59.5% and 60.6% of revenue. This means that Apple has good pricing control in the marketplace, and good cost control over its inputs. Selling, general and administrative expense has been shrinking relative to revenue, as has R&D expense. This means that Apple is containing its internal growth, despite having incredible amounts of cash at its disposal. This reflects fiscal discipline, but also that the company has found few genuinely good opportunities for its capital. The result of its costs growing more slowly than its revenues is that Apple's net margin has continued to increase over the past three years, from 19.19% in 2009 to 23.95% in 2011. This is a positive development for the company.
The common size balance sheet measures the growth or lack thereof of key line items. The cash and short-term investments represented 49.4% of the total assets in 2009, and this declined to 22.3% by 2011 as the cash was held at a stable level and the assets increased. The long-term investments increased from 22.16% to 47.79%. Perhaps the more important figure is combined cash and long-term investments. This was 71.56% of assets in 2009 and 70.09% in 2011, only a minor decrease. The note above about inventory is made clear here -- inventory in 2010 was significantly higher as a percentage of assets than in either 2009 or 2011. Thus, the 2010 figure was viewed by the company as a deficiency and corrective action taken to adjust it downwards again. This also occurred with receivables in 2010.
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