Apple Inc Financial Research Report

Financial Research Report
A: Introduction
There are several factors that one ought to take into consideration before investing in a firm. These factors include, but are not limited to, the enterprise's performance, the caliber of the management in place, the financial condition of the Company, and future prospects of the business. However, it is essential to note that one key factor that could be overlooked, despite its relevance, is the profile of the client seeking to invest in a firm. This is an incredibly important consideration given that each client has different temperament and investment objectives (i.e., protect savings from inflation, grow wealth, etc.). As a financial manager whose key functions include researching investments for clients, I intend to highlight the rationale for selecting Apple Inc. as the stock of choice and why the preferred stock is a suitable investment alternative for my client.
B: Rationale for Stock Selection
Apple Inc. happens to be one of the world's leading tech companies. Below is an overview of the Company:
0. History: The Company was founded on April 1, 1976, by two budding entrepreneurs who elected to drop out of college at the time and pursue their dream (Terrell, 2008). At present, the Company has its headquarters in Cupertino, California.
0. Primary products/services provided by the firm: The Company offers a wide range of products (and services). Some of the hardware devices that the Company manufactures and markets include, but they are not limited to mobile communication devices (such as the iPhone), tablets, and computers, as well as assorted accessories and wearables. It is also important to note that the Company also provides various services to its diverse clientele – including offering digital applications and content, and networking solutions.
0. Financial Overview: Apple's profitability has grown immensely since its inception. In its latest financial statements, the Company reported a net income of 55 billion (Apple Inc., 2020). This was a profit growth of 14% over three years. The Company had registered a profit of 48 billion in the year 2017. The said profit growth is of vital interest on this front, given that, as Brigham and Houston (2020) point out, profit happens to be the most important motivating factor in any economic undertaking. Thus, by growing its earnings, Apple appears keen on securing the wellbeing of its stockholders.
C: Client Profile
The client, in this case, was referred to me by a mutual friend. As a financial manager, one of my key objectives is ensuring that the investments I select for clients suit their needs and expectations. For this reason, I cannot overstate the relevance of developing the client's profile. Indeed, as Higgins (2018) observes, "client's profiles are instrumental in efforts to determine how comfortable clients will be with the outcome of a particular decision."
0. Age: 32 years old
0. Marital Status: Married
0. Profession: Entrepreneur – Client runs a car rental business in New York City. The business has been in operation for the last seven years. He is also in the process of setting up an online clothing store.
0. Investment goals: The client is keen on growing his wealth. He has a high appetite for risk. It should be noted that in any investment or portfolio, two of the critical factors that ought to be taken into consideration are risk and return (Keown, Martin, and Titman, 2017). While the client in this case wants a high return, I selected the current stock owing to the need to ensure that there is a balance between the possible return and the potential risk.
0. Other: The client does not presently own the stock of any other company.
D: Ratio Analysis
In seeking to assess the financial health of Apple, it would be prudent to conduct ratio analysis. The ratios highlighted in this section will be useful indicators of not only the financial situation of Apple, but also its performance over time. Towards this end, a total of five ratios will be taken into consideration. Table 1 below identifies the said ratios and how they have changed over the last three years.

2020
2019
2018

Current Ratio
1.36
1.54
1.13

Debt-to-Equity Ratio
1.72
1.19
1.07

Return on Assets
17.73%
16.32%
16.28%

Return on Equity
87.87%
61.06%
55.56%

Earnings Per Share
$3.28
$2.97
$2.98


Table 1
1. Current Ratio
This is a rather important liquidity ratio that would enable me to determine how capable Apple is to settle its obligations in the short-run. It is clear from the assessment above that over the last three years, the company has had a current ratio of more than 1. This is an indication that Apple’s assets (i.e. short-term assets such as cash) exceed its debts (due in a year or less). As a general rule, a higher current ratio is better because it indicates that the enterprise would be able to sort its short-term obligations if, for some reason, they suddenly fell due. Apple would not have any difficulty meeting its short-term obligations if they fell due.
2. Debt-to-Equity Ratio
This is an instrumental financial leverage ratio that could help me assess Apple’s solvency in the long-term. The said ratio, as Porter and Norton (2016) observe, “more specifically reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn” (p. 119). It therefore follows that a high ratio in the case of Apple would largely be synonymous with increased risk. In the present context, it appears that within the three years under consideration, Apples debt-to-equity ratio has been increasing in a consistent manner. This essentially demonstrates that the company has been aggressively making use of debt to finance its growth. Although this could trigger more future earnings, it could also negatively impact its performance in case of a downturn in economic activity, i.e. as a consequence of the associated cost of debt. This could in turn affect both the profitability and stock price of the company.
3. Return on Assets
According to Bierman and Smidt (2003), this happens to be one of the most important ratios when it comes to the assessment of how effective an enterprise is in the utilization of its assets to generate profits. Apple’s return on assets ratio has been on an upward trend over the last three years (as demonstrated in table 1). As per the company’s latest financial statements, its return on assets was 17.73%. This represents a 1.45% increase over the last three years. It therefore follows that Apple’s management has become more efficient in the utilization of the company’s assets over the said period of time. If this trend is sustained, the company will likely get better over time in as far as its profitability (relative to its total assets) is concerned.
4. Return on Equity
In basic terms, this is “a measure of the profitability of a corporation in relation to stockholder’s equity” (Porter and Norton, 2016, p. 78). This would be an instrumental ratio for any investor as it demonstrates how effectively shareholder funds are being deployed to generate returns. Over the three year period, this ratio has been on the increase. If this trend is sustained, it would mean that those persons who invest in the company would make more on their investment in the coming years.
5. Earnings per Share
As the name suggests, this is essentially the amount of money that an enterprise rakes in for every share of its stock. From a general perspective, Apple’s earnings per share has increased over the last three years. This means that in comparison to three years ago, Apple today makes more money for every share of its stock. According to Bierman and Smidt (2003), although there is no definite correlation, a higher EPS in most instances could have a positive influence on the price of a stock. Thus, in the present scenario, if Apple’s EPS continues its upward trend, those who invest now are likely to benefit from higher prices of stock in the future.
E: Risk Reduction Recommendations
1. Macroeconomic Risk
In essence, these are risks that emanate from outside the firm. It is important to note that at present, the nation (and indeed the world) is emerging form one of the worst pandemics in modern times, i.e. the COVID-19 pandemic. Most analysts fear that we could be headed towards a downturn in economic activity (Bauer, Broady, Edelberg, O’Donnell, 2020). This is more so the case given that most people have been laid off from their places of work – resulting in a decrease in household incomes. With less disposable income, people are less likely to purchase non-essential goods. Apple could, thus, have its profitability negatively impacted.
To reign in this particular risk, the client could diversify his stocks such that he buys into other sectors of the economy as well. For instance, he could also purchase the stocks of companies operating in the agricultural, utilities, as well as finance and insurance sectors. This would be the best way to ensure that he is insulated against shocks that affect specific sectors only. For instance, in the present COVOD-19 scenario, some of the sectors that could be mostly affected include, but they are not limited to, accommodation and food service, manufacturing, information technology, etc. In diversifying, the client would be limiting extensive variations in investing income.
2. Firm Specific Risks
At present, Apple has an able cast of managers who continue to inform the strategic direction of the firm. At the helm is Tim Cook who took over as CEO from Steve Jobs. Tim Cook has managed to curve out his own image and has taken the company to greater heights. As Associated Press (2020) points out, whoever takes over from Cook will have big shoes to fill. At present, there is no definite successor to Cook. Given that both Jobs and Cook have attained the rare feat of ‘superstar’ CEOs, it will be very hard for Apple to find someone who will continue the strategic trajectory that the two maintained and lead the company into an uncertain future. The wrong choice of a successor could negatively affect the long-term success of the company.
To reduce the risk highlighted above, the client could opt to purchase the preferred stock of Apple, as opposed to its common stock. This is more so the case given that these would give the client a priority over Apple’s income. Essentially, as a priority shareholder, he would be paid dividends before common shareholders. In the unlikely event that Apple is liquidated, the client would be amongst the first to lay a claim to the assets of the company.
3. Client Risks
One major risk on the client’s front is suffering a disability that interferes with his physical or cognitive faculties. This is more so the case given that such an occurrence would limit his ability to make sound or proper investment decisions to advance his businesses and monitor the performance of his stocks. This would likely threaten his financial stability.
The client could in this case consider taking disability insurance. In basic terms, this particular kind of insurance would guarantee the client some income if, due to a disability, he becomes unable to perform the various tasks that enable him to make a living. There are a wide range of providers that the client could choose from. The key considerations he ought to make in his selection of the best provider include, but they are not limited to, the benefit period and price of the said policy.
F: Recommendation of Stock to the Client
In my opinion, Apple would be an ideal stock to invest in. My assertion is in this case founded on a number of reasons. To begin with, the company continues to be a leader in the tech realm. Indeed, as Montgomerie and Roscoe (2013) observe, “current explanations of Apple's stunning performance and success tend to focus on innovation in product design or marketing strategy” (291). As a matter of fact, some of the innovations that the company has come up with in the past have ended up being a huge success. This is more so the case when we consider its iPhone mobile device, the Mac computer, and the iPod. If the company continues its innovative spirit, it will likely continue to be as competitive as it has been in the past.
Further, it would also be prudent to note that Apple’s profitability continues to grow year after year. For instance, over the last three years, the company has had a 14% profit growth. Also, an assessment of the company’s EPS indicates an impressive growth trend over the last 3 years. Islam, Khan, Choudhury, and Adnan (2012) observe that one of the key factors when it comes to the determination of the both the value of a firm as well as its share price is EPS. An increasing EPS would, therefore, be an indicator of future increase in stock price. This is particularly the case given that “literature shows that most of the individual investors take their individual investment decision based on the EPS” (Islam, Khan, Choudhury, and Adnan, 2012). The increase in both ROE and ROA is also a pointer towards growing profitability and efficiency. The only issue which ought to be highlighted is that fact that the company’s appears to be having a growing appetite for debt to finance its growth, i.e. as has been indicated by the debt-to-equity ratio. However, this is not a major concern. If the company sustains its profit growth trajectory, then I would not expect it to have any problem with the associated cost of debt.
References
Apple Inc. (2020). Investor Updates. https://investor.apple.com/investor-relations/default.aspx
Associated Press (2020). Apple CEO Tim Cook’s successor may also have big shoes to fill as Steve Jobs’ protégé builds distinct legacy. Financial Express. https://www.financialexpress.com/industry/apple-ceo-tim-cooks-successor-may-also-have-big-shoes-to-fill-as-steve-jobs-protege-builds-distinct-legacy/2063923/
Bierman, H. & Smidt, S. (2003). Financial Management for Decision Making. Beard Books.
Brigham and Houston (2020). Fundamentals of Financial Management (14th ed.). Cengage Learning.
Bauer, L., Broady, K.E., Edelberg, W. & O’Donnell, J. (2020). Ten Facts about COVID-19 and the U.S. Economy. Brookings. https://www.brookings.edu/research/ten-facts-about-covid-19-and-the-u-s-economy/
Higgins, R.C. (2018). Analysis for Financial Management (12th ed.). McGraw-Hill Education.
Islam, R., Khan, T.R., Choudhury, T.T. & Adnan, A.M. (2012). How Earning Per Share (EPS) Affects on Share Price and Firm Value. European Journal of Business and Management, 6(17), 97-108.
Keown, A.J., Martin, J.D. & Titman, S. (2017). Financial Management: Principles and Applications (13th ed.). Pearson.
Montgomerie, J. & Roscoe, S. (2013). Owning the consumer—Getting to the core of the Apple business model. Accounting Forum, 37(4), 290-299.
Porter, G.A. & Norton, C.L. (2016). Financial Accounting: The Impact on Decision Makers (10th ed.). Cengage Learning.
Terrell, E. (2008). Apple Computer, Inc. Library of Congress. https://www.loc.gov/rr/business/businesshistory/April/apple.html