Apple and Dell Used to Compete Directly

Apple and Dell used to compete directly against one another in the personal computer business. Apple has since moved on to become a consumer electronics powerhouse, earning most of its billions from the sale of smartphones and tablets, while Dell's business has all but stagnated, the company not even being a player in those two high-growth segments. Analysis of the financial statements of these two companies can shed light on how this bears out on the financial statements.

Apple has seen a sharp increase in its operating cash flows over the past three years. In FY2009, the company earned $10.1 billion in cash flows from operations, then $18.6 billion in FY2010. FY2011, however, represented a significant increase over that amount, to $37.2 billion. This represents an increase of 100%. The company's total cash holdings on the balance sheet, however, decreased by 12.8% to $9.8 billion. The major change was in the investing activities. Basically, Apple has determined that its current level of cash is sufficient, and has taken to investing it. The company invested $102 billion in the purchase of marketable securities in FY2011, compared with $57.7 billion in FY2010. Some of these were money market, since $49.4 billion in cash came as proceeds from marketable securities. The company increased its payments for plant, property and equipment and for the acquisition of intangible assets, but these amounts pale in comparison with the cash flow that Apple generates and subsequently invests in marketable securities. Cash flow from financing activities did not experienced a significant change in FY2011.

Comparing like quarter to like quarter (Q3), Dell did not experience much change in its cash flows from operating activities. The company saw a decrease of 6.8% in cash generated from operating activities. The company did, however, increase its cash outflows on investing activities. Dell accelerated purchases of marketable securities, tripling the level of the previous quarter. Dell also had a high level of capital expenditures and spent some money on the acquisition of new businesses. In total, Dell increased its cash outflows for investing activities by 565%. The company has accelerated stock repurchases in the past two quarters, most likely to prop up the value of the company's stock. However, Dell continues to finance its investing activities in part from the issuance of debt.

It is hard to compare annual results to quarterly results, especially slow quarters, so the Dell annual figures will be used as a point of comparison, using FY2011 for both companies. As noted, Apple's growth has been spectacular, with the company doubling its cash flows from operations in 2011, and these were already at a high level. Dell's cash flow from operations, at $3.9 billion, was only marginally changed from FY2010. The company did have an improvement in that year, basically doubling cash flow from operations. However, Dell's business has stagnated at this point. In addition, those additional business lines at Apple make that company nearly ten times the size of Dell, indicating that Apple has enjoyed significant growth over its former competitor.

In terms of investing cash flows, as noted Apple's job with respect to cash management seems largely to find a home for the immense stacks of cash the company brings in. This is not necessarily a difficult job. Dell must be much better at managing its cash in an environment characterized by low revenue growth. As an example, Dell simply rolled over its investments, the inflows and outflows matching almost precisely. This left Dell with positive cash flow for the year, something that is needed when cash flow from operations flatlines. Dell repurchased $800 million in common stock, actually more than Apple did. However, this is a tactic often used by firms that want to improve their stock price, so perhaps Dell has more reason to be motivated in this respect than does Apple. The financing flows from Dell show that the company is taking on new debt to help finance its operations, something that Apple is not doing.

In evaluating which company has managed its cash better in the last three years, there are two criteria that can be used, the absolute and the relative. Apple clearly has the better absolute cash position. It has increased cash flows from operations substantially, while Dell has merely doubled its cash flow from operations. Apple has invested more, bought back less stock and it has not taken on any debt. By all reasonable measures, Apple's cash position is much better than that of Dell.

However, on a relative basis, Apple simply does not earn many points for degree of difficulty. While one wouldn't actually want to put an orangutan in charge of managing Apple's cash, one probably could get away with it for a little while. Apple's biggest cash management issue is figuring out what to do with all the money that operations is generating. A quick look at the balance sheet reveals that much of Apple's cash flow has been diverted into long-term marketable securities. While it keeps cash and short-term securities at a mere $26 billion, the company feels that this amount is basically enough to meet its needs and has invested a further $55 billion in long-term investments. The company is probably right -- its total operating expenses for FY2011 were only $10 billion, with inventories and of less than $1 billion. Apple's cash supply of around $26 billion is sufficient. Even if it was not, the company could sell some of its securities and adjust the balance.