Apple Inc. is a unique company in the personal entertainment sector. It has been loyal to its design and marketing strategy over the past 33 years and has been able to position itself as a cult brand that is known worldwide for its innovative and market leading business operation.
Steve Jobs, CEO of Apple Inc. once said: “A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets” (Warner, 2009).
It is this attitude and the provocative but entertaining way the company introduces new products and presents itself to the public that made me want to have a look behind the scenes and into their finances.
Background
Apple Computer Inc. was founded in 1977 in the United States, in Cupertino, California and renamed to Apple Inc. in 2007 to display its comprehensive product portfolio (Datamonitor, 2010). Today Apple Inc. and its subsidiaries (from here referred to as Apple) operate in the wide field of personal entertainment. This includes designing, producing and promoting a variety of hardware products such as “personal computers, mobile communication and media devices, and portable digital music players” (Apple Inc., 2010, p. 1) as well as software solutions and services around its products.
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Over the past 3 years the company has raised its resources for research and development leading to expenses of $1,109 million in 2008, $1,333 million in 2009 and $1,782 million in 2010, a total increase of 60% (2008 to 2010). As a result Apple launched several new and revolutionary products such as the iPhone in 2007, the time capsule software in 2008, a new edition of the iPhone in 2009 and the iPad in 2010 which have led to a sustained success that reflects in the financial statements of the recent years (Datamonitor, 2010, p. 9):
In the fiscal years 2008, 2009 and 2010 ending in September of each year Apple increased its revenue by 14,4% to $42,905 million (2008 to 2009) and thereafter by 52% to $65,225 million (2009 to 2010). The company’s net profit was $6,119 million, $8,235 million and $14,013 million in 2008, 2009 and 2010 which resembles an increase of 34,6% (2008 to 2009) and 59% (2009 to 2010). The introduction of the iPad, where 300,000 pieces have already been sold on its launch day, April 3rd 2010, and 7,458 million pieces since its launch (Apple Inc., 2010, p. 33) as well as the new release of the iPhone and the third-party offers in the iTunes Stores being music and electronic book downloads are mainly responsible Apple’s recent success (Dowling, Press Release, 2010).
In order to gain a deeper understanding of the effects of the end of year financial results for Apple and its past and future development a critical analysis of its financial statements has been conducted and is presented hereafter.
Analysis
The critical analysis of the financial statement of Apple includes the general comparison of Apple’s main financial influencing factors and secondly a ratio analysis which will provide an in depth audit of the financial performance and its effects on the company.
Main financial influencers
The main influencing factors of Apple’s financial statements are the revenue, operating profit, net profit, cost of sales and earnings per share. These indicators show the overall financial performance of the company. The overview given in Table 1 (Refers to Appendix V) highlights the superior performance of the company from 2008 until 2010. Apple Inc. is an American based company, which is why the figures are expressed in USD and in the following table in $ million except for the earnings per share, which express the per share amount.
Apple’s financial results are a good indicator for the economy’s progressing recovery from the financial crises of the recent years. The above-average rise of Apple’s revenue and profit are the result of its investments in product developments which have met the needs and wants of the target markets. The image of the company was strengthened by its very good sales performance which was influential for the rise of earnings per share. The great increase for Apple’s costs of goods sold result from the development and production of the iPad, which will also be visible in the result of the financial year ending September 2011, as well as the development and production of the new release of the iPhone.
Ratio Analysis
A ratio analysis is used to express how the figures in the financial statement relate to each other and by interpreting the ratios to explain how the figures affect each other and the company’s development and performance (Dyson, 2010, p. 219). Comparisons of the figures are made within Apple’s own performance over the past financial years and where appropriate the figures are compared to two Apple’s competitors. For this critical analysis the competitive companies are Dell Inc. since they compete within the personal computer segment and Microsoft, who are one of Apple’s main competitors in the computer software sector (Datamonitor, 2010, p. 27). It shall be mentioned that currently there is no other company which provides a similar product portfolio as Apple. Therefore no absolutely satisfactory industry comparison can be made for the ratio analysis but indications on the positive or negative trend on the figures can be made.
Liquidity ratios
Liquidity ratios allow the assessment of the amount of cash which a company has access to from its own resources within the next twelve months. The two ratios which are put into one context are the current ratio and the quick ratio (Table 2 Refers to Appendix I).
The norm result for the current ratio is 2:1 (Hendricks, 2010, p. 6). The higher the current ratio, the more liquid resources are available for the company to pay its short term debts. The current ratio for Apple was higher in 2009 but is still within the industry norm in 2010.
By reducing the stock, the quick ratio is considered a more reliable statement of a company’s liquidity. A ratio of 1:1 accounts as safe. This again has been greatly outperformed in 2009 and slightly decreased towards 2010 which indicates on Apple’s good ability to turn assets into cash quickly.
The overall reduction of both ratios in the Financial Year 2010 (FY 2010) can be traced back to the fact that the companies liabilities have increased due to R&D, production and retail store investments.
Profitability Ratios
Profitability ratios calculate the earnings a company generates in relation to the expenses and costs it has during the financial year. An increase of the value of a profitability ratio indicates that a business performing well. In order to interpret the company’s performance a comparison to two competitors in Apple’s operating environments has been drawn.
Apple has invested in its fixed assets by expanding its retail segment which explains the slight decrease in return on gross assets (ROA). As financial analysts state a ROA should not undergo 5%, Apple is in a very good position with an ROA of 24.66%. (Table 3 Refers to Appendix II,A,B).
A high return on shareholder equity (ROE) expresses a company’s effective employment of stakeholder investments and in return high earnings for the stakeholders. The figures show that Apple has been able to invest more effectively in FY2010. But the company comparison reveals that even with a great loss in ROE for Dell in 2010 it can compete with Apple’s performance. Where as Microsoft’s ROE with 40.6% is much higher. However since the ROE should be interpreted in relation to the debts, and Apple only has short term debts which the company covers quickly, the investment strategy of Apple can be considered as benefiting for both the company and the shareholders.
Apple’s gross ratio decreased in FY2010. This is due to the less efficient use of its fixed assets in raw material and manufacturing. The company comparison shows that Apple’s gross ratio is at a high percentage – a positive indication for profit that is confirmed in Apple’s overall results.
The figures of Apple’s profitability ratios in relation to its competition display Apple’s ability to manage its investments and sales lucrative.
Efficiency Ratios
Efficiency Ratios express the ability of a company to use its resources profitably. An increase of the ratio figures over the years show an efficient management of resources. (Table 4 Refers to Appendix III).
The rate of stock turnover (ROST) can be described as the number of times the stock is being replaced per year. A high ROST show the efficient investments and a low ROST can be an indicator stockpiling and poor sales. Since Apple’s sales have greatly increased in FY2010 the decrease in ROST of 33% from FY2009 to FY2010 most likely result from inefficient stockpiling. Speculations can be made that a too high prognosis on iPad sales in combination with a lower sales rate of iPods may have led to an increased inventory level.
The fixed asset turnover (FAT) has decreased by 27% in FY2010 which means that Apple was less successful in using its fixed assets to generate sales. The reduction in FAT is the result if Apple’s investment in its retail branch and therefore an increase of fixed assets.
While the ROST and FAT are decreasing naturally the cost of sales ratio (COS) will increase. Apple’s has more money tied up in its fixed assets and was not able to handle its stock as efficient as in recent years.
The debt ratio expresses the percentage of assets which are financed by debts. Apple only has short term liabilities and no long term debts (Apple Inc., 2010, p. 27). Even though the short term debts have increased to 36.43% – which Apple’s should reduce over the coming financial periods – 63.57% of Apple’s assets are covered by equity. The risk for Apple therefore is low.
Investment Ratios
This part of the ratio analysis helps to judge how remunerative a potential or existing investment is or might be (Table 5 Refers to Appendix IV).
Apple does not pay dividends per share to its shareholders explaining the dividend yield of $0.00. Therefore the company has more financial resources to reinvest in its business and the development of its products to maintain a peer position in the market.
The earnings per share (EPS) allot the profit of a company to its number of shares and therefore indicating on the company’s overall profitability. Apple’s EPS increased by 67% to $15.41 in FY2010 which relates to the nearly 60% higher net profit in 2010. It also reveals an increase in investment in the company’s shares which most likely result from Apple’s positive consumer and investor awareness through the introduction of its new product developments.
A high price/earnings ratio (P/E) describes the high demand of the shares and therefore the confidence of investors towards a positive future of the company. With the high increase in EPS the P/E has risen as well. Apple’s market price per share ($) traded at 14.76x the EPS of $15.41.
Over the past years Apple has proven to be a lucrative company to invest in and it is likely that this trend continues for the following financial year.
- Impact of current event since last balance sheet
The publishing date of Apple’s recent annual financial report is the 25th September 2010. Since then Apple has introduced a new developments of its MacBook, the MacBook Air, a thinner and more powerful version of the Apple laptop (Dowling, Press Release 2, 2010).
This will affect the sales of the iPad since it can be seen as a competitive product and it is likely to increase Apple’s stock turnover ratio because it is an additional product in the company’s range. But at the same time Apple has made a move to stay competitive in the personal computer sector and it is likely that the company will increase its total revenue until the next financial report.
Conclusion and recommendations
Financially the fiscal year 2010 was a very successful year for Apple.
The company has increased the investments in research and development of new products and its retail branch. This has led to the launches of the iPad and the new iPhone generation and has brought the focus of public attention to the company enhancing its image and increasing its desirability in the minds of shareholders and investors.
Apple has increased its revenue by more than 50% and is taking a leasing position in the personal computer market despite the intense competition and price sensitivity of the consumers. The software and online services Apple is offering through third parties, such as the e-books have gained popularity.
A negative affect has been recognized when analyzing Apple’s efficiency in using its resources. The stock turnover decreased compared to the previous year which affected the cost of sales and fixed asset turnover.
It is recommended to continue the trend of high investments in research and development as this is a key success factor for Apple – to be one step ahead of its competition. Additionally the service offers though third party suppliers in the range of music, e-books and applications for the mobile phones should be kept up, as they increase the popularity of Apple’s products. Furthermore Apple could compensate the negative effects of the decrease in stock turnover by introducing improvements in its marketing and promotion efforts to boost sales.
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