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Financial Position of APPLE Inc. (2019)

  • 5th Sep, 2019
  • 22:10 PM

Introduction

The blog analyses the financial position of APPLE Inc. It is primarily a technology firm. It is listed in NASDAQ and traded in the name of AAPL. The report comprises of seven section covering, background and industry analysis, analysis of key financials which is based on common size analysis, and trend analysis, comparison of key ratios and metrics, and recommendation. 

Background and industry

Apple Inc. is a multinational technology based company whose headquarter is based out of Cupertino, California. Its primary activities are designing, developing, and selling consumer electronics, computer software and associated online services. Along with Amazon, Google and Facebook, it constitutes big Four of technology. It is well known for its size and revenues. Its gross worldwide revenue in fiscal year 2018 was $ 265 billion. Hence it turnout to be world’s third largest mobile manufacturer after Samsung and Huawei (Morningstar, 2019).

The technology industry always driven by innovation. It tends to use advanced and innovative concepts which either increases the experience of user or reduces the cost of operation or reduces the defects or making the operations hassle free (Deloitte, 2019). In 2019, some of the major technology trend is as follows:

  • Focussing on flexible consumption would promote pay as you go models
  • Handling big volumes of data and making its access hassle free with enhanced protection
  • Focussing on enhanced agility
  • Democratization of innovation
  • Increased focus on I-O-T (Deloitte, 2019).

These trends is an opportunity as well as a threat for APPLE as it demands higher innovation on mobile phones which not only require higher investment in terms of research and development but also making right value proposition for the customers.

Analysis of key financials

The earnings per share for APPLE has increased from 3.358 in Dec 17 to 4.394 in Dec 18. However, revenue growth in terms of percentage is not very high. Further the gross margins also remain at 38%. The increase in EPS attributed to huge profit base. Further common size analysis of financial statement of APPLE is conducted (Appendix).The outcome of common size analysis is as follows:

  • The revenue is increasing with compound annual growth of 4.35%
  • The cost of goods sold has increased marginally from 60% to 62%
  • Therefore the gross margin has reduced to 38% from 40%
  • Selling and general overhead cost as percentage of sales remain almost stable over the period under consideration
  • Research and development cost as percentage of sales also remain almost stable over the period under consideration
  • This also translates to operating income margin which has reduced to 27% in 2018 from 30% in 2015.
  • Net Income from Continuing Operations as percentage of sales has reduced marginally to 22% in 2018 from 23% in 2015.
  • Therefore, net income margin is also reduced marginally to 22% in 2018 from 23% in 2015.

The common size analysis indicates that gross margin has reduced marginally from 2015 to 2018. However the reduction is not significant in terms of percentage. This may be attributed to higher competition in various segments. However, other cost structure remain stable which keeps profit margins stable. Further three years CAGR of key elements of financial statement is conducted. Based on CAGR analysis, following inferences could be made:

  • The revenue is increasing at a CAGR of 4.35%. This indicate that revenue growth is not very high but it remains stable under the period of consideration. This is quite of concern because during the same period, the use of smartphone has increased significantly. Also, competitors’ sales have also increased significantly during the same period.
  • The cost of goods sold have increased as a CAGR of 5.34% during the same period.
  • The higher rate of increase in cost of goods sold is also reflected in reduced gross margin percentage. The gross revenue has increased as a CAGR of 2.84%
  • Other cost elements are remain stable with a notable decrease in income tax expenses.
  • The net profit has increased as a CAGR of 3.69%, however the profit margins has reduced marginally owing to increase in cost of goods sold as a percentage of sales.

Comparison of Key ratios and metrics with respect to market

Based on ratio analysis and comparing the same with the industry, following inferences can be made:

Valuation Ratios:

The P/E ratio of APPLE is 16.66 which is way higher than that of industry (7.30) and sector (11.57). This indicates that market has valued APPLE much higher than its competitors in terms of earnings multiple. This may be attributed to huge profits, market leadership and brand loyalty of its consumers. Though, it has relatively higher P/E, it does not mean it has high systematic risk. The beta of APPLE stock is 1.13 which is marginally lower than that of sector which is 1.15.  Price to book value of APPLE is also relatively higher i.e. 7.98. This multiple is way higher than that of sector’s 1.93. This is further attributed to higher confidence shown by investor in APPLE’s stock. Price to sales ratio of APPLE is 3.58 which is way lower than that of its sector’s 24.31. Such a huge difference is attributed to nature of business of APPLE and huge revenue base. Price to cash flow of APPLE is 13.42 which is marginally lower than that of sector’s 14.66.

Liquidity Ratios:

The current ratio of the company is more than 1 in years under consideration. Therefore it can be inferred that current assets is more than that of current liabilities. Hence, there is no major issue in meeting liquidity issues. However it should be noted that current ratio is lower than that of sector’s 2.39.

Further, it has been argued that current ratio account for inventories which may not be liquid, therefore quick ratio is used. Quick ratio of the company is also more than 1 in years under consideration. Therefore it can be inferred that current assets adjusted with inventories is more than that of current liabilities. Hence, there is no major issue in meeting liquidity issues. However it should be noted that quick ratio is lower than that of sector’s 1.92.

 

Cash ratio further uses only cash and cash equivalents in numerator and also considered as acid test ratio. The quick ratio is 0.57 which means, cash and cash equivalents are sufficient in meeting 57% of current liabilities. Further, working capital is 5.4% of sales which indicates 5.4% of sales is used to finance a company's operations and generating revenues.

Operating Performance Ratios

The number of days of receivable has increased from 47.4 days in 2015 to 67.3 days in 2018. The number of days of payable has increased from 92.5 days in 2015 to 124.6 days in 2018. The number of days of inventory has increased from 6.12 days in 2015 to 8.82 days in 2018. Therefore it may be inferred that total cash cycle which remain healthy but marginally deteriorated owing to decrease in number of days of payables.

Profitability Ratio

The gross profit margin, operating profit margin, net profit margin is positive in all years of analysis. However, it should be noted that profit margin has reduced marginally in 2018 as compared to 2015.

Return on Investment Ratios

  • Return on assets has reduced marginally to 16.3% in 2018 from 18.4% in 2015
  • Return on equity has increased to 55.6% in 2018 from 44.7% in 2015.

Leverage ratio

  • The debt ratio has increased from 18.4% to 25.6%. This indicates that financial leverage has increased in 2018 as compared to 2015.

The analysis indicates that for increasing the financial performance of the company, cost of goods sold need as percentage of sales needs to be decreased.

 

Du-Pont Analysis

Du-Pont analysis of the APPLE INC. is as follows:

 

 

‎9‎/‎29‎/‎2018

‎9‎/‎30‎/‎2017

‎9‎/‎24‎/‎2016

‎9‎/‎26‎/‎2015

DuPont Analysis

Net profit margin

22.4%

21.1%

21.2%

22.8%

Asset Turnover

72.6%

61.1%

67.0%

80.5%

Financial leverage

3.41

2.80

2.51

2.43

ROE

55.6%

36.1%

35.6%

44.7%

 

It has been observed that ROE of APPLE INC has increased from 44.7% in 2015 to 55.6% in 2018. This is primarily attributed to two reasons:

  • The profit volume has increased at CAGR of 3.69%.
  • The financial leverage has increased i.e. the debt ratio has increased from 18.4% to 25.6%. This indicates that financial leverage has increased in 2018 as compared to 2015.

Recommendation

Based on above analysis following recommendations can be made:

  • Apple should reduce its cost of goods sold. Since its cost of goods sold as percentage of revenue has increased over time, the gross margins has reduced marginally over time.
  • The revenue growth of APPLE is also not very high. The CAGR of revenue is less than 5%. Over the same period usage of smartphone, computers, media devices, etc. have increased at a CAGR of more than 15%. Therefore, APPLE needs to increase its revenue. Revenue can only be increased by increasing its consumer base.
  • The R&D expenses must be increased as it is a technology based company. Its customer base would increase only if APPLE continue to provide delightful customer experience. Historically also, APPLE never followed any trend but sets the new trend.
  • Since the competition in the space has increased multiple fold, therefore APPLE needs to penetrate into new market and expand there. Therefore, sales and marketing expense may increase.
  • However, over all APPLE exhibited the continuous profits over the period of consideration. Therefore, it may be consider as company where investment could be made.

Bibliography

Bloomberg Database

Deloitte, 2019, 2019 Technology Industry Outlook, Available online https://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/topics/technology-industry.htm  accessed on January 26, 2019

Morningstar, 2019, Available online https://www.morningstar.com/stocks/xnas/aapl/quote.html accessed on January 26, 2019

Yahoo Finance, 2019, Available online https://finance.yahoo.com/quote/AAPL/financials?p=AAPL accessed on January 26, 2019

Yahoo Finance, 2019, Available online https://finance.yahoo.com/quote/AMZN/financials?p=AMZN  accessed on January 26, 2019

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