This report presents a detailed financial performance analysis of Apple Inc. (AAPL) for Financial Years (FY) 2008, 2009 and 2010. The report takes a top-down approach that briefly highlights the industry trends before commenting on the financial performance of the company. The analysis is carried out by employing a set of ratios to assess the liquidity, long-term solvency, profitability, management's efficiency, and investment ratios of AAPL.
AAPL is engaged in designing, manufacturing, and marketing a wide range of mobile communication devices, media devices, personal computers, software, network solutions, and third-party digital applications and services. The company operates through 233 retail stores in the United States and 84 stores in international regions (Apple, A: 2010, p. 1). AAPL has impeccable brand awareness, which is evident in the undying popularity of its products, such as Macintosh computers, the iPhone, the iPad, and the iPod. Figure 1 shows its products' share of total revenue; clearly, iPhone and its related services generate the highest share of revenue. I have chosen this company primarily because I am interested in analyzing the financial performance of a cyclical industry in economic recession and in comprehending the way in which a company manages to keep its performance from getting deteriorated in economic turmoil.
Economic Outlook
According to S&P industry surveys, American economy is predicted to have 3.92% real GDP growth rate, 2.99% consumer spending growth rate and CPI to rise by 1.55% a year from now (Sam, et al., 2010). Analysts are of view that consumers are still scared and cautious with regards to borrowing and spending, primarily because of high unemployment and increase in inflation. Businesses on the other hand, are spending more on capital so that with the expected expansion in the economy, the increase in demand can be met with increase in production. A positive expectation of future has resulted in S&P500 index returns to grow by 11% from August 31-October 30, 2010 (Sam, et al. 2010). Consequently, investors' confidence has regained in secondary market investments.
Industry Profile
AAPL operates in the $1.4 trillion Information Technology industry sector and in $624 billion sub-sector of computer hardware (Smith, 2010). This industry is cyclical in nature, having seen 22 percent growth in the second quarter of 2010 over the same quarter in 2009 (Smith, 2010). The sector recovered from recession during the third quarter of 2009 and is expected to see an annual growth rate of 9 percent during 2011, driven primarily by sales of computer units and software in the Asia/Pacific region and the Middle East. It is also expected that there will be an exponential growth rate in demand for smaller, low-cost tablet and netbook PCs, which will result in strong price competition and, therefore, low profit margins for sellers.
Ratio Analysis
1. Liquidity analysis: Liquidity indicates the ability of a company to meet its short-term obligations (Brealey et al., 2008, p. 792). Current ratio and quick ratio will be employed here to assess the liquidity position.
a. Current ratio: The current ratio shows the ability of a company's current assets to retire short-term obligations (Brealey et al., 2008, p. 792). AAPL had 2.64 times as many assets as obligations in FY08, and the ratio increased by 3.84 percent to become 2.74 times as many assets as obligations in FY09. The increase was attributable to a 5.16 percent increase in current assets, whereas current liabilities increased by only 1.2 percent. However, in FY10 the current ratio decreased by 26.66 percent to become 2.01times as many assets as obligation, which was attributable to a 44.7 percent increase in current liabilities, which was more than the 32.08 percent increase in current assets.
b. Quick ratio: The quick ratio is a more conservative approach that assesses the ability of only those assets that are highly liquid to meet short-term obligations (Brealey et al., 2008, p. 792). AAPL's quick ratio was 2.36 times as many highly liquid assets as short-term obligations in FY08, which increased by 5.02 percent to become 2.48 times in FY09. The increase was attributable to a 5.98 percent increase in quick assets, whereas current liabilities increased by only 1.2 percent only. However, in FY10 the ratio decreased by 30.80 percent to become 1.72 times as many highly liquid assets as short-term obligations; the increase was attributable to a 44.7 percent increase in current liabilities, which was more than the 19.76 percent increase in quick assets.
2. Long-term solvency analysis: This analysis shows the ability of a company to remain solvent and meet its obligations on time (Brealey et al., 2008, p. 798. Debt/equity and times interest covered are employed here to assess AAPL's long-term solvency position.
a. Debt/Equity (D/E): This ratio indicates the capital structure of a company by showing the proportion of debt and equity financing employed; the higher the ratio is, the greater is the financial leverage (Brealey et al., 2008, p. 789). AAPL's D/E was 62 percent in FY08, which decreased by 19.44 percent to become 50 percent in FY09. The decrease can be attributed to a 12.53 percent increase in total liabilities, whereas equity rose by 29.5 percent. However, D/E increased by 14.3 percent to become 57 percent in FY10, which was attributable to a 32 percent increase in equity, along with a 33 percent increase in total liabilities, primarily driven by increase in current liabilities.
b. Times interest covered (TIC): TIC indicates the ability of a company's EBIT to cover interest expense (Brealey et al., 2008, p. 791). AAPL has not had long-term debt outstanding since FY2008, so it does not pay interest. Therefore, TIC cannot be calculated.
3. Profitability analysis: This analysis indicates the company's ability to withstand falling revenue or increasing costs; the higher the profitability indicators are, the better the company's ability is to withstand these changes (Hampton, 2007, p. 110). Operating profit margin, net profit margin, return on assets and return on equity are employed here to assess AAPL's profitability position.
a. Operating Profit Margin (OPM): OPM shows the operational efficiency of a company; the higher the company's margin is, the greater is its efficiency (Hampton, 2007, p. 110). AAPL's OPM was 22.2 percent in FY08, which increased by 23.2 percent to become 27.36 percent in FY09. The increase is attributable to 29 percent increase in operating profit, along with 12.6 percent increase in revenue. The ratio further increased by 3 percent to become 28.19 percent in FY10, which was attributable to 36.1 percent increase in operating profit, along with 34 percent increase in revenue.
b. Net Profit Margin (NPM): NPM indicates the percentage of revenue that makes its way into the net profit (Brealey et al., 2008, p. 794). AAPL's 16.3 percent NPM in FY08 increased by 17 percent to become 19.2 percent in FY09. The increase is attributable to a 25.7 percent increase in net profit, along with a 12.6 percent increase in revenue. The ratio further increased by 11.13 percent to become 21.48 percent in FY10, which was attributable to a 41.23 percent increase in net profit, along with a 34 percent increase in revenue.
c. Return on assets (ROA): ROA shows the return on the amount invested in the total assets of the company (Brealey et al., 2008, p. 794). AAPL's 19.89 percent ROA in FY08 decreased slightly (by 1.05 percent) to become 19.68 percent in FY09. The decrease is attributable to a 26.48 percent increase in average total assets, along with a 25.7 percent increase in net profit. However, 2009 the ratio increased by 16.5 percent to become 22.84 percent in FY10, which was attributable to a 31.8 percent increase in average total assets, along with a 41.23 percent increase in net profit.
d. Return on Equity (ROE): ROE shows the return on the amount invested in the total equity of the company (Brealey et al., 2008, p. 794). AAPL's 33.23 percent ROE in FY08 decreased by 8.11 percent to become 30.54 percent in FY09. The decrease was attributable to a 31.72 percent increase in average equity, along with a 25.7 percent increase in net profit. However, the 2009 ratio increased by 15.5 percent to become 35.28 percent in FY10, which was attributable to a 32 percent increase in average equity, along with a 41.23 percent increase in net profit.
4. Management's Performance Analysis: This analysis indicates the ability of a company's management to utilize available resources in an effective and efficient manner (Brigham & Houston, 2007, p. 91). Total assets turnover, average collection period and inventory turnover in days are employed here to assess the AAPL management's performance.
a. Total Assets Turnover (TATO): TATO indicates the management's ability to utilize assets effectively in order to generate revenue (Brigham & Houston, 2007, p. 93). AAPL's TATO was 1.22 in FY08, but it decreased by 15.86 percent to become 1.03 in FY09. The decrease is attributable to a 26.48 percent increase in average total assets, along with a 12.62 percent increase in revenue. However, the 2009 turnover increased by 3.68 percent to become 1.06 in FY10, which was attributable to a 31.8 percent increase in average total assets, along with a 34.22 percent increase in revenue.
b. Average collection period (ACP): ACP indicates the number of days it takes for the company to receive cash from its customers on credit sales (Brigham & Houston, 2007, p. 92). AAPL's ACP was 43 days in FY08, which decreased by 2.33 percent to become 42 days in FY09. The decrease was attributable to a 10.53 percent increase in average receivables, along with a 12.6 percent increase in revenue. However, the ratio remained at 42 days in FY10 because of a 34 percent increase in average receivables, which was the same increase as that of revenues.
c. Inventory turnover in days (ITO): ITO shows the numbers of days it takes for a company to sell as much as it keeps in its inventory (Brigham & Houston, 2007, p. 92). AAPL's ITO was 6 days in FY08, which slightly increased to 7 days in FY09. The increase was attributable to an 11.31 percent increase in average inventories, along with a 5.41 percent increase in cost of goods sold. However, the ratio remained at 7 days in FY10 because of a 35 percent increase in cost of goods sold, which was the same increase as that of average inventories.
5. Price to earnings (P/E): P/E indicates the price that investors are willing to pay for each $ of earnings; the higher P/E is, the better (Brealey et al., 2008, p. 795). AAPL's P/E was 20.61 in FY08, but it decreased by 21.04 percent to 16.27 in FY09. This undesirable result can be explained by a 24.73 percent increase in earnings per share (EPS), whereas the average market price increased by only 4 percent (from $143 to $150). The ratio decreased again, this time by 3.47 percent, to 15.7 in FY10, which was attributable to a 40.17 percent increase in EPS, whereas the average market price increased by 38 percent (from $150 to $242). That the company has not paid cash dividends since FY08 may be one of the reasons for the decrease in P/E; investors are not very keen to buy AAPL's shares in the secondary market. Moreover, AAPL's stock beta was 1.41 as of 10 November, 2010 (moneycentral.com, 2010). This high beta in the worst global economic recession is also an indicator that investors did not show much interest in AAPL's stock.
Yearly performance analysis
FY2008: In FY08, AAPL has exhibited quite a satisfactory performance with respect to its short-term and long-term solvency position; by making prudent investment in current assets and having low financial risk, respectively. The company effectively managed its assets, which has not only resulted in a faster operating cycle but also satisfactory assets turnover. Moreover, AAPL's 33 percent ROE and 22 percent OPM indicate higher profitability for its shareholders, which is reflected by the company's P/E of 20.61 during FY08.
FY2009: In FY09, AAPL's financial performance exhibited improvement in majority of its performance indicators. The company's liquidity as well as long-term solvency considerably improved, which was good news to AAPL's creditors. Moreover, the management was able to improve their inventory management but, the total assets turnover declined during the year. Nevertheless, AAPL showed very satisfactory level of profitability for its shareholders, which is evident by the increase in its margins and returns.
FY2010: In FY10, AAPL's current and quick ratio declined which signals to decrease in liquidity. Moreover, the company's D/E increased to 57 percent, which was driven by increase in current liabilities; hence did not imply increase in long-term financial risk for the company. In FY10, AAPL managed to improve its profitability and asset management, which is evident by increase in its margins, returns and turnovers.
Concluding commentary
The ratio analysis shows that AAPL has been doing a satisfactory job with respect to managing assets to generate satisfactory turnovers and maintain a safe liquidity position. It is prudently managing its current assets by not engaging funds for very long in the shape of inventories and receivables, and the company has apparently adopted an effective credit policy. Moreover, it is also matching its inventory with demand so it does not carry the unnecessary cost of holding high levels of inventory.
With respect to profitability, the profit margins have been improving, which suggests improved operational efficiency. While the company's returns fell prey to the recession during FY09, the company managed to increase its returns in FY10, which is commendable.
Finally, the company has been keeping its financial risk low by reducing its reliance on debt financing, which is a wise strategy in unfavorable economic conditions. However, because of the high risk associated with the nature of its business, its stock is a high beta stock. This factor, along with no dividend payouts, drives investors away from AAPL's stocks. Hence, it is advisable that AAPL revise its dividend policy and consider paying dividends again so its stock demand in the market can increase, along with its stock price.
I believe that, with the expected expansion in the global economy, the positive growth prospects of the industry, and the satisfactory historical performance of the company, AAPL will continue to grow and increase profits, and its stock will be a worthwhile investment.
