Financial Analysis of Apple Inc

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Information about Financial Analysis of Apple Inc

Published on November 16, 2012

Author: Maharonga


Financial Analysis of Apple Inc: Financial Analysis of Apple Inc Subject: Financial Management Group Members : Ms. Ouch Kanika Ms. Hour Kimhun Mr. Pen Vanndarong Lectured by: Mr. Sok Ousa Academic Year: 2011-2012 1 Table of Contents: Table of Contents Introduction Horizontal Analysis Vertical Analysis Ratio Analysis – Profitability Ratio Analysis – Efficiency Ratio Analysis – Liquidity Ratio Analysis – Leverage Conclusion & Recommendation Limitations of the Analysis 2 Introduction: Introduction Corporate Facts: Name: Apple Inc. Founded: April 1976 Founders: Steve Jobs Steve Wozniak Ronald Wayne Head Office: Cupertino, California Industry: Computer hardware Computer software Consumer electronics Digital distribution Products: iPhone , iPad , iPod, iMac, Mac Books and other related hardware and software Marketing: Direct: retail and online stores Indirect: resellers & cellular network carriers 3 Introduction: Introduction Reportedly, Apple is one of the most successful technology companies in the world. Apple business strategy focuses on research & development in order to compete in technology world. Based on Forbes (April 2012), Apple’s market capitalization worth $546 billion, which is: Almost twice of Microsoft ($273.5 billion) More than twice of IBM ($238.7 billion) More than twice of General Electric ($213.7 billion) More than twice of Wal-Mart ($208.4 billion) More than twice of Google ($203.2 billion) More than thrice of Coca Cola ($158.8 billion) This value can cover the areas of Phnom Penh and 5 provinces around Tonle Sap Lake (using $100 bill). 4 Horizontal Analysis: Horizontal Analysis Apple’s sales increased steeply by 52% and 66% between 2009 to 2010 and 2010 to 2011. COGS increased 54% in 2010 leading to lower gross margin due to higher cost structure for new product ( iPad ). Gross margin in 2011 was improved due to lower commodity price and return from new product line. Opex in 2010 increased by 33% and 30% in 2011. It is classified into two main heads: R&D expenses and SG&A expenses. EBITDA increased by 53% between 2009 and 2010, and by 85% between 2010 and 2011. EBIT and NPBT were almost the same due to Apple did not incur interest exp. NPAT increased 70% between 2009 and 2010 and 85% in 2010 to 2011. 5 Horizontal Analysis: Horizontal Analysis The growth of total asset by 58% between ‘09 & ‘10 and 55% between ‘10 & ‘11 was mainly driven by the increase in investment and fixed assets. Current assets grew 32% between ‘09 & ‘10 and only 8% between ‘10 & ‘11. However, it can be seen the decrease in stocks and debtors in the last period. Apple usually maintained low level of inventory to mitigate risks of obsolescence. Net fixed assets increased by 61% in ‘09 & ‘10, and 63% growing in ‘10 & ‘11. Long-term investment jumped 141% in ‘09 & ‘10 and 119% in ‘10 & ‘11. 6 Horizontal Analysis: Horizontal Analysis Total Assets and Total Liabilities & Equity: Apple does not have any short-term or long-term debt at their financial year-ends. Total liabilities increased by 73% and 45% between these 3 years while total equity increased by 51% and 60%. The increase in total equity was mainly driven by the increase in retained earnings which increased 58% and 69% in ‘10 and ’11, respectively. Retained earnings occupied about 74%, 77%, and 82% of total equity in these 3 years, respectively. 7 Horizontal Analysis: Horizontal Analysis Trade debtor increased by 64% 2010, but decreased by 3% in 2011. Inventory dramatically increased by 131% in 2010; however, it was not high in proportion compared to their net sales. However, in 2011, inventory decreased by 26% even sales rapidly increased. Trade creditors increased sharply by 115% in 2010 and only 22% in 2011. It can be seen that trade creditors alone can finance the working capital requirements (inventory and debtors). 8 Vertical Analysis: Vertical Analysis Sales and Gross Profit (GP): GP slightly declined in 2010 due to new product with higher cost structure (introduction of iPad ). It was offset by selling more iPhone with higher margin. GP was improved in 2011 due to lower commodity price and other product costs. Managing cost by subcontracting manufacturing aspect to Foxconn to ensure efficiency and leverage. 9 Vertical Analysis: Vertical Analysis Sales by Operating Segment: Asia-Pacific sales share was tripled from 2009 to 2011. Japan and Europe sales grew steadily in line with the growth of total sales. America and Retails showed declining percentage to total revenue, but the sales went up significantly in actual revenue. America sales went up from $19b in ‘09 to $24b and $38b in ‘10 & ‘11. Retails sales went up from $6.6b to $9.8b and $14.1b in these 3 years. 10 Vertical Analysis: Vertical Analysis Sales by Products: iPhone’s contribution to total sales increased significantly due to expansion of resellers and contract with cellular network carriers. iPad’s sales increased dramatically too since its introduction in 3Q 2010. Sales of computer (both desktop and portable) increased slightly, and its percentage to total sales decreased moderately. Sales of iPod dropped in 2011, net sales per iPod increased due to a shift to iPod Touch from other iPod product mix. 11 Vertical Analysis: Vertical Analysis 2009 2011 2010 Current Assets increased year-over-year, but its % to total assets was reduced because investment increased significantly. Current Assets did not increased much because of no significant increase in debtors and stocks while short-term investment grew marginally. Long-term investment was mainly constituted by acc. retained earnings. Fixed assets increased year-on-year, but its % was small because Apple does not manufacture by themselves. 12 Vertical Analysis: Vertical Analysis Compared to Total Assets Compared to Current Assets 13 Vertical Analysis: Vertical Analysis % of fixed assets to total assets: Apple does not have large portion of fixed assets because its manufacturing jobs was outsourced to Foxconn . Amount of each item of fixed assets does not include depreciation. Unallocated depreciation and amortization expenses was $1.6b, $815m, and $606m in ‘11, ‘10 & ‘09. 14 Vertical Analysis: Vertical Analysis Short-Term and Long-Term Investment: Total investments occupied big part in total assets as it was 60.48% in 2009, 52.87% in 2010 and 61.66% in 2011. Short-term investments have maturities of 3 months or less. Long-term investments have maturities from 1 to 5 years. Net unrealized gains of $106m during 2011 and no significant net realized gains or losses during 2010 and 2009. 15 Vertical Analysis: Vertical Analysis Liabilities and Equity : Total liabilities stood at roughly 35% with no debt recorded on the book. Total equity was about 65%, in which 49% was acc. retained earnings in ‘09 and ’10 before jumping to 54% in ‘11. 16 Ratio Analysis – Profitability: Ratio Analysis – Profitability Apple’s Profitability: GP was steadily maintained at around 40% with slight decline in 2010. Operating and other expenses was managed efficiently. Thus, EBITDA, NPBT and NPAT remained healthy over the past 3 years. Business is seasonal with 1Q and 4Q sales higher than the rest. Volatility of revenue stream was low given their outstanding product and service quality. 17 Ratio Analysis – Profitability: Ratio Analysis – Profitability Peer Comparison (FY2011) 18 Ratio Analysis – Profitability: Ratio Analysis – Profitability Apple’s Profitability: ROE was improved year over year by climbing from 26% in 2009 to 29.3% and 33.8% in 2010 and 2011. ROE were driven by high operating efficiency (net profit %) and financial leverage (equity multiplier). Asset-use efficiency was acceptable at 0.9x, 0.87x and 0.93x in these three years. Through operating efficiency, ROA was enhanced in the same manner as ROE. 19 Ratio Analysis - Efficiency: Ratio Analysis - Efficiency Main contributors of TA were current assets and investment with combined of more than 80% of TA. Fixed assets were low due to no/minimal manufacturing. Relatively low of total assets turnover at about 0.9x on average from 2009 to 2011, leading to slightly higher capital intensity of about 1.1x. However, acc. retained earnings were 49% in ‘09 and ‘10, and 54% in ‘11. Apples needed 0.27$ of current liabilities to generate 1$ sales in ’09, and $0.32 & $0.26 in ‘10 and ‘11. 20 Ratio Analysis - Efficiency: Ratio Analysis - Efficiency Debtors and stock were significantly low compare to their total assets, net sales and COGS. Debtor turnover stood at 13x and 12x in ‘09 and ‘10 before jumping to 20x in ‘11. This resulted from their well-diversified customers and good credit policy. The stock turnovers were high because Apple needs to ensure minimal stock level to reduce obsolescence risk because of their product nature. 21 Ratio Analysis - Efficiency: Ratio Analysis - Efficiency 22 Ratio Analysis - Efficiency: Ratio Analysis - Efficiency Peer Comparison (FY2011) 23 Ratio Analysis – Liquidity : Ratio Analysis – Liquidity Apple is one of the most liquid companies net cash after operation” of $18.1b in ‘10 and $35.6b in ‘11. Current ratio was 2.74x, 2.01x and 1.61x in these 3 years. It was good because it was highly contributed by cash and short-term liquid investment (74%, 61%, and 58% of current assets in the studied years) . Given the stock level was low, current ratios and quick ratios did not differ much. Working capital days was negative indicating Apple was very sufficient in meeting their working capital requirement. Their trade creditors were even larger than the combination of debtors and stocks. This was a big part leading to strong growth in cash flow from operation. 24 Ratio Analysis – Liquidity : Ratio Analysis – Liquidity 25 Ratio Analysis - Leverage: Ratio Analysis - Leverage Apple is a company with no debt reported at the end of their financial year. Most of their liabilities were in current ones which were mainly contributed trade creditors, accrued expenses, and deferred revenue. Non-current liabilities consisted of non-current deferred revenue, deferred tax liabilities, and other non-current liabilities. 26 Ratio Analysis - Leverage: Ratio Analysis - Leverage Adjusted gearing stood roughly 0.5 for these three years. As Apple did not have debt at their financial year-end, debt ratio was 0. Total liabilities to total tangible assets (TTA) was about 0.35 as an average, which means that more than 60% of Apple assets were funded by their own equity – mainly from retained earnings. As such, retained earnings contributed to more than 50% of TTA in these 3 years. 27 Ratio Analysis - Leverage: Ratio Analysis - Leverage 28 Conclusion & Recommendation: Conclusion & Recommendation Apple is reportedly the most valuable corporation in the world because of their product competitiveness which sourced from convenience, high-level security, and simplicity. Quality of Income : Apple’s sales had double-digit growth in these last three years. Profitability was strong due to: Outsourcing their production/manufacturing to Foxconn . Well-managed operating expenses. Quality of Assets : More than 50% of total assets were funded by retained earnings. Operating activities could be supported by current liabilities. Total asset turnover was lower leading to capital intensity was larger than 1. This was due to large acc. retained earnings, but the earnings was used to invest to gain greater shareholders’ value. 29 Conclusion & Recommendation: Conclusion & Recommendation Liquidity Status : Apple is one of the strongest companies in term of cash flow with cash flow after operation of $18b and $35b in 2010 and 2011, respectively. Ability to well circulate their inventory to generate sales. Outstanding management on collection. Sufficient credit term from suppliers. Leverage : Apple was moderately geared, but their total liabilities did not consist of both short- and long-term debt. Overall, Apple is financially strong as of their financial reports in 2009, 2010, and 2011. Their asset structure, asset utilization, working capital management, profitability, and leverage were satisfactory. 30 Limitations of the Analysis: Limitations of the Analysis No other risk analyses – but not limited to: Risk of global economic conditions Risk of technological competition Risk of insufficient supply of components Risk of management and corporate governance Risk of intellectual property and worldwide law and regulation exposure Risk of manufacturing and logistics (3 rd party) Limited reliability of peer comparison: Only last year result (2011) was taken into comparison Based on consolidated financial statements Different product lines and mixes Different business models Interpretation of historical data No analysis on management & leadership 31 PowerPoint Presentation: THANKS FOR YOUR ATTENTION! 32

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