Company Overview
Apple manufactures designs, and markets communication mobiles as well as media devices, portable digital players and personal computers in addition to making sales of the related software, accessories, services, network solutions as well as digital third-party content and applications. The management of the company`s business primarily is on the basis of geographic region including the Europe, America, Japan, Greater China, Rest of the Asia-Pacific as well as Retail.
The Company has a commitment to bring the best customers experience onto its customers via its innovative software, hardware as well as services. It leverages its unique ability in designing and developing its operating systems, hardware, services and application software to provide the customers products as well as solutions for innovative designs, seamless integration, and superior ease-of-use.
As its strategy expands the platform for discovering and delivering third-party applications and digital content via the iTunes. It also supports the community for the development of the third-party hardware and software products as well as digital content which complement the firm`s offerings. Further, the strategy includes expanding and building its own online and retail stores as well as a third-party network of distribution so as to reach effectively many more customers while providing them with sales and after-sales support of high-quality experience. Finally, the Company has the belief on continual investment in R&D, advertising and marketing are critical towards development as well as the sale of innovative technologies and products. (Apple, 2014).
Final statements review
Analyzing financial statements helps understand how the business has performed over time on various performance parameters. In that respect, the following is a summary of Apples financial statements’ analysis covering the key income statement, balance sheet and the cash flow statement’s items (Damodaran, 2010).
Income Statement
The following table shows the revenues and gross, operating as well as net profit for the company over three years.
Source: (Apple, 2014; Yahoo Finance, 2016a)
Given the above information and chart, it is clear that the business has had substantial revenues and profits over the three years, also, the information shows improving performance given the increase in the revenues and profits over the period.
Balance sheet
The following table and chart summarize the select balance sheet items including assets, liabilities and equity.
Source: (Apple, 2014; Yahoo Finance, 2016b)
Given the above, the substantial business assets that are more compared to the liabilities. That is shown by the current assets and the total assets. It is also notable that the company’s assets had a growth trend over the three years a trend that also marks the liabilities. However, the tangible assets and equity have had a decrease in 2014 and the 2015 values were relatively less than the 2013 ones.
Cash-flow statements
The following table and chart summarize the company’s cash flows over the three years.
Source: (Apple, 2014; Yahoo Finance, 2016c)
Given the information, it is clear that the business has had only positive cash-flows from the operating activities over the three years. However, the cash-flow had a fluctuating trend with a decrease in 2014 and an increase n 2015. Regarding the other cash flows, investments had the most outflows followed by the financing activities. Finally, the business has had the capacity to retain positive change in cash given the substantial cash inflows from the operating operations.
Pro-forma financial statements
The following are the Pro-forma financial statements for 2016 assuming a ten percent growth in the sales and the COGS and applying the level basis where Revenue is used as the base for the income statement and the balance sheet while the net income is the level basis for the cash-flow statement.
APPLE’s Pro-forma Income Statement
Source: (Apple, 2014; Yahoo Finance, 2016b)
Source: (Apple, 2014; Yahoo Finance, 2016c)
Ratios analysis
Ratios analysis offers an insight into the performance of various aspects of a business including liquidity, leverage, profitability, assets management and market valuation (Damodaran, 2010). In that respect, the following is a summary of Apple’s performance on those aspects.
Liquidity
Liquidity ratios measure a business ability to meet its short-term obligations. They include the current and quick ratios calculated as follows.
Current ratio
Measures availability of current assets to pay for the current liabilities
Source: (Apple, 2014; Yahoo Finance, 2016b)
Given the above, Apple has adequate current assets to meet its short-term obligations, but that ability has been fluctuating with a decrease in 2014 and an increase in 2015.
Quick ratio
It is a better measure of the ability to meet short-term obligations as it only considers the most liquid assets excepting the inventories
Source: (Apple, 2014; Yahoo Finance, 2016b)
The ratios show adequate assets to meets the short-term obligations which also has had a fluctuating trend over the three years period.
Assets management
The ratios measure the efficiency in assets management and includes inventory and asset turnover calculated as follows
Inventory turnover
The ratio shows the number of times the inventory is sold and the higher the ratio, the better.
Source: (Apple, 2014; Yahoo finance, 2016a, 2016b)
Given the above ratios, it is clear that Apple has a high inventory turnover. However, the inventory management efficiency decreased as shown by the decrease in the ratio in 2014 and the 2015 value that is low than 2014.
Asset turnover
The asset turnover measures the efficiency in utilizing the company assets to generate revenues.
Source: (Apple, 2014; Yahoo Finance, 2016a, 2016b)
The above ratios show a low turnover indicating low efficiency in assets management. The efficiency also fluctuated with a decrease in 2014 and an increase in 2015.
Financial leverage
The ratios measure the level of debt that a business applies for its capital.
Debt to Equity
It is a measure of the level of debt given the equity calculated as follows
Source: (Apple, 2014; Yahoo Finance, 2016b)
Given the above ratios, Apple has low debt level given its equity and that level has been decreasing over the period which is a suitable trend.
Debt ratio
The ratio measures the level of debt given the company’s assets and is calculated as follows.
Source: (Apple, 2014; Yahoo Finance, 2016b)
The above ratios show that Apple has had a low debt level that has been decreasing over the period marking decreasing.
Profitability
The ratios measure the ability of a business to generate profits and generate wealth for its stockholders. They include the ROE and Gross profit margins calculated as follows
Return on Equity
The ratio measures the ability to generate profits given the applied equity.
Source: (Apple, 2014; Yahoo Finance, 2016a, 2016b)
The above ratios show substantial profitability that one that has been decreasing over the three years indicating decreasing profitability.
Gross profit margin
The ratio measures the ability to generate gross profits given the sales level
Source: (Apple, 2014; Yahoo Finance, 2016a)
The ratios indicate substantial profitability buy one that has been decreasing over time indicating.
Market value ratios
The ratios measure the value that the market places on the company’s stock and they include the dividend yield and the P/E.
P/E
The ratio indicates the amount that investors are willing to pay for a dollar of the stock’s earnings share identifying whether the stock is over or undervalued.
Source: (Apple, 2014; Yahoo Finance, 2016d)
Given the above ratios, it is clear that Apple is averagely valued by the market and that valuation fluctuated over the period with a decrease in 2015.
Dividend yield
The ratio measures the value of the dividends given the stock’s price.
Source: (Yahoo finance, 2016d)
The above ratios show a low dividend yield, and that has been fluctuating but relatively increasing over the three years.
Du-Pont ROE Analysis
The analysis breaks down ROE into three parts representing operating efficiency, leverage and assets management efficiency. That helps identify where the business is performing well and where it does hence noting what needs to be improved to improve the ROE (Damodaran, 2010). In that respect, the following is the Apple’s Du Pont ROE.
Source: (Apple, 2014; Yahoo Finance, 2016a, 2016b)
The values show that the operating efficiency as being the lowest with also low asset management efficiency but both is increasing. On the other hand, although the leverage is relatively high, it has been decreasing resulting to the substantial decrease in the company’s ROE.
Economic Value Added (EVA)
EVA measures the financial performance by a company’s residual wealth that is calculated by deduction of the capital cost from the operating profits. The value is also known as the economic profit (Damodaran, 2010). The following is the calculation of Apples EVA.
Source: (Apple, 2014; Bank rate, 2016; Yahoo finance, 2016a, 2016b).
Given the above value, it is clear that Apple has a negative EVA/Economic value which indicates poor performance.
Findings
Given the financial statements, ratios, Du Pont and EVA analysis, the following is the summary of Apple’s performance.
The business has a suitable performance with substantial revenues and profits that show an increasing trend.
The business has substantial assets that have been growing over the period but has had a fluctuation in the value of the equity and the tangible assets. Liabilities have also been increasing indicating increased reliance on debt.
The business has suitable liquidity having adequate assets to meet its short-term obligations.
The business has suitable inventory management but poor assets management that needs improvement.
Low and decreasing leverage showing less reliance on debt and fewer burdens in term of interest payments.
The business has substantial profitability but needs improvement as it has been decreasing over time.
The stock is not overvalued although it has a low dividend yield.
Recommendations
Given the analysis in that the business has suitable profitability, assets growth, suitable liquidity and low leverage, I would consider Apple as averagely valued by the market and would recommend the buying of the stock.
References
Apple. (2014). 2014 Annual Report. Retrieved 11 February 2016 from, http://investor.apple.com/secfiling.cfm?filingid=1193125-14-383437
Bank rate. (2016). Treasury Rates. Retrieved 11 February 2016 from, http://www.bankrate.com/rates/interest-rates/treasury.aspx?ec_id=m1022480&s_kwcid=AL!1325!3!68171475368!b!!g!!treasury+bill+interest+rates&ef_id=VlV5%40QAABEM4qgiF%3a20160212120626%3as
Damodaran, A. (2010). Applied Corporate Finance. 3rd ed. Colorado: Wiley.
Yahoo finance. (2016a). Apple’s Income Statements. Retrieved 11 February 2016 from, http://finance.yahoo.com/q/is?s=AAPL+Income+Statement&annual
Yahoo finance. (2016b). Apple’s Balance Sheets. Retrieved 11 February 2016 from, http://finance.yahoo.com/q/bs?s=AAPL+Balance+Sheet&annual
Yahoo finance. (2016c). Apple’s Historical Prices. Retrieved 11 February 2016 from, http://finance.yahoo.com/q/hp?s=AAPL&a=11&b=12&c=2012&d=01&e=12&f=2016&g=m
Yahoo finance. (2016d). Apple’s Cash-flow Statements. Retrieved 11 February 2016 from, http://finance.yahoo.com/q/bs?s=AAPL+Balance+Sheet&annual
