Accounting & finance for managers (apple)
Section I
Apple is an American public and multinational firm that was incorporated in 1977 and is among the most recognizable consumer electronic products in the world (Khan, Alam & Alam, 2015). The company’s operations involves designing , manufacturing and marketing an array of products including mobile phones, personal computers, music players and even media service. It was named the most valuable firm globally in 2011. The firm’s icon brand iPhone was launched in 2007, a device that involves a combination of mobile phone, touch control and internet connectivity. The company also sells various related services, accessories, software, accessories and third-party digital applications and content. The firm has its presence across the world and its segments comprises of America, Japan, Europe, China and other Asia Pacific regions (Apple Inc., 2016). The products portfolio for Apple include iPhone, Apple Watch, iPad , Mac , Apple TV , various software applications including OS X , iOS , iCloud and some services and accessories(Apple Inc., 2016). The company’s business model, therefore, involves writing and designing proprietary software while offering its own operating systems that are compatible with all its devices. Over the recent years, the company has also included information service and entertainment as part of its business operations through online streaming of video, retailing of music and software solutions like smartphone applications (Apple Inc., 2016).
As the largest American technology firm with global presence, Apple operates in mixed economic environments of different countries and markets. The conditions of the local and world markets are major factors that affects the business operations of the firm considering its international presence .These markets have differing economic conditions in terms of recession, inflation and health of various currencies .Factors such as recession really influence the performance of the company as observed during America recession of 2008-2009 when the industry was affect by the prevailing hardships in the economy (Khan et. al 2015). During inflation, the purchasing power of customers in the U.S and global markets decreases which means that its sales are bound to decline. In moments when the U.S dollar has lost its value, the firm has been forced to take various measures in order to reduce the impact of inflation such as purchasing foreign currency. This way, their revenue in from the international market will be more. Its international presence means that it’s exposed to different situations in the market such as increased cost of labor, low middle-class incomes that remain stagnant in emerging markets and developed markets (Khan et. al 2015). Increased labor cost in major markets like China can jeopardize cost advantage of its products while stagnation of incomes may results to shrinking of potential market for its higher end consumer products.
In addition, when the U.S dollar value increases, the exchange rate increases and this make Apple’s products to be expensive or doing business becomes expensive in the major markets such as China and Europe and other emerging economies. The presence of Apple in the International market means that it feels the heat of any financial risks that may be present across the world. The company was affected considerably by the global recession in terms sales and overall growth (Khan et. al 2015). When the growth of economy is slow, like in 2012-2013, it affects the consumer electronic industry and reduction in sales is felt across board. Issues such as unemployment and fiscal problems have the potential to influence the performance of the firm. The firm operates in the consumer electronics industry, and the firm has been growing as an emerging power with adequate promise to remain at the top. This industry has a high level of competition among the major firms whose products compete directly with products offered by Apple Inc. This competition in the market is majorly driven by continuous technological innovations and advancement. The firm competes directly with Samsung, Google, Inc., and Amazon, Inc which are among the major competitors. Hence, the competitive force in this sector is very high, especially due to switching cost that is quite low.
A consumer wishing to switch from Apple’s products such as iPad to Kindle offered by Amazon does not need significant investment. The company is exposed to such market competition risks and which it deals with primarily by continually unique and new products so as to strengthen its market share. Moreover, the threat presented by entrants onto this market and which can adversely affect its market share is quite low. (Khan et. al 2015) This is fundamentally because of extremely high cost associated with establishment of a new firm and the high cost of introducing a brand name. For a new entrant into this market of smartphones and personal computing, they need to have large amount of capital which have to spend on innovation and in manufacturing of the product portfolio before selling such products to the market and generating income. The market also has a weak bargaining power among the suppliers since there are a huge number of them for the company’s supply (Khan et. al 2015). Moreover, the firm switching cost from one supplier to another is quite low and does not present a considerable obstacle.
Section II
Financial analysis
Apple trade at NADAQ as AAPL, and has reported a constant increment in its revenue over the past five years; the revenue for the company increased from $156,508 Million from 2012 to $215,639 Million in 2016 although there was a decrease of about $18 million in 2016 .Its gross profit margin showed an improvement from 2014 to 2015, and then deteriorated slightly in 2016, not attaining the same level as 2014. The gross margin ranged from 43.9 % to 39.1 % from 2012 to 2016, with a yearly average of 38.4 % (Morningstar, n.d). There was an improvement in return on equity from 2014 to 2015 financial years but then reduced in from 2015 to 2016, and not attaining the 2014 level. The firm experienced a net income of 115.5 B of shareholders’ equity average for the year 2015, which represented a 46.25 percent return on equity. This ratio has ranged from 42.84 percent in 2012 to 36.90 percent in 2016 with an average of 34.57 percent. (Morningstar, n.d) The report shows a constant ratio for return on equity, with slight increase and decrease over the years, probably due to a financial leverage that was higher, and offset partly by a decreasing asset turnover. The firm is able to be a leader in relation to return on equity among its competitors and peers because it has sustained a broader net profit margin. The company’s 46.25 % as return on equity indicates the highest value to be attained for any entire financial year of the previous decade. There has been a steady net increase in net income for larger part of Apple’s recent performance and history , and with 8.6 percent 3 year average growth, and another 44.6 percent average growth for 10 year period (Morningstar, n.d). The company’s book value seems to have an upward trend in the whole of the past decade, even though the shareholder’s equity growth rate has decreased over the previous three year period. Moreover, the adoption of a regular activity dividend and share purchase has brought about this trend and enhanced the propulsion of return on equity along its growth. The firm has the highest return on equity among its biggest competitors in the industry, whose average return on equity ratio was 8.9 percent for the year 2015 (Apple Inc., 2016).
DuPont Analysis.
The company attained the highest margin in 2012, which was 26.7 % better than other recent financial years. The subsequent years have seen the net margin ratio ranging between 21. 19 % in 2016 and 22.85 % in 2015 financial periods, and the five year average being boosted by the 2012 performance. The high 26.7 % margin in 2012 created an upper bound in terms of material distribution higher than most recent value (Morningstar, n.d). Even though this margin can explain the growth of return of equity in post 2009 period, it has not been a major aspect in driving this growth over the past five year period. Nevertheless, the company has a key advantage over its rival in the industry in terms of profit margin the main favor in the best return on equity. The company’s operating margin for the past five year has ranged between 35.30 and 27.84 percent for 2012 and 2016 financial years respectively. The ratio has been constant over the same period apart from 2012 which was the highest over the past decade. The EBT margin for the past five year period has ranged from 35.63 % to 28.46 % for 2012 and 2016 respectively which means the firm attained the highest profit in 2012 . The assets turnover ratio in average ranged from 1.07 % in 2012 to 0.70 % in 2016 which shows a considerable decline over the five year period (NASDAQ, 2017). In addition, the financial leverage ratio in average for the company for a similar period was 1.49 % in 2012 to 2.51 %, while debt to equity ratio ranged from 0.14 % in 2013 to 0.59 % in 2016 which indicates a steady increase over a four year period (NASDAQ, 2017).
The company’s turnover ratio for 2015 financial year was 0.89 %, being among the lowest value to be attained for whole of the past decade , and can compared rightly with 2013 and 2014 financial ratios . It also shows that asset turnover has reduced regardless of a constant and rapid increase in revenue as a result of the company’s rising assets book values. The equity multiplier for Apple has increased constantly since 2012 fiscal year to 2.43 in 2015 fiscal year, an indication of highest value over a decade. Such equity multiplier was just 2.08 in 2014 financial year.
There was an improvement in Apple’s Cash Conversion Cycle for the 2014 to 2015 period and 2015 to 2016 periods. This metric is a measure of time needed for the firm to convert the invested cash to cash received from operations. The cash conversion ratio for the firm can be reviewed in terms of outstanding day’s sales and days inventory. The Days Sales Outstanding ratio ranged from 19.01 % in 2012 to 30.51 % in 2014, while Days Inventory ratio ranged from 74.54 % to 101.11 % for 2012 and 2016 financial years respectively (Morningstar, n.d). For Apple, cash position seems to be a major source of strength, since it holds cash or cash equivalents amounting to 13.8 billion dollars and even holds 11.23 billion dollars in terms of marketable securities whose conversion into cash is very easy. The company’s accounts receivables for the $ 10,930 million in 2012 to 17,460 in 2014 which indicates the highest sum, and for 2016 the receivables were $ 15.754 Million. This cash represent the amount of money owed by firms Apple carries out business with over different periods of time. The highest amount of cash receivables was in 2014, the same year the company realized highest level of profit margin over the past decade. The trend shows cash receivables improving from 2012 and reaching the peak in 2014 and then declining in 2015 and 2016 financial years (Morningstar, n.d). The long-term market securities seems to be a major asset for the company as per the year 2015 , which also comprises of nearly 22 billion dollars in US Treasuries and 79 billion dollar in form of corporate securities. Mover, the financial statements showed a good will of 4.6 billion dollars, which is an intangible asset representing an estimation of an upbeat consumer association of Apple’s brand name. For the 2014 fiscal period, the firm had a 2.2 billion in form of good will that was connected to its buying out of Beats Music for about 2.6 billion dollars. The current liabilities for the company as at 2016 were $79,006 million which is a decline from $ 80610 million including $35,490 million and $37,294 million for 2015 and 2016 respectively. The current ratios have remained above 1, an indication that the form has good liquidity.
Cash at hand for the company comprises of real cash and even cash equivalents, temporary and long-standing securities that are marketable. The firm has a large cash reserve and by 2016, it was raking in more from massive sales of hardware which gives the company lot money for potential acquisition. The firm has been spending much of this cash on research and development, and in 2016 the amount spent was 7.475 billion dollars for the same in comparison to 5.847 billion over the same period in 2015. The firm is also involved in big investments, as seen in 1 billion dollars spent building the Didi Chuxing, a car-hailing application in China and this shows a diversification in the investment strategies. The firm is also continuing using the cash by giving back to investor (Apple Inc., 2016). The amount of dividend issued in 2016 fiscal year was $ 0.57 per share in the third quarter, 5 cents more than previous year. The total dividend for 2016 was $1.61, in comparison with $1.46 for the fiscal 2015. The firm also spent about 23.7billon dollars in 2016 in purchasing stock as in comparison with 22 billion dollars for fiscal 2015 (Apple Inc., 2016). The trend shows that Apple is increasing using stocks in research and development, paying out dividend to the shareholders and in building new products.
Section III
The steady growth in returns on equity indicates a future possibility for continuous growth over the next five years, that likely to be driven by increasing annual growth in earnings. The expected increase in return on equity is an indication that the firm will remain to be the largest among its peers in the electronic device sector. In addition, the high profit margins indicate that Apple will retain its major advantage or edge over its rivals, a major contributor to the ROE in the industry. The declining assets turnover is an indication that the company is utilizing its assets base in a less efficient manner in order to drive revenues, even though the present value can be compared to the rest in the industry.
Moreover, a higher level of equity multiplier shows that has better financial leverage and less of its operations are being used for financing equity. Financial leverage seems to be the major factor that has been influencing the company’s return on equity over the past five year period. Apple’s financial position can also be understood by looking at the specific ratios which gives a clue on how the business operations are managed. The liquidity ratio and the trends over the past five years shows a healthy condition , with the firm having sufficient Current assets at hand to cover all current liabilities. The trend in debt-to-equity ratio indicates a conservative ratio that has been giving breathing room for management. The reducing cash in hand for the firm over the past 2 years ending 2016 indicates that the firm is starting to utilize the large cash , which serves investors interests. The company is likely to continue performing well in the industry, at least for the next five years.
References
Khan, U. A., Alam, M. N., & Alam, S. (2015). A Critical Analysis of Internal and External Environment of Apple Inc. International Journal of Economics, Commerce and Management, 3(6), 955-961.
Apple Inc., (2016). Annual report. Form 10-K. Retrieved from: http://files.shareholder.com/downloads/AAPL/4560892425x0x913905/66363059-7FB6-4710-B4A5-7ABFA14CF5E6/10-K_2016_9.24.2016_-_as_filed.pdf
Morningstar, Apple Inc. Retrieved from: http://financials.morningstar.com/balance-sheet/bs.html?t=AAPL®ion=usa&culture=en-US Nasdaq,(2017).AAPL Company Financials. Retrieved from: http://www.nasdaq.com/symbol/aapl/financials?query=ratios
Appendix
Financial measures
|
|
|
|
|
|
|
|
|
2012 |
2013 |
2014 |
2015 |
2016 |
|
Revenue |
156,508 |
170,910 |
182,795 |
233,715 |
215,639 |
|
Gross margin |
43.9 |
37.6 |
38.6 |
40.1 |
39.1 |
|
|
|
|
|
|
|
|
Operating margin |
35.3 |
28.67 |
28.72 |
30.48 |
27.84 |
|
|
|
|
|
|
|
|
Net margin |
26.67 |
21.67 |
21.61 |
22.85 |
21.19 |
|
EBT |
35.63 |
29.35 |
29.26 |
31.03 |
28.46 |
|
|
|
|
|
|
|
|
ROE |
42.84 |
30.64 |
33.61 |
46.25 |
36.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Turnover |
1.07 |
0.89 |
0.83 |
0.89 |
0.7 |
|
Current Ratio |
1.5 |
1.68 |
1.08 |
1.11 |
1.35 |
|
Debt/Equity ratio |
|
0.14 |
0.26 |
0.45 |
0.59 |
|
|
|
|
|
|
|
|
cash at hand |
10,746 |
14,259.00 |
13,844 |
21120 |
20484 |
|
Cash receivables |
10,930 |
13,102 |
17,460 |
16,849 |
15,754 |
|
Current liabilities |
38,542 |
43,658 |
63,448 |
80,610 |
79,006 |
|
|
|
|
|
|
|
|
Days Sales Outstanding |
19.01 |
25.66 |
30.51 |
26.79 |
27.59 |
|
Days Inventory ratio |
3.26 |
4.37 |
6.3 |
5.81 |
6.22 |
