Apple Inc.
Financial Resources
Ratio analysis and Value Drivers.


Introduction.

The paper contains research and ratio analysis on a company name Apple Inc. in technology industry which makes computers, Mobile phones and many such new electronic devices which is dynamic in nature and continuously changing, it is one of the leading companies in its sector as the company is so expanded and huge. The research will be on the financial side of the company comparing the company's key financial, profitability, gearing and ratios such as Current ratio, Liquidity ratio, Shareholders ratio, Solvency ratio, ROCE, Profit margin etc. The ratios will be calculated with the help of company's balance sheet, Income statement and cash flow statements which will be explained later. It will be than followed by value drivers the reason or the value which drives this company to increase or decrease in given ratios. Lastly it will be followed by overall financial status of the company.


Brief history of the Company.

Apple Inc. was founded in 1976 is an American Multinational corporation, specialised in manufacturing consumer electronic and computer products. Till 2006 it was known as Apple Computer Inc. but in 2007 they dropped the word Computer due to diversification of their products in making ipods and Mobile phones (iphone). Apple has more than 35,000 employees worldwide and an annual sale of $9,870 million in year ending September 2009. It is one of the market leaders in Computer industry and even in mobile phone industry with its latest innovation and technology. Apple(UK) Limited is just a part of the company based in London, which is one of the major market for Apple Inc. The market share of Apple Inc. as per years can be seen in the graph 1.1 below. The market rate range for Apple Inc. shares which is listed in NADAQ currently in last year can be seen in graph 1.2 the company has tremendous growth in shares in last year even in the time of recession. The company is progressing through its new technologies and a type of unique products which has given them a hold over the market. Apple Inc. is considered as a parent company with its subsidiaries like Apple UK, Pixar animation, Apple sales international and Apple sales Ireland.

DIRECT COMPETITOR COMPARISON

 

AAPL

DELL

HPQ

MSFT

Industry

Market Cap:

184.46B

28.80B

120.57B

265.84B

27.95B

Employ­ees:

34,300

76,500

3,21,000

93,000

34.30K

Qtrly Rev Growth (yoy):

25.00%

-22.30%

-2.10%

-14.20%

6.50%

Revenue (ttm):

36.54B

53.70B

117.21B

56.30B

36.54B

Gross Margin (ttm):

35.96%

18.38%

23.21%

78.42%

18.38%

EBITDA (ttm):

8.34B

3.73B

15.44B

21.81B

3.73B

Oper Margins (ttm):

20.96%

5.47%

9.22%

34.57%

5.83%

Net Income (ttm):

5.70B

1.84B

7.32B

13.77B

N/A

EPS (ttm):

6.289

0.941

2.97

1.539

0.94

P/E (ttm):

32.56

15.65

17.12

19.45

31.79

PEG (5 yr expected):

1.43

1.12

1.23

1.45

1.43

P/S (ttm):

4.93

0.52

1.01

4.67

3.82

DELL = Dell Inc.
HPQ = Hewlett-Packard Company
MSFT = Microsoft Corporation
Industry = Personal Computers

Source: Adapted from Yahoo Finance.

From the table above we can see the market positioning of the company when compared with its competitors. It is the only company with a positive growth when compared to its rivals. So we will be discussing about the key ratios of the company compared two years and also with one of its competitor


Key Ratios.

Ratios of Apple Inc. in the year 2009 and 2008 only few will be discussed below.

 

2009

2008

Current ratio

1.88

2.29

Liquidity ratio

1.86

2.26

Shareholders liquidity ratio

4.13

4.73

Solvency ratio %

51.68

53.14

Shareholders fund per employee

75630.43

59073.03

Working capital per employee (unit)

63578.80

59926.97

Total assets per employee(unit)

1,46,334.24

1,11,157.30

Net Profit Margin%

21.85

21.23

ROE %

28.69

32.79

ROCE %

23.10

27.06

Return on total assets %

14.83

17.42

GP margin %

35.96

34.31

Stock holding period

7.10

8.71

Receivable collection period

33.58

27.22

Sales revenue on capital employed

1.06

1.28

sales revenue per employee

99,285.33

91,233.15

Price/earnings ratio

25.35

27.37

Talking about the ratio analysis we will first start with financial ratios starting with current ratio, looking at the balance sheet and income statement of Apple Inc. and comparing it with two years (year ending September 2009 and 2008) and also with one of its competitor named Hewlett-Packard Limited (HP). (All the ratios are being calculated from Apple Inc. Financial statements given in 10-K form of the company).

* Current Ratio - We can see that current ratio of the company has gone down from 2.29 in 2008 to 1.88 in 2009; this is because the amount of current liabilities has increased more when compared to current assets. However, the company asset retirement obligation (ARO) liability has also increased from $ 21 million to $25 million in year 2008 and 2009 respectively, which forms the major reason in decline of current ratio. When compared to HP the current ratio of the company in year 2008 is far ahead then HP, this is because HP's current liabilities is more than current assets of the company.

* Acid test/Quick test ratio - Acid test or quick asset ratio we can see that even after gaining profit there is a decline in quick ratio which has fell from 2.26 in 2008 to 1.86 in 2009, this is due to decrease in inventories of the company as Apple's most of the inventories is in form of finished goods, and increase in current assets of the company but at the same time as discussed before the amount of change in liability of the company is more than its asset which gives decline in quick asset ratio of the company. Hp's ratio is declining as well when compared to Apple, it is far behind it due to higher amount of current liabilities.

* ROCE (%) - The total returns of the company on its capital has also declined to a good margin, it has fell from 27.06 in the year 2008 to 23.10 in 2009. However there is an increase in income before tax but at the same time there is also increase in assets and current liabilities is also increasing but in less margin compared to assets. The company's capital is being distributed more in its assets. Compared to HP the ROCE is 19.05 in 2008 which is less than Apple so the company is doing far better than its competitors.

* ROE (%) - The Return on Equity has also declined from 32.79 to 28.69 in 2008 and 2009 respectively, this due to greater amount of increase in shareholders fund and less increase in profit when compared to shareholders fund. HP's ROE is just 20.53 which is way below Apple, this gives the company an upper hand than its competitor, as people would like to invest more in Apple than HP due higher amount of ROE.

* Gross Profit Margin (%) - Even in the time of recession, company has increased its GP Margin which was 34.31 in 2008 and increased to 35.96 in 2009. This is due to increase in gross profit of the company and also the turnover of the company has increased due to its new products in market, which shows that company is making good profit. HP has a GP margin of 10.39 which is way low when compared this shows the market share and profitability of the company.

* Net Profit Margin - The NP margin of the company has also increased showing that there is a growth in the company from 21.23 in 2008 to 21.85 in 2009, the increase is because of higher net profits and turnover of the company compare to last year, demand of the products and higher profit margin has helped it to increase. HP's NP is relatively lower, 8.5 in 2008 which shows that Apple has a better growth rate than HP.

* Stockholding period - The Inventory of the company is really low when compared with other companies as its primary inventories consists of finished goods and also the demand in market has helped the company by using FIFO method to reduce the stockholdings which has reduced from 8.71 days to 7.10 days in 2008 and 2009 respectively due to reduction in inventories and increase in cost of sales. HP stock holding period is 32.09 days which gives illiquidity in the company.

* Receivables collection period - The number of days in Receivables has been increased as compared to last year to 33.58 from 27.22 days this is because company's one of the customer has accounted 16% of receivables in 2009 which was 10% in 2008, however the debtors has also increased in this year resulting in increase of this ratio. HP has a ratio of 47.04 days which is relatively higher than Apple.

* Sales revenue per employee - The amount of sales revenue per employee has increased in 2009 to 99,285.33 from 91,233.15 in 2008 this is due to increase in sales of the company and increase in lesser amount of employees. HP has a ratio of 539, 374 which is extremely good for HP and Apple should be coping it up.

These were the few major financial ratios of the company which help company to analyse with its previous year and its competitor.


Value Drivers

The Major Value Drivers which we could see in Apple Inc are as follow:

Proprietary Technology - Apple is one of the leading brands in specialised in innovating new things and doing it differently the inspiration of making and developing new technology has helped the company to in its business and also to be a market leader in short span of time, and has also helped company to earn a good amount of business and profit and is one of the major key value drivers of the company, in today's world specially in dynamic industry like technology it is really important to be an innovator and come up with new products every time as it is gives a head over your competitors.

Competition - Even the competitors of the company are the value drivers as it helps company and motivates them to be at the first place in the race of market leader, it pushes them for continuous improvements and improvements in their products and services. It defends in the clearly defined market niche which is defensible and helps Apple to separate its product from a commodity.

Market Demand & Profitability - The demand for the products and services given by Apple is increasing day by day for eg:- iphone, Macbook air, ipod touch etc in itself has separated themselves from other products in the market and the demand for such products helps and motivated company to be in the market and produce a better product every time. People are ready to give the amount asked by the company for their product inturn giving them a huge success and a better profit margin even in the time of recession, company has a positive cash flow and profit due to the demand created in the market.

Customer Loyalty - Due to the demand of the Apple products the company has created a really strong customer database who are loyal to the company and prefer using only apple products, this loyalty towards a brand has helped company to drive themselves in new market and also in diversifying their products. These customers brings the actual business and profit to the company and also help company to bring new customers and push them to keep an edge over their competitors and in continuous improvements in the company.

Management Depth - Apple CEO Steve Jobs is a value driver for company in himself, due to its dedication and its faith in company which has helped other employees in the company to work efficiently and dedicatedly towards the company, its deal to the company in working for just $1 showed how much faith he has and also taking proper decision by him has helped the company to be in the place where it is. Co-founder and now the CEO has helped the company in achieving its goals and being the market leader.

These were the few value drivers of the company there are many such value drivers such as growth, cost of capital, no debt etc. which can be discussed and are few the other value drivers of the company.


Conclusion

As per the analysis we could see that apple is one of the leading brands and profit making company even in the time of economic downturn. As per the different ratios and yearly comparison also showed that though company's ratio comparatively has declined but when compared with its competitor Apple Inc. is far ahead of its competitor. Value drivers discussed helped us to show the reason for the company's growth and profitability of the company it also helped us to show the company's management and customer loyalty which forms the base of the company. Previewing all the things we can say that Apple Inc. is one of the better company's in its industry and has also been a market leader for several years which has improved efficiency and also in innovating new technologies in market.


References

Apple Inc., (2009), About us, [Online], Available: http://www.apple.com/pr/library/2009/10/19results.html [ 16 November 2009]

Apple Inc. form 10-k(2009), Apple inc., pg 3-88

Apple Inc. history (2009), Apple 1 - ipod touch late 2009, [Online], Available: http://www.apple-history.com/ [ 12 November 2009]

Hewlett Packard, (2008), Annual report, [Online] Available: http://media.corporate-ir.net/media_files/irol/71/71087/AR2008/HTML2/default.htm [ 20 November 2009]

Source: Essay UK - http://turkiyegoz.com/free-essays/finance/ratio-analysis-and-value-drivers-appleinc.php


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