Finance Analysis of Apple Inc
The paper contains financial analysis of Apple Inc., which is the leading company in technological industry, as well as describes its investment projects and financial metrics connected with capital and budgeting. The primary aim of this research is to reveal the major sources and preferences of the cost of Apple’s capital and characterize its investment decisions with the application of capital budgeting techniques. Initially, the overall performance of the company in the market is presented. Then, the key tendencies from its financial documentation are highlighted. With regard to the financial indicators, the paper analyzes Apple’s debt, credit rating, and major value drivers and their impact on company’s cost of capital. Calculations constitute the core of analytical part of the essay and represent WACC and EVA of Apple Inc. as well as its current investment projects. Having sufficient data, the recommendation on the choice of the best investment project and the main stages of its implementation by the company are provided.
Apple Inc. is a technological company aimed to design, produce, and distribute hardware and software devices as well as services, mobile applications, and different types of electronic content. The company sells its goods and services by the means of own retail and online stores, thus reaching its customers through the specific “i-centered approach”. Apple’s main groups of clients are individual consumers, representatives of small and medium business entities, educational institutions, as well as governmental bodies. In its performance over 2018 year, the company has demonstrated a net sales growth of 16% that equals to 36.4 billion dollars (Apple Inc., 2018, p. 41). The 10-K annual report of Apple Inc. explains such increase primarily by growth in the sales of iPhones, services, and other groups of products (Apple Inc., 2018, p. 36). Such a growth is observed in all operating geographic regions of the company. In comparison with its performance in 2017, the company has avoided loss in net sales due to the weaknesses in foreign exchange currencies. In particular, last year, in China, there was 8% decline in Apple’s net sales owing to the diminishing position of yuan towards dollar (Apple Inc., 2018, p. 25). Jim Edwards (2017) indicates China to be the second biggest market for the company . Thus, the loss of market share to 14% caused strengthening of its main competitors, such as Vivo and Huawei (Edwards, 2017). However, 2018 year was the period of dollar devaluation due to the US political uncertainties and tensions in international trade (Dilger, 2018). It has helped the company recover its sales and boost the incomes overseas.
Financial Documents of Apple Inc.
The financial conditions of company’s performance can be better understood with the analysis of its financial statements. The 10-K annual report of Apple Inc. includes the statements of operations, comprehensive income, balance sheets, shareholders’ equity, and cashflows (Apple Inc., 2018, p. 3). The documents with company’s operational activity reflect a rocketing growth in sales and increased operating expenses, primarily due to the research and development expenditures. The boost of share price (from 9 to 12 dollars per share) can be observed as a result of successful share repurchase program implemented by the company (Apple Inc., 2018, p. 24). It shows that the company is doing well.
The consolidated statement of comprehensive income demonstrates a stable positive growth in Apple’s revenue over 2017-2018. In particular, during this period, the net comprehensive income of the company grew by 18%, which is 10% more than during 2016-2017 (Apple Inc., 2018). However, in 2018, new comprehensive income was significantly diminished by losses in the fair value of marketable securities that equaled to 300 million dollars (Apple Inc., 2018, p. 39). From the balance sheets, in equity table, one may notice the logical decrease of the value of marketable securities and much less increment in property. The data with liabilities indicates that Apple Inc. has paid on its debt accounts as well as decreased the amount of term debt and other non-current liabilities.
On the sheets with shareholders’ equity information, one may observe the repurchase of 371,000 thousand of shares in 2018 by the company that ended with the lessening of shareholders’ equity by 26,900 million dollars (Apple Inc., 2018, p. 41). Finally, the statement of cashflows demonstrates 32 billion dollars of tax benefits obtained by the company from debt payment, small value of deferred revenue, and three times higher expenses on the purchases of non-marketable securities, which are almost 2 billion dollars (Apple Inc., 2018, p. 42). Overall, form the analysis of the financial statements of Apple Inc., it can be concluded that the company is in the period of stable growth of revenue, which is partially affected by the external currency fluctuations and its equity policy.
Analysis of the Cost of Capital
Prior to the development of a project in capital budgeting for the company, it is necessary to explore its cost of capital. As mentioned in the analysis of Apple’s financial statements, the company is financed through both debt and capital.
In terms of its market debt policy, the corporation issues promissory noted for the short periods that are denominated as “Commercial Papers” in its accountancy. The income from these notes is used for the operations of dividend and share repurchases. On September 29th, 2018, Apple Inc. had 12 billion dollars of such papers with the average debt rate of 2.18% (Apple Inc., 2018, p. 33-34). The maturity period of “Commercial Papers” was less than nine months. As it is indicated in 10-K Report of Apple Inc., the total value of its term debt equals to 104.2 billion dollars, and in 2018, the company decreased the portion of such debt by 4%, thus rising its interest expenses (Apple Inc., 2018, p. 59). Greatest part of the future debt repayments falls on the 2020 year, but in general, it is distributed for 2019-2023 equally and ranges between 8,750-10,200 million dollars (Apple Inc., 2018, p. 60). The debt is denominated in the US, Australian, British, Japanese, Euro, Swiss, and Canadian currencies.
The valuation of company’s debt instruments is based on the official market prices and is usually associated with high credit ratings. In particular, both S&P and Moody’s ratings grade Apple Inc. as the company with stable credibility that has AA+ and Aa1 marks appropriately (“Apple | Credit Ratings | eMarketer Retail”, 2018). Such a high level of credit solvency makes an indelible part in the success of company’s debt issuances and helps it overcome market fluctuations.
With regard to Apple’s multisided activity, its main value drivers can be classified into the following categories:
- Cutting edge technology – Apple Inc. has gained huge market share due to its technological innovations and permanent advancement of products’ functionality. As mentioned in the analysis of operating statement of the company, in 2018, it increased investment in R&D in order to retain high positions among its competitors. Ramification: successful technological advancements lead to sales growth and, consequently, increase in investors’ and lenders’ trust to the company.
- Market demand – measured in seasonal terms, company owns its value to the high demand of its customers. As indicated in Apple’s annual report, demand is typically higher in the first quarter of the year during holidays.
Ramification: when the company has high return on its sales, it can create additional shareholder value for its investors and increase the ratio of equity capital.
- Intensive share repurchase program – on May 1st, 2018, the board of Apple Inc. authorized a share repurchase program that equaled to 100 billion dollars (Apple Inc., 2018, p. 22).
Ramification: the repurchase program has helped boost the company’s share price and increase Earnings Per Share (EPS) ratio.
Analysis of Capital Budgeting
The ongoing investment projects of Apple Inc. mainly aim at the strengthening of its competitiveness in technology market, promotion of its products via resellers, and expansion of its brand awareness with the help of exclusively designed stores. The first category of investment projects of Apple Inc. relates to spending money on R&D. Only with the development of new and more sophisticated hardware and software, it can sustain among the competitors that attract consumers by cheap production costs and emulation of Apple’s devices (Apple Inc., 2018, p. 30). During 2016-2018, the expenditures of the company on R&D constituted 5% of the net sales, which evidences of high importance of such a kind of investment for the company.
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The next part of Apple’s investment funds goes to the projects that advance its reseller stores. In such a way, the company improves the placement of its goods and services and their distribution. However, the performance of resellers cannot be fully controlled by Apple Inc.; thus, any sign of uncertainty in their solvency may lead to the refusal of these resellers to distribute Apple’s products (Apple Inc., 2018, p. 16). To diversify its investment portfolio, Apple is expansively investing in its retail stores, some of which are designed to promote brand awareness. Due to the unique design, the company spends on such stores notably more money than on the usual retail units (Apple Inc., 2018, p. 16). Such subgroup of investment portfolio of Apple Inc. also belongs to the risky category, as the stores’ performance is permanently affected by macro factors and external volatilities.
The structure of capital of Apple Inc. can be characterized by the prevalence of debt and its growing size in the last two years. Specifically, in 2018, from the overall 365,725 million dollars of capital of the company, 71% belongs to the liabilities and, accordingly, 29% – to the shareholders’ equity (Apple Inc., 2018, p. 43). In comparison with 2017 year, the amount of debt has grown by 7%, while the volume of equity lessened by 2%. In both 2017 and 2018, the greater part of liabilities was the non-current liabilities with mainly term debt. With regard to the equity during 2017-2018, its major group was retained earnings (Apple Inc., 2018, p. 43). It shows strong future growth potential of the company.
WACC and EVA of Apple Inc.
From the tendency of WACC of the company over time, it is possible to determine the cost of raising funds and current risk level in the financial market. From the following tables and calculations of cost of capital of Apple Inc. from its 10-K report, it can be concluded that over 2017-2018, the cost of Apple’s financing has increased by 0,6%, which demonstrates higher interest rates set by the government and rising level of uncertainty among investors.
With the consideration of calculated WACC, the Economic Value Added of Apple Inc. over 2017-2018 shows lessening of economic profit of the company on 200% due to the net operating profit, primarily due to the decrease in equity equivalents.
Overall, from the analysis of capital budgeting of Apple Inc., it can be highlighted that the corporation directed its money resources and short-term strategy towards product promotion and vast campaign of equity repurchase, thus having reserved sufficient funds for ensuring its financial stability.
Excellent results of the financial performance of Apple Inc. demonstrate its strong potential in any of the chosen investment projects. However, with regard to the higher risks associated with resellers and exclusive stores for brand promotion, the best solution for the company would be to focus on investment in R&D and, as a key performance indicator, achieve constant growth in net sales by 10% during 2019-2020. With such a growth rate, Apple Inc. might ensure its solvency during the changes in investors’ expectations and guarantee stable dividend payouts.
The determined investment plan should bear a proper implementation strategy. First of all, the company should conduct a survey to reveal the most selling products during 2018. Minimizing the range to 3 or 4 units, the management of Apple Inc. needs to focus on renovation of their software as well as creation of new devices. Then, the company should redistribute total investment in R&D between software renovation and development of new devices as well as set the relevant deadlines and KPIs for the manufacturers.