Analysis of Apple Inc.

The analysis report focuses on a company that is ranked among the best International firms operating in the tech industry in the world; Apple Inc. The outfit is recognized worldwide for quality product lines and services to the market. The analysis report took two forms, including use of qualitative and quantitative methods. The company financial statements alongside those of its competitors were extracted from the respective company’s websites and other finance websites such as Yahoo finance and Statista.com. Qualitative methods for analysis involved evaluation of primary success factors for Apple Inc. and a benchmark analysis against other two competing companies in the industry (Ic et al., 2015, p.71); Alphabet Inc. and Microsoft Inc. Alphabet Inc. and Microsoft Inc. were considered the best choices for this analysis since both companies have almost the same market capitalization as Apple Inc. Quantitative approach utilized ratio analysis to evaluate how Apple Inc. has been performing in the past three years compared to Microsoft and Alphabet. However, the study encountered challenges in retrieval of financial information on Alphabet Inc. since it is a recent company formulated by a group of firms including Google Inc. Key terms that necessitate defining include benchmark analysis, ratio analysis and market capitalization.

Background

Industry backdrop

The tech industry especially that which Apple Inc. operates in, is a developed industry with more than one hundred major industries globally. The industry enshrines services such as software development, mobile and computer applications’ development, internet solutions, anti-virus solutions, and products such as smartphones, computers, laptops, music and sound devices, among others. Development of the industry dates back to early 1970’s, a window within which companies such as Apple and Microsoft were founded. The industry growth has been influenced majorly by extensive research, unmatched innovation, and advancement in technology (Financial Analyst Warrior, 2012). The industry mainly utilizes distributors in stores and agents across the global market to supply services and products to customers. According to Statista (2013), Apple Inc. owns approximately 24% of the market share in the industry, with about 15% from the smartphone market where competitors such as Samsung own more than 20% of the market. Major companies in this industry include Apple Inc., Microsoft Inc., Alphabet Inc., Lenovo, Samsung, among others. Porters’ five forces rank as the most appropriate tools to use to analyze various industry facets including suppliers bargaining power, buyers, barriers to entry, competition intensity, and threat of substitute products.

Company backdrop

Apple Inc. is listed on the United States Securities Exchange as a fully-fledged company according to laws of the United States. The outfit was founded by the late Steve Jobs in 1976 in California, Los Angeles with specialization in provision of computer services in the state and other parts of the country. Since then, the tech giant has experienced growth and expansion and thus has transformed into a multinational company with over a thousand stores around the world. Due to the high level innovation by Apple Inc. in the mobile and computer services industry, high level technology, competitive marketing strategies, and brand identity, the firm has maintained a leading position. The company management was under Steve Jobs as the CEO since its inception. He who was later ousted and reinstated later until his death. After Steve Job’s death, Tim Cook has since been the CEO of the firm. Apple Inc. operates in more than 150 countries worldwide with well-established stores in the said markets. However, the company is still expanding its markets and is currently investing in market pentation in Africa, Asia, and the Middle East where companies such as Microsoft and Samsung have dominated the market. In future, the company is projected to make tremendous sales from the expanded markets. The success is courtesy of the industriousness of a team of experts and professionals in the company and a well-organized management and board of directors.

Apple Inc. Company has a product portfolio, highly diversified with varieties of smartphones; iPhone series, computers, headphones, media devices, and music and sound devices. The company’s sales volume has always been high and on an augmenting trajectory due to increasing market penetration. Statista (2013) noted that in 2015 and 2016, the iPhone 6 series made a sales record in the company history, with over 200 million purchases within the first few days of its launching in the market. Apple Inc. has also experienced challenges during its operation in the industry, which have acted as setbacks and learning points for the firm. The company faces stiff competition from rival firms such as Microsoft, Alphabet, Nokia, and Samsung in a majority of its product lines. Other software operating systems have also stiffly competed against the iOS software used by Apple Inc. Additionally, growing technology has exerted massive pressure on Apple Inc. to maintain performance. Patent cases in the recent years have also been a major phenomenon in the organization’s history. The cases rose in 2015 with Nokia Corporation, 2017 with Samsung, and Qualcomm. Therefore, according to Statista (2013), the firm has lost millions of dollars to pay fines and bankroll such cases. However, the future is still open for its expansion.

Critical Success Factors

Customer base

Apple Inc. customer base size is huge since the outfit has a global market in more than 150 countries. Yahoo Finance (2013) adduced that the market share owned by Apple Inc. is approximately 19% as indicated by tech industry statistics; 19.7% in 2015, 18.7% in 2016 and 18.2% in 2017. The clientele base is also highly diversified; with segments having different needs from divergent backgrounds. Diversification of the customer base benefits the company through ensuring that every product sells; iPhones, computers, software, music devices, cables, and headphones among other items. Additionally, care for customers as shown by Tim Cook’s efforts in reaching out is a major contributor to success (Cook, 2016).

Suppliers

The company’s suppliers’ bargaining power is low. Apple Inc. adopted strategies which suppressed supplier’s power. Diversification of product lines created a large pool of different suppliers including cutting production of some products and brand differentiation. The result has aided Apple Inc. towards securing more power over its suppliers hence making business for the firm through cost leadership on purchase of resources from suppliers. Involvement of suppliers in projects is also a factor that has made Apple successful, for instance Intel Corp.

Product quality and differentiation

Apple Inc.’s merchandise are produced with the latest taste of the current market, thus making the company achieve high customer satisfaction (Rothkopf, 2016). The firm manufactures iPhones with cutting edge quality digital video and sound systems, diverse mobile applications, high quality camera pixels, large storage, graphics, and physical sleekness (Zhang et al., 2015). Jobs et al., (2016) outlined that customers have always been left anxious for the next product lines due to features such as these. Currently, Lai et al., (2015) adduced that iPhone X is the latest model with exquisite features that have maintained the company’s position in the industry; display with graphical user interface and cover display. The phone also has wireless connection which thrills most (Choi and Kim 2015).

Research and development

Zhang (2017) explained that Apple Inc. has invested resources in R&D, since its inception. The company appreciates benefits reaped from research and innovation while overlooking the high costs involved in the process. Innovation and research in technology has enabled the firm stay ahead of competitors by producing devices with the latest features in modern technology (Blau, 2015). Additionally, Apple Inc. has gained market in the music and entertainment industry courtesy of R&D and utilization of big data analytics (Mangulis et al., 2018, p.21).

Employee diversification

Employee diversification in terms of skills, knowledge, field of expertise, age, gender, and ethnicity has ensured that Apple Inc. maintains the best talent in the world across all fields of professionalism. The company has a committed staff in finance field, business management, engineering, marketing, computer science, software development and engineering, research, technology, art, design, among others (Margulis and Galli, 2018). The diversification has led to creation of diverse ideas in the company which are used to strategize.

Financial statements

Notably, there was nothing unusual about Apple’s Inc. financial statements. Apple Inc (2010) explained that the directors at Apple Inc. seemingly are optimistic about the company’s future in technology, market penetration, and investment in other fields such as the motor vehicle industry. Although, speculations exists regarding Apple’s future project on electric cars, the directors did not disclose anything concerning the idea.

Financial analysis

Total income and profitability

Apple Inc. has been making tremendous sales over the last three years. The total company revenue has operated above 200 billion US dollars between 2015 and 2017 (Apple Inc, 2010). Apple Inc (2010) noted that in 2015, the revenue hit a record highest of $233,715,000,000 due to tremendous sales made by the iPhone 6 series in the market. The product was well received by the market hence boosting revenue that year. Earnings slightly dropped in the following year to $215,639,000,000 and later increased to $229,234,000,000 in 2017; an indication of increasing profitability (NASDAQ, 2012). The net profit firm margin decreased over the three-year period from 23% in 2015 to 21% in both 2016 and 2017 (Apple Inc, 2010). The cause of the result might have been the increased costs incurred by the company in funding court cases on infringement of copy rights by Samsung, Nokia, and Qualcomm which consumed more than 100 million US dollars in fines and compensations. The costs reflected in the earnings decrease after taxes, interest and net profits. According to Apple Inc (2010), the company profitability reduced in 2016 but slightly increased in 2017, as indicated by the profit margin. Given that the net profit margin rose above 20% over the three years, Orztuk and Karabulut (2017) noted that Apple Inc. has the ability to remit its taxes and still make considerable profit. Such a scenario is good for the firm financial health. Apple Inc. had the highest net profit margin on average compared to both Alphabet Inc. and Microsoft Inc. between 2015 and 2017. Alphabet Inc. had an average of 16% profit margin; 21% in both 2016 and 2015 and 11% in 2017 while Microsoft had an average of 19% profit margin; 13% in 2015, 20% in 2016, and 24% in 2017 (NASDAQ, 2012).

Returns to investment

Apple Inc. had a dividend payout hiatus between 1994 and 2011, but later resumed paying dividends in 2012. According to Wei (2016), the company had accumulated over $25 billion in cash reserves from 1994 due to sales made from the previous brands of iPhones and iPads. Therefore, with a rise in revenue and profits, shareholders have been receiving dividend payments; quarterly in 2012 and after every six months thereafter. The payments have been on an increasing stream over the last three years. The value of ROCE according to tables in the appendix, has been on a downward trend from 35% in 2015, to 25% in 2016, and 23% in 2017 (Apple Inc, 2010). The reduction in company ROCE resulted from the decline in the profit per unit of sales made in 2016 and 2017 caused by increasing costs, heightened competition from other android products, and low ability of the profits made to offset effects of the increasing capital employed over the three years (Heikal et al., 2014). After launch of the iPhone 6 and perfect reception by the market in 2015, which increased revenue to $233 billion, Apple Inc. invested in production of iPhone 6S, and iPhone 6S plus within the same window (Apple Inc, 2010). However, the market did not respond well to the products given the short span of advertisement, product awareness and the dominance of the iPhone 6 (Chen and Ann 2016). Therefore, costs outweighed revenue from the items in 2016 and 2017 partly.

Products from China operating under the Android operating system, selling at lower prices compared to the prices offered by Apple Inc. also influenced returns and revenue. The market responded positively to android smartphones than iPhones hence leading to the decrease in ROCE in 2016 and 2017 (Annualreports.com 2011). Notably, with net profits lower than the capital employed, which was on a constant rise due to increased borrowing, the ROCE was suppressed in the two years after 2015. Apple Inc (2010) reported that the ROE also decreased from 45% in 2015 to 36% in both 2016 and 2017. The decline in ROE indicated Apple’s inefficiency in utilizing shareholder equity to make company profit (Christodoulou et al., 2016). Apple Inc. had the highest ROCE compared to Alphabet and Microsoft over the three years. Alphabet’s ROCE was 14% in 2015, and 15% in both 2016 and 2017 (Alphabet Inc, 2012). However, Microsoft had the highest ROE compared to both Apple and Alphabet.

Asset management

Apple Inc. has higher non-current assets relative to the value of current assets. The non-current assets worth was over $200 billion during the three years from 2015 (Yahoo Finance). The scenario could possibly have been caused by nature of company business, that is, software business whose value is usually high. Additionally, Tayeh et al., (2015) explained that company facilities are of high value due to nature of products manufactured by the firm; hence leading to high value of non-current assets. Apple Inc. has invested in the mobile car business. The current CEO, Tim Cook has partnered with various companies in the motor industry such as Hyundai and Ford to integrate the CarPlay product developed by the company in their vehicles. The product is used to display desired content by the driver (Apple Inc, 2010). According to Yahoo Finance (2013), the inventory turnover period over the three years at Apple Inc. is averagely 8 days; 6 days in 2015 and 2016, and 13 days in 2017. Therefore, in a single year, inventory at Apple Inc. is turned 45 times. Apple Inc (2010) affirmed that the nature of business at the company entails sale of software, mobile applications, computer services, and gadgets. Therefore, with advancing technology there has to be frequent updating of technologies and system upgrades hence resulting to the high turnover in a year.

Apple Inc. offers its customers an average of 51 days of credit and receives approximately 172 days of credit from its suppliers (Apple Inc, 2010). The company’s suppliers treat Apple Inc. well. The firm thus pays its debts comfortably. However, the firm’s clients may feel that the number of credit days allocated to them by Apple Inc. is unfair compared to what they receive from suppliers; hence the outfit may lose clientele to competitors offering more credit days. However, Apple Inc, (2010) attested that the company has been increasing credit days to its customers over the three years from 47 days in 2015, to 50 days in 2016, and 57 in 2017. Additionally, suppliers may easily be lured into deals with companies offering less than 90 days of credit. Apple Inc.’s suppliers allocate to them the highest number of credit days compared to Alphabet and Microsoft while the company gives the lowest number of credit days to its customers compared to Alphabet and Microsoft (Annualreports.com 2011).

Solvency

According to Yahoo Finance (2013), the current ratio of Apple Inc. increased from 1.11 in 2015 to 1.35 in 2016, then dropped to 1.28 in 2017. Therefore, the firm is able to pay its short term liabilities comfortably. Increase in the current ratio between 2015 and 2016 was caused by a rise in value of current assets relative to that of current liabilities whereas the decrease in 2017 was attributed to a flop in the cash at bank. The acid test ratio over the three years was above 1, which indicated that Apple Inc. comfortably covered its short-term financial needs. Thus, assets held can easily be converted to liquid cash for purposes of settling liabilities in the short term. The ratio increases from 1.08 in 2015, 1.33 in 2016, and 1.23 in 2017 (Yahoo Finance 2013). Therefore, liquidity and solvency have been stable throughout the three years. Apple Inc. has the lowest solvency compared to both Microsoft and Alphabet Inc. with the later having the highest solvency. Alphabet has more than 4X acid test and current ratios, while Microsoft has ratios above 2X (Alphabet Inc, 2012).

Debt

Yahoo Finance (2013) expostulated that the company’s level of debt has been on an increase since 2015 from $64,328,000,000 to $87,032,000,000 in 2016, and $115,680,000,000 in 2017. The rise in borrowing can result from increase in capital requirements and high demand of finances from investments. Apple Inc (2010) explicated that the firm’s gearing increased from 23% in 2015 to 31% in 2016 and to 42% in 2017.The gearing was below 50% over the three-year period. However, the ratio has been on an increase from 2015; an indication that the company was risking insolvency since the ratio almost neared 50% (Pescaton et al., 2014). Currently, the firm is stable; however, there is a limitation to what the firm can borrow further. According to Ross (2016), Apple Inc. may not seek loans further because additional borrowing would increase the risk of default on debt and ultimately cause insolvency. The company interest cover indicates that the firm can still meet its interest payments on debts. Apple Inc. had the highest gearing in 2015 and 2016, followed by Microsoft (Annualreports.com 2011). However, in 2017, Apple Inc. only outshined Microsoft leaving Alphabet Inc. with the lowest gearing; 2%.

Cash Flow

The free cash flow to equity was approximately $119 billion for the three years. However, the dividend payout ratio was about 32.7% of the total net income, which stood at $18.321 billion (Apple Inc 2010). Therefore, the cash flow after dividend payments at Apple Inc. was approximately $12.33 billion (NASDAQ 2012).

Valuation

Valuation based on asset value and intrinsic value

The value of Apple Inc. based on asset value is $375 billion according to the latest financial report by the company (Crain, 2017). The company value based on the intrinsic calculations, which is Asset value- Liabilities- Intangible assets is approximately $100 billion. Schmidlin (2014) affirmed that the intrinsic value of the company is the true value of the firm and represents what remains after clearance of debts during liquidation. The disparity exists owing to deductions included in the second method of valuation.

Consideration

Apple Inc. seems to be generally performing well in all aspects including profitability, liquidity, solvency, and financial efficiency as showcased by the ratio analysis. The company has been more profitable than Microsoft and Alphabet Inc. According to Blau (2015), other success areas such as R&D, customer satisfaction, brand identity, product differentiation, and diversified talent group at Apple Inc. have contributed to its growth over time. However, based on the analysis, the company should trim borrowing due to the increasing insolvency risk (Christodoulou et al., 2016). The firm had high gearing relative to its competitors which is disadvantageous. Additionally, reduction in payables turnover will secure the firm’s position among its suppliers. Apple Inc. should also focus more on cost leadership during innovation to increase its profit margins. The ROE is also slightly below average; hence the firm should increase investment on equity to yield more return.

Conclusion

Based on the undertaken analysis, Apple Inc. seemingly is performing well in most areas compared to Microsoft Inc. and Alphabet Inc. The company’s profitability is high except for the debt and gearing ratios which pose as a challenge when compared to the two benchmark companies. Therefore, the firm should pay keen attention to elements such as reduction in debt, and turnover. In future, if borrowing is not controlled, Apple Inc. is likely to face the risk of insolvency and liquidation in the worst case scenario. Additionally, given the current state, the firm may not borrow further. Apple Inc. is more profitable than its competitors. Therefore, with increased R&D, cost leadership, and investment, the company is projected to increase sales and its profit margin in future. Apple Inc. has a huge untapped opportunity of market expansion in other parts of the world such as Africa and the Middle East; and this should be part of their plan in future.

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Appendices

Apple Inc. statements and ratios

Source: NASDAQ (2012)

Alphabet ratios and statementsSource: Yahoo Finance (2013)

Source: Yahoo Finance (2013)

Microsoft statements

Source: NASDAQ (2012)

Financial ratios

Apple Inc.

LIQUIDITY(Working in '000s)

Years

Item

2015

2016

2017

Current assets

89378000

106869000

128645000

Current liabilities

80610000

79006000

100814000

Inventories

2349000

2132000

4855000

Current ratio

1.1087706

1.3526694

1.2760628

Quick ratio

1.0796303

1.3256841

1.2279049

STABILITY

Item

2015

2016

2017

Long-term debt

53329000

75427000

97207000

Total debt

64328000

87032000

115680000

Total assets

290345000

321686000

375319000

Shareholder equity

119355000

128249000

134047000

Debt ratio

0.2215571

0.2705495

0.3082178

Gearing

0.3088242

0.3703284

0.4203473

PROFITABILITY

Item

2015

2016

2017

Capital employed

172684000

203676000

231254000

EBIT

72515000

61372000

64089000

Revenue

233715000

215639000

229234000

Cost of revenue

140089000

131376000

141048000

Profit after tax

53394000

45687000

48354000

Gross profit

93626000

84263000

88185000

Non-current liabilities

90380000

114431000

140458000

ROCE

0.3457458

0.2528927

0.2334712

ROE

0.4473545

0.3562367

0.3607242

Profit margin

0.2284577

0.211868

0.2109373

Asset turnover

1.3534259

1.0587354

0.991265

Net profit margin

0.88

0.889

0.9

WORKING CAPITAL EFFICIENCY RATIOS

Item

2015

2016

2017

Accounts payable

60671000

59321000

74793000

Accounts receivable

30343000

29299000

35673000

Inventory

2349000

2132000

4855000

Trade receivables turnover ratio

47.387609

49.592768

56.800671

Trade payables turnover ratio

158.07747

164.81066

193.5472

Inventory turnover ratio

6.1202878

5.9233041

12.563631

Source: Statistica (2013)

Alphabet Inc.

LIQUIDITY(Working in billions)

Years

Item

2015

2016

2017

Current assets

90.11

105.41

124.31

Current liabilities

19.31

16.76

24.18

Inventories

0

0.268

0.749

Current ratio

4.666494

6.2893795

5.14102564

Quick ratio

4.666494

6.273389

5.11004963

STABILITY

Item

2015

2016

2017

Long-term debt

2

3.94

3.97

Total debt

5.23

3.94

3.97

Total assets

197.3

167.5

147.46

Shareholder equity

120.33

139.04

152.5

Debt ratio

0.0265079

0.0235224

0.02692256

Gearing

0.0163492

0.0275563

0.02537228

PROFITABILITY

Item

2015

2016

2017

Capital employed

122.33

142.98

156.47

EBIT

17.66

22.8

26.19

Revenue

73.59

89.73

111.02

Cost of revenue

28.16

35.14

45.58

Profit after tax

15.83

19.48

12.66

Gross profit

45.43

54.6

65.44

Non-current liabilities

7.02

11.323

19.93

ROCE

0.1386729

0.151633

0.15188772

ROE

0.1315549

0.1401036

0.08301639

Profit margin

0.2151107

0.2170957

0.11403351

Asset turnover

0.6015695

0.6275703

0.70952898

Net profit margin

0.11

0.22

0.211

Source: Statistica (2013)

WORKING CAPITAL EFFICIENCY RATIOS

Item

2015

2016

2017

Accounts payable

1.93

2.04

3.14

Accounts receivable

13.97

14.23

18.71

Inventory

0

0.268

0.749

Trade receivables turnover ratio

69.289985

57.884208

61.5127905

Trade payables turnover ratio

25.01598

21.189528

25.1448004

Inventory turnover ratio

0

2.7837223

5.99791575

Source: Statistica (2013)

Microsoft Corporation

LIQUIDITY(Working in billions)

Years

Item

2015

2016

2017

Current assets

122.797

139.66

159.851

Current liabilities

49.647

59.357

64.527

Inventories

2.902

2.251

2.181

Current ratio

2.473402

2.352882

2.477273

Quick ratio

2.41495

2.314959

2.443473

STABILITY

Item

2015

2016

2017

Long-term debt

27.808

40.557

76.073

Total debt

35.292

53.461

86.194

Total assets

174.472

193.468

241.086

Shareholder equity

80.083

71.997

72.394