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Apple, Inc. Financial Performance Analysis

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Apple, Inc. Financial Performance Analysis

Abstract

This is a financial performance analysis for Apple, Inc. for the previous three years i.e., 2011-2013. Financial performance analysis provides insights for creditors and investors on the financial health of a company. Major ratio analyses show that Apple, Inc. is a financially healthy company and has started to pay dividends after nearly two decades.

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The company’s net sales have continued to rise since the fiscal year 2011 to present, but the margins have continued to decline because of several risk factors, both internal and external. Apple, Inc. anticipates that margins could experience downward trends in the future because of fierce competitions and short product life cycles among others.

Apple, Inc. must control internal costs, but continue to invest in R&D to ensure that it can develop products for future needs of customers and remain competitive. The major risk factors for the company are mainly external ones, which it cannot easily control. Consequently, Apple, Inc. must continue to find new ways of working with its suppliers, distributors and other services providers in order to develop new products and services, distribute them, grow net sales and increase margins and profitability.

Outline

  1. Introduction
  2. Financial Performance Analysis
  3. Assessment of Apple, Inc. Future Financial Performance
  4. Significant Risk Factors for Apple, Inc. to Consider
  5. Conclusion

Introduction

This is a financial performance analysis of Apple, Inc. for the past three financial periods (2011-2013). It is expected that the analysis shall provide a clear view of the financial position of the company, including its strengths and weaknesses. Accounting ratios will be applied in the analysis processes.

Major financial statements will be analysed. Specifically, the analysis will focus on profitability ratios, liquidity ratios, and cash flow ratios among others.

An overview of the company

Apple, Inc. was established in 1976 by Steven Paul Jobs, Steve Wozniak and Ronald Gerald Wayne. It is head office is based in Cupertino, CA.

Apple, Inc. designs, makes and markets mobile communication devices, computers, digital music players and sells other various related software and peripheral pieces of hardware components, services and networking solutions alongside third party products and services (Apple, Inc., 2013). The company’s products and services include “iPhone, iPad, iPod, Mac, iPod, Apple TV, the iOS and OS X operating systems, iCloud, accessories, service and support offerings” (Apple, Inc., 2013). Apple Inc also sells various digital contents and apps on its different platforms such as the “iTunes Store, App Store, iBooks Store, and Mac App Store” (Apple, Inc., 2013).

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Apple, Inc. business strategy includes its commitment to “bringing the best user experience to its customers through its innovative hardware, software and services” (Apple, Inc., 2013). The company relies on its capabilities to design and manufacture unique innovative products and offer services that meet customers’ needs. Apple, Inc. believes in continuous innovation and investment in “research and development and promotion to facilitate sales of its products and services globally” (Apple, Inc., 2013). In addition, its strategy focuses on enhancing user experiences from the product purchase to ease of product use.

Apple, Inc. manages its business mainly on geographical basis, which reflects the nature and locations of customers globally.

Financial Performance Analysis

Financial performance analysis for Apple, Inc. will cover three financial years i.e., 2011 to 2013. It is expected that analysis of these statements will provide a clear view of the company’s financial position. Financial ratio analysis assists investors and loan officers to understand performances and credit worthiness of a company. Ratio analysis shows the company performance trends and assists in comparing the company’s performance against its competitors.

Profitability Ratios

Gross Profit Margin

= Gross Profit / Net Sales = ____

  • 2011
    • 43,818 /108,249 = 0.4047 = 40.47%
  • 2012
    • 68,662 /156,508 = 0.4387 = 43.89%
  • 2013
    • 64,304 /170,910 = 0.3762 = 37.62%

Gross Margin

Gross margin for 2013, 2012 and 2011 are as follows (in millions, except gross margin percentages):

2013 2012 2011
Net sales $170,910 $156,508 $108,249
Cost of sales 106,606 87,846 64,431
Gross margin $ 64,304 $ 68,662 $ 43,818
Gross margin percentage 37.6% 43.9% 40.5%

The gross profit margins for the last three financial years were 40.47 %, 43.89% and 37.62 % for the year 2011, 2012 and 2013 respectively. Although the margin for the year 2012 was slightly high, Apple, Inc. has recorded year-over-year decline in its gross profit margins. These fluctuations could have been occasioned by several factors.

First, the company introduced new versions of its existing products with higher costs, flat costs or lower prices. Second, consumers chose products with lower costs. Third, changes in the company’s service structures and warranty policies. Fourth, foreign exchange fluctuations from overseas markets could have affected the margins. Finally, higher mix of products’ sales and improved net sales were responsible for the increased profit margin in the year 2012. At the same time, the US dollar became stable and stronger against other foreign currencies.

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The gross profit margins for Apple, Inc. show that the company has effective ways of managing its costs of inventory and controlling other related costs. Hence, it can pass low costs to customers.

Net Profit Margin

= Net Income/Net Sales = _____

  • 2011
    • 25,922 /108,249 = 0.239 = 24 %
  • 2012
    • 41,733 /156,508 = 0.267 = 26.7 %
  • 2013
    • 37,037 /170,910 = 0.217 = 21.7 %

Apple, Inc. makes profits from every dollar after paying all its expenses. The margin ranges from 24%, 26.7% to 21.7 %. This represents profits that Apple, Inc. makes from a dollar in terms of cents. However, the company’s profitability fluctuates because of several factors.

Apple, Inc. has increased and decreased prices of some of its iPhone and iPad products when it launched the new versions. These changes influenced the number of quantities sold, which have affected the firm’s profitability. Getting the perfect price for products is a major challenge for many entities. Consumers consider Apple pricing strategy as premium. This is a challenge for the company because the mobile and electronic market has become highly competitive. Overall, Apple’s pricing strategy can either increase or decrease its net profit margin.

Apple, Inc. “inventory affected its net profit margin” (Apple, Inc., 2013). Apple may not be able to record the sales of its inventory until it realises the actual sales. Changes in the market affect the prices of inventory. The devaluation of some of the products have decreased the company’s net profit margin while “moving inventory, particularly the pre-orders have greatly increased the company’s sales” (Apple, Inc., 2013).

Variable costs also influence net profit margin of the company. These are costs associated with labour costs, taxes, costs of raw materials and changes in foreign exchange markets. At the same time, fixed costs of running the business also affect the company’s net profit margins. While these costs may not change, they have significant impacts on the net profit margin of Apple, Inc.

Operating margins

Operating Margin = Operating Earnings / Revenue

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2011 2012 2013
31.22 % 35.30 % 28.67 %

Higher operating margins indicate that Apple, Inc. is a highly profitable and efficient company, particularly in its flagship products and services. However, over the years several factors have influenced operating margins of the company.

Apple, Inc. pricing strategies, raw materials and labour costs have increased. At the same time, the company has reduced some prices of its products. These high percentages show that Apple, Inc. has highly flexible and competent management team that can manage rough economic times and downturns.

Labour costs and raw materials are particularly critical consideration for the company in this context. The company must evaluate these margins against its competitors in the industry.

Specifically, Apple, Inc. has increased spending on research and development (R&D). The company attributed such increments to an increase in “the number of employees and other related expenses to support expanded R&D activities” (Apple, Inc., 2013). Apple, Inc. increased expenses in R&D from 32% in 2012 to 39 % in 2013. While there was an increment, it was consistent with the net sales percentage. Apple, Inc. believes that a focused approach to R&D activities is highly important for its future growth and for creating competitive advantage in the industry. In addition, R&D activities directly support the development of its “core business strategy and product development in a timely manner and therefore, the company focuses on increasing investment in R&D over the years to remain competitive” (Apple, Inc., 2013).

Apple, Inc. also noted increased expenses from “selling, general and administrative (SG&A) costs” (Apple, Inc., 2013). The increment in these expenses during the fiscal year 2013 was mainly attributed to the firm’s continued expansion of its retail outlets and additional employees and other associated expenses. However, the company decreased expenses related to professional services. The increment in SG&A in the fiscal year 2012 was occasioned by the “continued expansion of the retail segment, increased number of employees, higher costs of professional services, increased marketing and advertisement activities and increments in variable costs related to overall company’s growth of the net sales” (Apple, Inc., 2013).

The Cash Flow Margin Ratio

= Cash flow from operating cash flows/Net sales = _____

  • 2011
    • 37,529 /108,249 = 0.347 = 34.7 %
  • 2012
    • 50,856 /156,508 = 0.325 = 32.5 %
  • 2013
    • 53,666 /170,910 = 0.314 = 31.4 %

From the results, investors can locate how Apple Inc. has managed to generate revenues from its customers and other partners through product and service sales. These are significantly high ratios, which show that Apple, Inc. has good cash flows from its core business activities. Therefore, Apple, Inc. does not face any risks from its suppliers and investors or any solvency challenges.

The Return on Assets Ratio

Net Income/Total Assets = _____

  • 2011
    • 27.07
  • 2012
    • 41,733 /176,064 = 0.237 = 23.7 %
  • 2013
    • 37,037 /207,000 = 0.179 = 18 %

The ROA shows profitability of Apple, Inc. relative to its assets. From the ratios, investors can conclude that the company can effectively use its assets to generate revenues and profits.

At the same time, Apple, Inc. can leverage on its assets to control debts in order to maximise returns for its shareholders. However, Apple, Inc. has experienced continued declines in ROA. The declines in ROA year-over-year show lesser profitability for the company. Apple, Inc. should improve ROA by increasing net incomes without acquiring expensive new assets. Alternatively, the company can enhance efficiency of its current assets. Declining net incomes and increasing acquisition of new assets or poor activities on accounts receivable are responsible for the declines in ROA.

The Return on Equity Ratio

= Net Income/Stockholder’s Equity = _____

  • 2011
    • 25,922 / 76,615 = 0.338 = 34 %
  • 2012
    • 41,733 /118,210 = 0.35 = 35 %
  • 2013
    • 37,037 /123,549 = 0.299 = 30 %

Between the year 2011 and 2013, Apple, Inc. had a good ROE of up to 35 % and thus, good returns for shareholders, but this has changed. Between 2012 and 2013 financial period, the company’s ROE declined from 35 % to 30 % because of the increase in total shareholders’ equity and a decline in net income. This situation has affected shareholders’ returns.

It is advisable to invest in companies with good ROE over time. The current state of Apple, Inc. is therefore good for potential investors. This shows that the company has managed to maintain its profitability and rarely relies on shareholders’ equity for its growth.

Cash Return on Assets

= Cash flow from operating activities/Total Assets = _____

  • 2011
    • 37,529 /116,371 = 0.322 = 32.2 %
  • 2012
    • 50,856 /176,064 = 0.29 = 29 %
  • 2013
    • 53,666 /207,000 = 0.26 = 26 %

Cash Return on Assets Ratio is significant in evaluating how Apple, Inc. has maximised its investments to generate income from its assets (Kieso, Weygandt, & Warfield, 2013). From the recent figures of the last two years, one can conclude that Apple’s performance has started to decline. Nevertheless, it has significantly higher Cash Return on Assets Ratios.

Shareholder Equity Ratio

= Total Shareholder Equity/Total Assets

  • 2011
    • 76,615 /116,371 = 0.658 = 65.8 %
  • 2012
    • 118,210 /176,064 = 0.67 = 67 %
  • 2013
    • 123,549 /207,000 = 0.599 = 60 %

Between the years 2011 and 2012, shareholders’ equity continued to rise steadily as the company depended on shareholders’ contributions to fund its operations. Therefore, in case of a company-wide liquidation, investors would get good returns from their investments. These are high ratios, which suggest that the company operates with investments from shareholders. However, Apple, Inc. has started to rely on its own internal sources of funds to drive its investment activities.

Liquidity

= current assets/current liabilities

  • 2012
    • 57,653 / 38,542 = 1.49
  • 2013
    • 73,286 / 43,658 = 1.678

Low liquidity ratios (less than one) demonstrate that the company may not easily fulfil its short-term obligations. Apple, Inc. has high liquidity ratios and thus, it can meet its near-term obligations. The company can meet its obligations through its current assets (current ratio) or its available total cash. This is important because Apple, Inc. can change its short-term assets into cash in order to clear its debt easily. Hence, it may not face bankruptcy. Apple, Inc. is stronger as a going concern.

Efficiency

Efficiency Ratio = Expenses / Revenue * 100

  • 2011
    • 10,028 / 108,249 * 100 = 9.26 %
  • 2012
    • 13,421 / 156,508 * 100 = 8.58 %
  • 2013
    • 15,305 / 170,910 * 100 = 8.96 %

The efficiency rations show how fast Apple, Inc. can generate revenues from its resources. Low ratios are good. Most accountants have considered 50% as the best ratio for efficiency. Apple, Inc., therefore, has some lowest ratios as indicated for the last three consecutive years. These ratios fluctuate due to changes in operation costs and net sales.

It is necessary for the company to maintain its operating expenses and enhance revenue generation in order to operate at optimal level.

Capital Structure Ratio

Debt to Total Assets Ratio = Total debts/Total Assets = Debt to total assets ratio

The analysis of capital structure in this case used debt to total assets ratio.

  • 2011
  • 2012
    • 57,854 / 176,064 = 0.328
  • 2013
    • 83,451 / 207,000 = 0.4

These ratios show that Apple, Inc. does not heavily rely on debts to fund its operations. A good company should not exceed 50% of the capital structure because it may exceed its borrowing limit (usually 65%).

Therefore, any investor can use these to understand the financial health of the company. Investors can make wise decisions during investments. In addition, loan officers also rely on these risks to assess credit worthiness of a company. Company executives use financial ratios to enhance their productivity and profitability.

Fiscal Years 2011 – 2013 Highlights

In the fiscal year 2013, net sales rose by nine percent relative to the year 2012 while in year 2012 it increased by 45% compared to 2011. The growth in sales resulted from the increased sales of existing iPhones, iPads, iTune, software, peripheral hardware and the introduction of the new iPhone 5c and 5s. However, the company recorded sales decline for Mac and iPod products. The company’s major market segments recorded improved performances in the year 2013. In the fiscal years 2012 and 2011, Apple, Inc. also noticed improved growth from its major markets.

The company attributed these improved net sales to its various lines of flagship products. For instance, Apple, Inc. acknowledged that in the fiscal year 2013, sales were driven by iPad and iPhones. In addition, Apple, Inc. launched the fourth generation of iPad and iPad Mini and several other new products with improved features and capabilities. In the same year, the company introduced the “iOS 7 and launched other services such as iTunes Radio, iMovie and iWork” (Apple, Inc., 2013).

Clearly, Apple, Inc. has been relying on its existing products, new versions and other new products and services to drive net sales year-over-year. As a result, the company net sales have continued to increase significantly. This implies that Apple, Inc. must continue to introduce new products and services or launch improved versions of its existing products and services in order to grow net sales. Otherwise, the company may record decline in sales.

Assessment of Apple, Inc. Future Financial Performance

Financial ratios of Apple, Inc. show that the company could realise good future earnings. In addition, the company has embarked on aggressive business risk management and investment in R&D in order to control costs and introduce innovative products and services to its customers. The company also focuses on rapid expansion through opening new retail outlets globally. These strategies aim to position Apple, Inc. for future competition, drive net sales and improve its profitability.

According to Michaels (2012), the company started the year 2012 with several challenges. Flood issues in Thailand, which affected all manufacturers had critical effect on hardware supplies.

Today, Apple, Inc. appears to be performing well financially and this reflects the company’s ability to maintain upward trends and growths. The company’s CEO predicted all-time record sales for new products.

Apple, Inc. has adequate financial strength. For instance, in the fiscal year 2011, the company had over $81.6 billion in cash alongside other short-term assets. In the fiscal year 2012, the company used this cash to pay dividends of $2.65 per share. This is something, which Apple, Inc. had not done in several years (Apple, Inc., 2012). The company also uses its cash to buy other companies, which have technologies and products that can augment its products and services. For instance, the company bought Siri to change its line of iPhone products. This strategy of acquisition has been a critical point of development for many IT companies.

For the fiscal year 2014, the company expected the growth margin to range between 36.5% and 37.5 & within the first quarter (Apple, Inc., 2013). This is however a “forward-looking output and could differ from the actual gross margin” (Apple, Inc., 2013). Apple, Inc. has acknowledged that its future net sales and gross margins could be influenced by several risk and other favourable factors.

Generally, Apple, Inc. has noted that its gross margins and net sales on specific individual products will continue to experience pressure and thus these margins could remain in downward trends because of several reasons. First, continued pressures on the global pricing strategies of the company. Second, it will experience continued assault from cheap competitors’ products. Third, electronic products have compressed life cycles accompanied by shift product transitions. Fourth, there is a potential increment in the prices of software and hardware components. Fifth, the US dollar could strengthen against other currencies and influence the margins for foreign markets. Finally, there is a possible rise in costs beyond manufacturing services and marketing activities while consumers may consider low priced products.

Apple, Inc. intends to respond to these issues in several ways. For instance, for competitive assaults, the company intends to continue reducing its prices, which could have negative impacts on the gross margins. The company’s abilities to control its “product quality and costs associated with warranty may also influence margins” (Apple, Inc., 2013). In addition, the increasing demands for specific products may also result in higher margins relative to previous years. Apple, Inc. has important international operations. Therefore, the company’s financial performances can be critically “affected by short-term changes in the exchange rates” (Apple, Inc., 2013).

Significant Risk Factors for Apple, Inc. to Consider

Global economic conditions

The company’s financial performances depend “significantly on global economic activities” (Apple, Inc., 2013). Therefore, uncertainties in the global markets due to higher rates of unemployment, economic slowdowns, government austerity measures, financial market turbulence, declines in income and values of assets pose serious risks to the company’s future performances. These risks factors are most likely to have adverse impacts on the demand for products and services from the company (Jinjin, 2013).

Apple, Inc. has a tendency to “raise prices of products and services sold outside the US to protect itself from fluctuations in the foreign exchange market” (Apple, Inc., 2013), particularly when the US dollar strengthens. In addition, the rising costs of “energy, labour, healthcare and other conditions could also influence the global market and affect consumer behaviours and spending patterns” (Apple, Inc., 2013).

Apple, Inc. recognises that these factors could greatly affect its future margins and net sales.

Competition and rapid technological changes

Apple, Inc. competes in “a more competitive global market” (Apple, Inc., 2013). The industry players are aggressive and involved in price cutting strategies. This would affect the company’s margins negatively as consumers opt for cheaper products and services. At the same time, “product short life cycles, frequent introduction of new products, changing industry standards, changes in product pricing, disruptive and adoption of new technologies and consumer price sensitivity” (Apple, Inc., 2013) also affect the company’s margins.

The company’s ability to remain competitive in the global market depends on its abilities to “introduce new innovative solutions continuously” (Apple, Inc., 2013).

Apple, Inc. believes in its uniqueness. Its products and services are uniquely designed. It also introduces new solutions to support existing products. Consequently, Apple, Inc. aims to enhance its investment in R&D. Nevertheless, there is no assurance that Apple, Inc. will continue to “deliver quality products and services to its customers and compete effectively” (Apple, Inc., 2013).

Product introduction and transition management

Apple, Inc. competes in a highly volatile and competitive IT and telecommunication industry. The company, therefore, must continue to “introduce new products and services to enhance its growth and profitability” (Apple, Inc., 2013). This stimulates the demand for new products and services. However, the introduction of new services and products depends on several other factors.

Apple, Inc. must ensure timely and successful development of new products, consumer acceptance, risks management, immediate availability of the required components and effective management of orders and inventory based on the expected demands. In addition, product availability, resources to support product for expected demands and risks related to defects or deficiency of such new products or services also affect product introduction. Apple, Inc., therefore, lacks the capacity to determine how its new products will influence the market.

Dependence on third parties

Apple, Inc. depends on other service providers such as “retailers, wholesalers, cellular network carriers and other resellers to distribute its products” (Apple, Inc., 2013). Most of these partners, however, also have products from competitors. The company uses retail stores and online platforms to sell its products and peripheral products from “third parties to learning centres, governments, individual consumers and to businesses” (Apple, Inc., 2013). Carriers have been able to subsidise the products of the company’s products such as iPhones and iPads. However, there is no assurance that such arrangement will continue into the future or in similar manners after the contract expiry. These could affect the company’s distribution channels and revenue growth strategies.

Sufficient components from suppliers

The company relies on components’ suppliers to develop new products and services. It is imperative to note that sources of components are limited or single (Apple, Inc., 2013). Hence, Apple, Inc. faces significant supply and pricing risks. On the same note, other components that are available in the market may also experience industry-wide shortages accompanied by significant price changes. While Apple, Inc. has several agreements with component suppliers, there is no assurance that such agreements will continue to exist or continue on the same terms after their expiry. The resultant effects of the global economic activities usually affect suppliers and in turn affect the company’s abilities to get components. Hence, component shortages and prices are significant risk factors that could influence its margins.

Outsourced services

Several suppliers of the company are “located outside the US” (Apple, Inc., 2013). In addition, Apple, Inc. outsources some of its services to partners. In fact, substantial manufacturing of the company’s products occurs outside the US, specifically in Asia. In addition, it has also outsourced “transport and logistics management services to third parties” (Apple, Inc., 2012). These arrangements are meant to reduce costs of operations.

Nevertheless, they lessen the company’s abilities to control product distribution and production. It is not clear what outcomes of lessened control could have on the product quality or quantity, or the company’s ability to respond to urgent cases. While arrangements with third parties may have provisions for “warranty costs and reimbursement, Apple, Inc. may still bear the greatest responsibilities for any product or service defects and could face several expensive claims” (Apple, Inc., 2012).

Conclusion

Analysis of Apple, Inc. major financial ratios has shown that the company is financially stable. Apple, Inc. continues to realise increased net sales year-over-year. On the other hand, its gross and operation margins have continued to decline, and the company has attributed such declines to several factors, including competition and increased costs of operations and labour. Overall, the company is credit worthy and suitable for investment. The analysis shows that Apple, Inc. finally approved payment of dividends to stakeholders in the fiscal year 2012, nearly after two decades. Today, the company has adequate cash for expansion and investment.

Apple, Inc., however, continues to face critical risk factors, which have abilities to affect its product and service sales adversely and ultimately profitability. These are mainly external factors, which the company may not be able to control. As a result, Apple, Inc. has continued to seek for beneficial partnerships to meet its production and distribution needs.

References

Apple, Inc. (2013). 10-K Annual Reports 2013. Web.

Apple, Inc. (2012). Annual Report on Form 10-K. Web.

Jinjin, T. (2013). A Strategic Analysis of Apple Computer Inc. & Recommendations for the Future Direction. Management Science and Engineering, 7(2), 94-103.

Kieso, D., Weygandt, J., & Warfield, T. (2013). Intermediate Accounting. New York: Wiley.

Michaels, P. (2011). 2011 in review: Apple’s financial performance. Macworld. Web.

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