APPLE INC. FINANCIAL ANALYSIS
Introduction
Apple Inc. is a viable company selected for the case study. It is an American international technological corporate that designs, produces, and sells software, online services, and consumer digital appliances (Jargosch, & Jurich, 2014). Some of the standard hardware appliances manufactured by the company include iPhone, iPads, Apple Watches, Mac personal computers, iPod media players, and Home pod speakers. Despite that, it specializes in offering customer software, like Watch OS, IOS, Tv OS, and OS X. iWork, Pro X, Final cut Pro are some notable applications owned by the company. Besides, the company offers customer-friendly services, such as Apple pay, Apple care, and online service platforms, like Mac store, iCloud, and iTunes. Globally, Apple is the most significant information technology organization in terms of revenue.
The operational framework of Apple Inc. rotates within the electronic technology department and telecommunication equipment industry. Also, its general visionary objective involves the delivery of innovative and high standard services and products to its worthy clients (Matterra, 2015). The organization specializes in the upper-class people in its operating market segments. Due to its premium pricing strategy, the company’s primary segment countries include Greater China, America, Europe, India, and Japan, with America accounting approximately 40 percent of the total net sales. China contributes to nearly 16 percent, while Europe, Japan, and Asia account for 22 percent, 8 percent, and 6 percent, respectively, of total sales.
For a couple of years, the company has done extremely in business development even though it nearly took a nosedive after suspending one of its founding members. One of its primary development drivers is the investment in millions of dollars in Research and Development. Its stock value keeps escalating, making investors develop confidence in the organization (Jargosch, & Jurich, 2014). The company deploys democratic leadership leading to the choosing of the company as a reputable case study. Also, the company has embraced innovative product development of superior products resulting in the rise of the number of customers, thus improved revenue.
Apple Inc.’s Financial Analysis
The company executives need to utilize the financial analysis aspect during the decision-making process for business development. It helps management in making reasonable decisions on the evaluation outcomes. In the historical period, Apple has remained to record high profits. The company gained investors in its early inception stages via amassing considerable wealth to its shareholders. Therefore, investors escalated confidence has led to the exponential growth of the company. For the future status communication of the company, investors analyze the company’s financial prowess. It makes the investors assess the company’s rising concerns vis a vis its business performance. The economic analysis focus on verticle and horizontal analysis of financial statements.
Financial Analysis
Vertical analysis
Apple’s vertical analysis gives useful insights into organizational financial performance.
(Source: Progress Report, 2017)
In 2015 and 2016, the company’s sales and the costs of purchase reduced as per the general income statement scanning. However, the organization recorded an increase in operating expenses with a drastic fall in operating income. Also, during the period, the company witnessed a decline in net income, pre-tax income, provision for income tax, and net interest income. The increment of the operating expenses led to a reduction in the revenue cost. The article analysis showcases primary factors impacting the net profit. In the same period, the general, administrative, and general expenses reduced by one margin, with an escalated rise of 2 percent in the research and development. Therefore, the decline in the net income was a result of small cumulative changes among different income statements and not massive changes in items on the income statement. In 2015-2016, the total current assets elevated by a 3 percent margin with a reduction of 2 percent of the non-current assents, hence a definite escalation of the overall business assets. In the same period, the total current liabilities decreased by approximately three percent, leading to business development.
Horizontal financial analysis
In 2015-2016, the expenses on the research and development increased with a decrease in entire items on the income statements. Even though the declining sales indicate poor marketing strategies for financial gain, they have quite a small significant impact on the initial net income. However, despite the escalation on the investment in the research and development indicates a decrease in the net income but led to Apple Inc.’s business development in the creation of competitive products in the market. Besides, 2015-2016, the balance sheet elaborates on the significant increase in the non-current assets and current assets of the company. Even though the company recorded a decline in the inventories and receivables, it had a vast elevation in the speculation, which led to an increase in the total organizational assets. For business development, the company invested in the acquisition of equipment, property, and plants, which in turn escalated non-current assets. The long-term debt, accrued expenses, and capital lease obligations led to the contribution to the increment in the long term and the current liabilities and the subsequent total liabilities, thus venture development due to capital redirection to the production of innovative products. The total organization equity increased due to the capital stock and the amount of retained earnings escalation. The move led to the positive business development.
Changes in Ratios
(Source: Progress Report, 2017)
For the Apple Inc. company to determine its long-term solvency, it must utilize the financial ratios properly. The debt-equity rate weighs the number of owners funds as compared to that of non-owner funds. Therefore, the company’s debt ratio recorded below one means that the company is not highly geared. Nevertheless, as compared to other expenditures in the industry, Apple extensively utilizes the debt/equity ratio. More so, the company relies on the current ratio, whereby it measures the existing company assets to current liabilities. The current company assets are much more as compared to the current liabilities meaning that the current ration is more than one. Also, the company performs much better than the industry average. Besides, the quick ratio measures the rate of existing assets less stock to current liabilities of a company. When compared to other competitive industries, it is in the better performance position since the current ratio exceeds the one rate mark as compared to the industry average. The Apple Inc. organization has a current ratio of more than one means it has an excellent liquidity condition for business development. Despite that, the company has elevated interest ratio, suggesting that Apple Inc. faces escalated financial uncertainties as compared to other competitors in the technology industry.
The gross profit margin of 38.51 regarding the profitability ratios indicates that the organization has effectively controlled the production costs as associated with administrative and production costs and, in a higher sufficient degree that the moderate range of the industry of 38.16. The Apple company has actively regulated financing, production, and operation costs due to its statistical indication of the net profit margin of 20.87. when compared to the industry average, Apple company has performed better, leading the massive business development in creating innovative products. The equity returns use by the company measures the effectiveness of the Apple corporate to utilize funds given to the organization to engender more revenue to the primary shareholders. The Apple company shareholders receive more than a third of every unit of funds supplied to the organization, meaning that Apple has a high return of equity of 36.63. as part of business development, the company utilizes the performance of equity funds as compared to other industries in the technological market. Besides, the company effectively converts the supplied funds into shareholder returns to ensure that it continues to receive more funds for the development.
Moreover, the Apple company utilizes the long-term funds and the permanent assets from its 19.72 return on capital to attract rapid investors in providing more funds for venture development. The Apple corporate management effectively regulates the conversion of stock shares into cash through improved marketing sales strategy to maintain the positive performance of the company. Besides, the company’s sustainable active achievement derived from the positive price ratios.
Cashflow analysis
(Source: Progress Report, 2017)
The company has positive operating activities derived from the total net cash flows suggesting that the organization is in an excellent monetary ranking since the company task sales accruals exceed the cash needed to make such sales. More so, from 2015 to 2016, the net cash flows of Apple’s operating activities increased tremendously, translating to higher chances of the net future increment needed for the venture development. However, in both years, the company has negative net cash flows from investment activities, indicating that the company re-invests in the capital. Therefore, despite the negative net, it showcases that the Apple corporate has improved sustainable future inflows for venture pragmatic improvement. Also, the Apple financing activities focus on cash goings to external monetary schedule tasks. Therefore, the financing activities derived from the cashflows indicates that the company meets its obligations effectively, thus eligibility to acquire financing from both money markets and capital markets.
Stock Price Analysis
Factors such as demand and supply market forces and the investor perception determine the rise and fall of the Apple share prices. In cases of the launch of the new product, the company’s executive team focuses on the media advertisement, whereby the organizational share prices escalates. In cases of the sharing of false information, the company shares to drop significantly. For instance, at the time of the appointment of Mr. Tim Cook as the chief executive officer, the former CEO gave misleading information that changed the investor perception leading to the massive dwindling of the company shares. The company fired the former CEO to save the share price trends of the company and maintain the financial reputation of the company from both shareholders and stakeholders. in April 2016. The lowest closing share price was at $93 million, while in February 2017, the company shares amount increased to 136 million dollars. Therefore, the company share price increment indicates the positive venture development by attracting the investors to channel their funds for the continuing venture in the product line development of innovative products. There exist a minimum risk level of Apple shares. The Apple company shares do not fluctuate in value as they have a low uncertainty for the organization investors as compared to other stocks. Most of the investors have developed confidence in the Apple shares, thus escalating the company share demands. Therefore, it is the mandate of the investors to track the purchasing time for the purchasing time of the additional shares for them to invest and able to sell them at a high profit. Buying the Apple shares by the investors means that they do not sell them at a lower price, thus attracting most of the investors to support the business for its development.
International Trade and Risk
The Impact of International Trade
Apple is a global company that conducts many of its operations in international markets. As a result, there are many factors at play in the international environment that can severely impact the amount of business that the company does, its stock process, and its financial position. The first significant risk in international trade that can affect on Apple’s financial statements is exchange rate risk. Foreign exchange risk is the risk that occurs when business transactions are carried out in currencies other than an organization’s base currency (Shim, & Constas, 2016). With the dollar serving as the base currency of the organization, changes in the strength of other denominations may have significant effects on the operations of the business (Form 10-K, 2016). For example, prices on goods and services in international markets may be raised to match the strengthening dollar. Rising prices can discourage some consumers and reduce the company’s revenues as it did between 2015 and 2016. Volatility in foreign exchange rates might also make investors more cautious, leading to a fall in stock prices.
In addition to foreign exchange risk, many other factors can impact on the financial position of the organization and its financial statements. Increased levels of unemployment in international markets may lead to an increase in the cost of sales. On the other hand, tighter credits, highly volatile financial markets, changes in the real estate markets, and fluctuations in asset value and income may also severely impact on the financial position of the organization (Form 10-K, 2016). Furthermore, on rare occasions, there may be economic turmoil affecting the banking systems and other aspects of the financial industry, making credit access a problem. The resultant low liquidity may cause product delays and consumer inability to access credit to buy the company’s products. These are just some of the risk factors in international trade. There are many more. Hence, the global trade environment provides unique challenges that have the potential to affect the profitability and financial position of Apple Inc significantly.
Regulatory and Tax Implications
Apple conducts its business in various international as well as domestic market segments, each which is subject to specific regulations and tax requirements. Regulatory and tax obligations are continually changing, inconsistent, and vary from region to region, making total compliance a challenge. As a company, the decisions that are made within the organization might conflict with some of these regulations and tax implications, which in turn can affect the cost structure of the business, as well as the way it carries out, is operations. A recent decision by the organization that might have regulatory implications is the choice to manufacture iPhones and iPads from China. It is the right decision since it enables the company to cut costs by accessing cheap labor and raw materials. However, as Pun, Yuan, Yuhua, Huilin, Chan, and Selden (2016) noted, there have been reports of worker exploitation through longer working hours and inadequate compensation. It has put the company at loggerheads with labor laws, and this poses serious regulator implications.
Concerning decisions with tax implications, Apple’s dodgy tax deal with Ireland has put the company in direct conflict with the European Commission. As Beesley and Barker (2016) pointed out, Apple’s affairs in Ireland means that the organization might be liable to pay up to 13 billion sterling pounds in recovered taxes and accruing interests.
Corporate Governance and Ethical Responsibilities
The robust ethical responsibility of the company through corporate social responsibility and the rigid organizational governance has led to the success of the Apple company. The competent Board of Directors understands the essentiality of governance and accountability, and they ensure that the Apple senior management team acts ethically to promote the best interest of the shareholders.
On the flip side, in terms of ethical responsibility, the organization has put in place measures to ensure its entire business operations are carried out in an ethical manner that impacts positively on all stakeholders and safeguards the reputation of the business. The organization has a secure code of ethics that regulates the conduct of all employees, including the CEO (Form 10-K, 2016). Also, all employees are adequately compensated and provided with numerous career development opportunities, as concerning the customers. The organization adheres to ethical responsibility principles by ensuring that the customers are provided with high-quality products at affordable prices (Thompson, 2017). Also, Apple has a responsibility to protect the rights of all persons and communities within their supply chain. The organization aims to continually improve environmental sustainability and conducive labor environments (Progress Report, 2017). Regular comprehensive audits are conducted to ensure supplier compliance with environmental and labor laws. The company’s excellent financial performance denotes ethical adherence to shareholder interests.
Alternative Financing Methods
A scan of Apple’s financial statements of the years 2015 and 2016 point to the utilization of both debt and equity alternative sources of financing. Besides, retained earnings, the organization utilizes alternative sources of funding in the form of long-term loans as well as through the sale of shares. Long-term debt is a form of debt financing where the organization obtains capital in the form of loans from financial institutions and uses the money to facilitate business activities and operations. On the flip side, the sale of shares is a form of equity financing that allows the organization to raise cash from its shareholders.
SWOT Analysis Introduction
For many years, Apple Inc’s success relies on the use of venture strengths to outweigh weaknesses and threats and exploiting opportunities in the technological industry. Therefore, the SWOT analysis helps at giving insights on the venture strategic actions. Consequently, it helps the company executive management to screen and assess the potential internal and external environmental factors for the company’s growth during the decision-making process. It helps at undertaking a thorough feasibility study on the current market to create a wide array of strategies to ensure its competitiveness and business expansion. The strong financial prowess has led to the acquisition and merging with reputable partners for its business development. For example, the Apple company merged with notable companies like PA Semi (for 278 million dollars) for microprocessing designs and AuthenTec to create fingerprint biometrics. Besides, it merged with NeXT for hardware and software development and also with the PrimeSense for the 3-D sense technology improvement (Jargosch, & Jurich, 2014).
Apple’s Strengths
The Apple internal strategic factors help overcome the potential weaknesses, threats, and taking market opportunities to advance in the market. There exist notable strengths, like sharp brand image, high-profit margins, and extensive innovative development processes by the company. Globally, Apple ranks as one of the most valuable and most reliable brands. Due to this factor, the company can effectively introduce new products in the market due to the influential power of the brand image. For the last seven years, the Interbrand statistics ranks it as the large growing company with a brand value estimated 234 billion US dollars (Khan et al., 2015). Therefore, it serves as an international technological icon in the provision of advanced personalized computers and smart technology appliances. The move escalates the number of loyal customers due to the maintenance of the corporate image and reputation. The company relies on the premium pricing strategy, thus recording high-profit margins. Despite that, the company relies on rapid innovation advancement (Shtal et al., 2018). It has introduced most of the world’s valuable products, like iPhones, mostly targeting upper-class people in urban centers, thus a rigorous rise in revenue collection.
Since most of its clients are youths aged between 20 and 35, the company has developed a specific business page to help offer solutions from their client feedback at meeting the corporation’s needs. The strength helps increase the customer’s urge to buy their commodities. The proficient investment in the research and development helps understand customer needs and requirements to enable the company to identify the best companies for merging. Apple has invested in the use of Liam recycling robots of the used parts of the iPhone (Khan et al., 2015). The availability of resources at a cheaper cost leads to the cost-saving, thus expanding through mergers. Lastly, most of the company’s services contribute nearly to sixteen percent of Apple’s annual revenue. It has a wide array of services, such as streaming services, iCloud, AppleCare, and content stores. Therefore, the technological advancements lead to the compatibility with other companies providing similar services, hence business merge (Omer, 2019).
Apple Inc.’s Weaknesses
Despite the strengths, there exist exceptional weaknesses deterring Apple venture growth. The most notable gaps include limited distribution network, the dependence of sales on high-market segments, and high selling prices. Apple’s company exclusivity policy results in a limited distribution network for product/service delivery to intended customers (Khan et al., 2015). For instance, the company extensively screens its product authorized sellers. The premium pricing strategy leads to the dependence of sales on high-end market segments, preventing low-income customers from purchasing their products (Sammut‐Bonnici et al., 2015). For the company to consider merging, the company leadership needs to restructure its pricing and distribution strategies. Apple relies on the iconic and flagship retail stores marketing, thus limited advertisements and promotions (Omer, 2019). The fear of spending on ads marketing makes other brands, like Samsung, and Huawei to thrive well. The company has also ventured into new services, like video content, mostly dominated by Netflix and Showmax, thus entering into an area of non-competency. Most of the Apple products have compatibility issues with modern software and technologies, subjecting their customers to purchase Apple apps and accessories to continues using their products (Shtal et al., 2018).
Apple Inc.’s Opportunities
The first opportunities experienced by the Apple company include higher sales volumes based on elevating demand, expansion of the distribution network, and the development of new product lines. Apple’s customer retention rate stands at 92 percent due to its ability to provide quality and cutting-edge technology products, thus consistent customer growth and the formation of new alliances (Khan et al., 2015). The company has qualified professionals (developers, researchers, and product specialists) with intense experience in branding customer products (Sammut‐Bonnici et al., 2015). The expansive distribution network engenders higher revenues. Also, the company has not ventured into green technology by embracing sustainable technology. Besides, the company has ventured into the utilization of the Smart wearable technology with escalated market demand. It has innovated Apple Watch and Airpods with an elevated demand in the market. The company has prowess in utilizing an Artificial Intelligence portfolio in helping at searching the photo apps and arranging apps and features required for new alliances (Shtal et al., 2018). The company has frequently relied on expanding music streaming services due to the youthful population’s emerging economies of scale. Besides, the company has invested in the delivery of self-driving software technology rather than entirely relying on fully functional autonomous cars.
Apple Inc.’s Threats
The most considerable threats faced by Apple Inc. include imitation, aggressive competition, and increased labor costs in different nations. The supply chain uncertainties resulted in Apple’s flat revenue (Sammut‐Bonnici et al., 2015). Also, illegal dealers sell Apple’s counterfeit products, making it vulnerable to destroying the company’s brand image to reliable customers. Like Samsung, Dell, and Huawei, other companies have embraced the introduction of cheap and quality products with modern innovative designs, so Apple should revise its pricing strategy to overtake their competitors. For instance, the global market share of Apple stands at 24 percent, while the Android technologies stand at 73 percent for customer preference (Khan et al., 2015). The escalated lawsuits from the customers due to CPU performance throttles and imposition of China tariffs by the US government reduce revenue growth.
Apple’s SWOT analysis indicates that it has vast primary strengths needed to curb the arising weaknesses, thus the provision of reliable information to the management in undertaking merging and partnership decision making. The company can use its influential brand image, expansive distribution network, and rapid innovation processes to successfully develop and launch new product lines. It faces challenges, like product design imitation and aggressive competition. The company needs to embrace modern technologies in reducing product imitation in raising its revenue. Also, it should establish partnerships to improve the market share of the organization’s distribution network. Therefore, the company has rigorous strengths and opportunities required to enter into the merge and compete in the technological industry effectively.
The financial health of the company
From the analysis, Apple Inc. enjoys excellent financial health that has influenced its business development positively. The broad commercial categories, that is, liquidity, cash flows, leverage, and liquidity indicates overall company financial health that has led to the investment and partnership with primary shareholders to ensure the business performs well. Besides, Apple management has effectively controlled its gross and net profit margins, thus notable profitability. Among the external competitors, the company has achieved extremely well above the industry average. There exists a positive net cash flows from the operating activities as derived from the cash flow statements, and the investing tasks indicate a resourceful re-investment of the capital. Besides, the company secures funds effectively and with ease as showcased by the financing cash flows, thus Apple meeting its entire obligations.
The organization’s liquidity is favorable since the current and quick ratio exceeds the one mark, and when compared to the industry average, the company has improved performance on cash. Also, the gearing ratio analysis of the debt/equity ratio suggests a lowly-leveraged company with declined financial uncertainties. An intensive scan on the business risk, international trade environment, and the SWOT analysis reveals that Apple’s financial situation is not in real danger but thriving to meet its business development. With the help of the financial advisors, the company has effectively reduced the challenges faced in international trade and other financial risks. The competent Board of Directors understands the essentiality of governance and accountability, and they ensure that the Apple senior management team acts ethically to promote the best interest of the shareholders.
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