The Financials of Apple

The Financials of Apple

Financial analysis is needed to determine the economic health and stability of a company. It helps in understanding a company’s current financial position and its possible financial requirements in the future. The vital financial fundamentals used to analyze the performance of a company include liquidity, profitability and solvency. Financial analysis is essential to investors who want to invest in the respective firm. According to Chordia (2001), financial statements serve to highlight the upside and downside of companies and firms. Therefore, the financial ability and insufficiency of Apple Inc. can be determined by analyzing and interpreting economic metrics and evaluating the financials of Apple Inc.

Liquidity

Liquidity ratios determine a company’s ability to cover short-term obligations and cash flows. Liquidity ratios include the quick ratio, current ratio, and cash ratio. The current ratio is calculated as existing assets divided by the current liabilities. For instance, a good current ratio lies between 1.2 to 2, which means that the business has two times more current assets than liabilities to covers its debts. A current ratio below 1 indicates that a company doesn’t have enough liquid assets to cover its short-term liabilities. (Chorafas, 2001) Apple Inc.’s current ratio deteriorated from 1.28 in 2017 to 1.12 in 2018 but then improved to 1.54 in 2019. The quick ratio is a liquidity ratio calculated as (cash plus short-term marketable investments plus receivables) divided by current liabilities. Apple Inc.’s quick ratio deteriorated from 1.09 in 2017 to 0.99 in 2018 but then later went up to 1.38 2019. A high quick ratio means that assets take a short time to become cash when current liabilities are required to be paid off.

Profitability

Profitability ratios used in analyzing a company’s performance include gross profit margin (GPM), operating margin (OM), return on assets (ROA), return on equity (ROE), return on sales (ROS) and return on investment (ROI). (Chordia, 2001). The gross profit margin shows the percentage of revenue available to cater for operation costs and other expenditures. Apple Inc.’s total profit margin ratio had gradually gone down from 38.47% in 2017 to 37.82% in 2019. This is a crucial measure since it shows the efficiency of the management in utilizing supplies and labour in the production process. The operating profit margin is a profitability ratio calculated as operating income divided by the revenue. This is a crucial measurement of how much profit a company can make after excluding variable costs in production, for instance, wages or raw materials (Schwartz, 2004). Apple’s operating profit margin ratio went down from 26.76% in 2017 to 24.57% in 2019. A high operating margin is an indicator that the company is well managed and has a lower risk potential compared to a company with a lower operating margin.

Solvency

The solvency ratio is also one of the metrics that is used to determine whether a company can stay solvent. It measures a company’s ability to meet long-term obligations. Solvency ratios include debt-to-equity, total-debt-to-total-assets, and interest coverage ratios. Solvency measures this cash flow capacity concerning all liabilities, rather than only short-term debt. (Schwartz, 2004). The debt to equity ratio is a solvency ratio calculated as total debt divided by the total shareholders’ equity. Apple Inc.’s debt to equity ratio rose from 0.86 in 2017 to 1.19 in 2019. This ratio shows the stability of a company and its ability to raise more capital necessary for growth. The debt to assets ratio is calculated as the total debt divided by total assets. Apple Inc.’s debt to assets ratio increased from 0.31 in 2017 to 0.32 in 2019. This helps in analyzing the financial risk of a company. A ratio that is greater than 1 indicates that a large amount of assets is debt-funded, and the company may be experiencing default risk. Hence, the lower the debt to asset ratio, the safer the company.

Comparison between Apple and Microsoft

Apple and Microsoft are one of the most iconic companies in the 21st century’s technology industry, both having more similarities than differences. Markus (2020) states that their equities, for instance, stand at $112 billion for Apple and $90 billion for Microsoft. In terms of liquidity, Apple has a debt-to-equity ratio of 0.68, while Microsoft’s is 0.62. This is quite a narrow margin, although Apple slightly relies more on debt than on its shareholders’ equity to finance its operations. In the end, Microsoft’s solvency seems somewhat superior to that of Apple. The current balance sheet ratios of the two companies vary, with Microsoft having a quite an edge, that is, 1.1 for Apple, and 2.5 for Microsoft. Apple is under the low end of the historically approved 1.5 – 3 range. Apple’s working capital is $5 billion, Microsoft’s $68 billion. Apple’s cash gets the headlines, but Microsoft wins the liquidity war.

A profitability comparison between the two, in the financial year of 2018, reveals that hardware-focused Apple’s 265.6 billion US dollar revenue was close to double the amount of Microsoft, which generated 110.36 billion US dollars in that same year. (Markus, 2020) Another significant difference between Microsoft and Apple is Apple’s reliance on long-term marketable securities, which currently add up to $130 billion, a decent-sized multiple of Microsoft’s total. A look at both Apple’s and Microsoft’s accounts receivable shows another significant disparity, particularly when quoted as day sales outstanding. Apple’s are 17, Microsoft’s 52. So, all things being equal, Apple gets paid more quickly.

In conclusion, when companies are as vast and successful as Apple, their financial statements may vary annually. Apple and Microsoft are quite healthy companies from an economic stand-point. In the balance sheet, Microsoft has about $2 billion in short-term debt, and Apple $6.4 billion. Microsoft has about $21 billion in long-term debt, Apple just under $17 billion. That’s a long-term-debt to total assets ratio of 8% for Apple 12% for Microsoft. Apple also has many more liabilities than Microsoft (Schwartz, 2004). In the foreseeable future, both these companies will be able to visualize oncoming challenges and problems and adapt accordingly, given their enormous size and abundant resources.