Financial Analysis of Apple Inc Research Paper

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Apple Financials

Major Line of Business

Apple designs and markets consumer electronics. The company has a strategy of integration that sees it as a designer of both software and hardware, which is unique in the industry. Apple competes as a differentiated player, with products priced at the high end of their respective ranges. The major business lines for Apple are as follows. In the 2015 fiscal year, the iPhone contributed $155 billion in revenue out of a company total of $233 billion. The Mac line of computers contributed $25 billion, iPad $23 billion, services nearly $20 billion and other products a further $10 billion. The iPhone saw a strong increase in sales for the fiscal year, while the iPad experienced a substantial decline in sales. Sales are spread around the world. The Americas is the largest geographic segment with $93.8 billion. This is followed by Greater China, with $58.7 billion after 84% growth in FY15, and Europe at $50.3 billion. Japan and the rest of Asia Pacific contributed around $15 billion each to the top line (Apple 2015 Form 10-K).

Current Returns

Apple's returns illustrate how successful the company has been in recent years. The current return on assets is 16.02% and the current return on equity is 42.71% (Yahoo Finance, 2016). These compare with the company's five-year average figures of 19.36% and 42.71% respectively (MSN Moneycentral, 2016). Apple therefore is earning a lower return on assets now than it has over the past few years. The company's return on equity has not changed over its five-year average. These figures are in line with the industry averages.

Senior Management

The CEO of Apple is Tim Cook, who was the second-in-command under founder Steve Jobs and inherited the CEO post. Cook was previously the Chief Operating Officer for the company, having joined the company several years ago from Compaq. Luca Maestri is the Chief Financial Officer. He joined Apple in 2013 after working at Xerox in the same post. Jony Ive is the Chief Design Officer, and joined the company in 1996. The Chief Operating Officer is Jeff Williams, who joined the company in 1998. There are several senior VPs as well, many of whom joined the company in the late 1990s. The Senior VP of retail is Angela Ahrendts, who came to Apple recently from Burberry, as one of the relatively few outsiders in the company's senior management team.

Investments

Apple has a number of investments in its portfolio. The company's multi-year run of wild profitability left the company with a tremendous amount of cash on its balance sheet. For many years, shareholders pressured Apple to pay dividends or otherwise return that money, since the company was unable to find suitable investments. Holding that money in cash equivalents was a drag on the company's returns. In 2012, Apple reinstated its dividend, which it continues to pay to this day (Niu, 2015). The current dividend yield is 2.17% (MSN Moneycentral, 2016). Apple has also initiated a share buyback program, repurchasing nearly $100 billion in stock in the past three years, according to the latest 10K. Thus, a lot of Apple's investments have been directly back to the shareholders, with dividends and repurchases to increase the value of the company's outstanding shares.

Apple still holds a lot of cash on its balance sheet. At the end of the last fiscal year, Apple had $21.1 billion in cash. A further $20.4 billion was in short-term marketable securities.

The company also has $164 billion in long-term marketable securities, over half of the firm's balance sheet. It could be argued, then, that Apple's financial performance as a company is based to a fairly significant extent on what it does with its investment portfolio. The portfolio is diversified, and is fairly high risk, something that Apple can support because of the overall strength of its financial position and its long time horizon.

The largest category of asset is corporate securities, with $116 billion. U.S. Treasuries make up $34.9 billion. Treasuries are used as part of the cash or near-cash portfolio because of their liquidity. They do not pay much. The corporate securities are used to enhance the yield on the company's investment portfolio. There are several other asset classes in the company's total portfolio as well. Mortgage- and asset-backed securities are worth $16 billion. U.S. agency securities ($5.8), non-U.

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S. government securities ($6.3), CDs ($4.3) and commercial paper ($6) are all major asset classes for Apple, lending diversification to the portfolio. The company has unrealized losses on the corporate securities higher than the unrealized gains, indicating that recently Apple has not been making money on its largest and riskiest asset class. Most of the corporate securities are bonds, and the portfolio has a high level of diversification with respect to individual securities.

Cash Position and Credit Rating

As noted, Apple holds $21.1 billion in cash, and a further $20.4 billion in short-term marketable securities, much of which are U.S. Treasuries at near-cash maturities. These assets are sufficient for Apple to meet its cash flow requirements. The company can, if theoretically it had a cash flow problem, choose to reduce its share buybacks in order to preserve cash, without compromising operations or the dividends. Apple is still highly profitable, earning a net income of $53 billion, which also provides cash for the company.

With respect to Apple's credit rating, it rather famously did not receive an AAA rating when it first tapped the debt markets in 2013. Both Moody's and S&P gave the company their second-highest investment grades, Aa1 at Moody's and AA+ at S&P. The credit agencies looked past the company's exceptional balance sheet to the volatility of the industry, the fickle tastes of consumers and the risk that with a change in consumer tastes Apple could be left with a declining business and $50 billion in debt in a few short years (Mead, Stilwell & Gangar, 2013).

Regulatory or Statutory Issues

There are essentially no major issues for Apple to address. The company of course has faced numerous lawsuits in the past, as is normal for any large corporation, but pending actions are not expected to be an undue financial burden for the company. It faced criticism in the media for working conditions at contractor facilities in China, but moved to remedy the issue voluntarily rather than risk any regulatory sanction, which would have been unlikely anyway in China. The company's auditor, Ernst & Young, did not find any issues of note to report in the latest 10K.

Standing

Apple is considered to be a leader in its industry. The company has positioned itself as a cutting edge consumer electronics company. While there are some who feel that the company might be losing a little bit of its edge after the death of Steve Jobs, the latest revenues show that consumers do not feel this way. The company's revenues are still increasing, as are its profits. Apple is not the market share leader, however, in any of its major businesses. It does have a strong share of the U.S. smartphone market, and that has helped the company substantially. It is gaining share in the key Chinese market. Overall, Apple may not be quite as innovative as it once was, but the market for mobile devices is slowing with respect to the pace of new innovation in general, and Apple has remained well-positioned ever since it entered the market.

Otherwise, Apple is in excellent standing. It is one of the most admired companies, and one that many in the industry seek to emulate. Apple's success in recent years is almost entirely without parallel. The company is largely perceived as being ethical, and it had to move quickly on the Foxconn scandal to maintain this reputation. The company has enjoyed a fairly smooth transition to Tim Cook's leadership as well, quieting skeptics who were unsure of that transition.

There is a risk in this, however. If the market for mobile technology does not see any advances, phones and tablets will become cheaper to make at high quality levels. The degree of differentiation between Apple's leading products and those of me-too competitors will diminish. While Apple's branding and hardware design, and its integrated suite of products, should all insulate the company from significant risk of downturn, the reality is that Apple still may find it difficult to continue to charge the premiums that it is presently charging if its products are not sufficiently differentiated.

The other major risk is with technological change. Apple needs to remain at the fore of change in consumer electronics, because this is a difficult industry in which to catch up to competitors. Apple's sustained success.....

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