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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
Apple Inc. – Financial Research Project
Name
Course
Tutor
Date
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
Table of Contents
Introduction
3
Background and Industry
3
Financial Performance Analysis
4
Financial Ratio Analysis
6
Return on Equity – DuPont Analysis
10
Financial Analysis
12
Stock Performance
13
Market Ratios
14
Historical Stock Prices
15
Required Return
16
Recommendation
17
References
18
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
Introduction
High Technology Corporation (HTC) is an established manufacturer of a line of
electronic components in an international market. HTC is currently looking to undergo a longterm commitment with another company (Microsoft Corporation). The Chief Executive Officer
has some concerns that the offer from the Microsoft Corporation due to the fallout of other
companies in the industry in general. As a result, it is required that the Assistant to the Chief
Financial Officer of HTC prepare a report looking into the financials of the Microsoft
Corporation to see if a long-term commitment is the best option for the High Technology
Corporation (HTC).
Background Information
Apple (AAPL: NASDAQ GS) was founded in April 1976 by twenty six year old Steve
Wozniak, and twenty one year old Steve Jobs. Apple initially started off as a laptop company;
but, it’s grown into an awfully labyrinthine company that focuses on more than simply
computers. Apple Inc. is a multinational corporation in the US that styles, manufactures, and
markets personal computers, software, networking solutions, and peripherals, together with a line
of moveable digital music players. Additionally, Apple joined the phone business in 2007 with
the iPhone, which has additionally been a tremendous success. The company’s merchandise is
oversubscribed on-line, through third-party wholesalers, and through its own chain of stores.
Apple owns around one hundred twenty five retail stores within the US, it also has stores in;
North America, Japan, and also the UK. Apple could be a trade goods company, and so
evaluating its worth needs understanding its merchandise and shoppers. This could be terribly
troublesome as a result of Apple competes with many various corporations throughout the
various industries it takes half in.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
Technology is constantly changing, which means that competitors are constantly entering
and exiting the market. Due to the rapid rate at which technology changes, the technology
industry could be considered one that is volatile. As a result, the finances of Apple Inc. will need
to be looked at in detail and compared to a competitor within the same industry.
Financial Performance Analysis
In order to look at the financial performance of Apple Inc., it will be compared to the
financials of the Microsoft cooperation over the course of the last three years. The main
categories that will be examined are revenue, net income, current assets, current liabilities,
working capital and inventory. Below are the financials side by side for the years of 2014, 2015
and 2016.
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2014
Microsoft Corporation1
Apple Inc.2
Revenue
86.7 B
183.2 B
Net Income
22.1 B
39.5 B
Current Assets
114.2 B
68.5 B
Current Liabilities3
45.6 B
63.4 B
Working Capital
68.6 B
5.1 B
Inventories
2.7 B
2.1 B
All information gathered for the Microsoft Corporation for the year 2014 was taken from CNN Money.
All information gathered for Apple, Inc. for the year 2014 was taken from CNN Money.
3
The current liabilities for each company for 2014 were taken from Yahoo! Finance.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
In 2014, it is clear that Apple, Inc. had more in revenue than the Microsoft Corporation.
However, the number of current assets of the Microsoft Corporation is higher than Apple and the
number of liabilities is lower. This leads Microsoft’s working capital to be significantly higher
than Apple. The amount of inventory on hand at Microsoft is also higher. Therefore, Apple Inc.
had higher revenue; hence it’s clear to see that Apple Inc. is a stable and growing company.
2015
Microsoft Corporation4
Apple Inc.5
Revenue
93.0 B
231.3 B
Net Income
12.2 B
53.4 B
Current Assets
124.7 B
89.4 B
Current Liabilities6
49.6 B
80.6 B
Working Capital
75.1 B
8.8 B
Inventories
2.9 B
2.3 B
In 2015, the two companies followed the same trends. Apple blew Microsoft out of the
water in revenue earned. However, Apple Inc. held a lower amount of assets and a higher
amount of liabilities than Microsoft. The working capital for Apple Inc. was still strong it had
increased by (3.7 billion) than the year before. From 2014 to 2015, Apple managed to increase
their inventory from 2.1 billion to 2.3 billion. The revenue for both Microsoft and Apple
increased significantly from 2014 to 2015 by 6.3 billion and 48.1 billion, respectively.
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All information gathered for the Microsoft Corporation for the year 2015 was taken from CNN Money.
All information gathered for Apple, Inc. for the year 2015 was taken from CNN Money.
6
The current liabilities for each company in 2015 were taken from Yahoo! Finance.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
2016
Microsoft Corporation7
Apple Inc.8
Revenue
84.7 B
214.2 B
Net Income
16.8 B
45.7 B
Current Assets
139.7 B
106.9 B
Current Liabilities9
59.3 B
79 B
Working Capital
80.4 B
27.9 B
Inventories
2.3 B
2.1 B
In 2016, the revenue for both Microsoft and Apple decreased by 8.3 billion and 17.1
billion, respectively. While Microsoft increased their net income by 4.6 billion Apple’s
witnessed a decrease of 7.7 billion. Throughout 2016, Microsoft managed to keep their assets
higher and liabilities lower than Apple, which resulted in a higher working capital for Microsoft.
The inventories for both companies decreased in 2016, with Microsoft’s decreasing from 2.9
billion to 2.3 billion.
In order to effectively compare these two companies, it is important that we look at key
financial ratios over the past three years. As a result, the compiled totals will be needed and are
presented below, numbers per billion. Please note that the inventories total is not presented, as
this number represents the amount of inventory that was remaining as ‘un-sold’ at the end of
each year.
7
All information gathered for the Microsoft Corporation for the year 2016 was taken from CNN Money.
All information gathered for Apple, Inc. for the year 2016 was taken from CNN Money.
9
The current liabilities for each company in 2016 were taken from Yahoo! Finance
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
Microsoft
Revenue Net Income Current Assets
2014
2015
2016
Total:
Apple
Total:
Working Capital
86.7
93
84.7
22.1
12.2
16.8
114.2
124.7
139.7
45.6
49.6
59.3
68.6
75.1
80.4
264.4
51.1
378.6
154.5
224.1
Current Liabilities
Working Capital
Revenue Net Income Current Assets
2014
2015
2016
Current Liabilities
183.2
231.3
214.2
39.5
53.4
45.7
68.5
89.4
106.9
63.4
80.6
79
5.1
8.8
27.9
628.7
138.6
264.8
223
41.8
Financial Ratio Analysis
One can compare numbers between two competitors as often as they would like;
however, it is equally important to compare ratios as it is to compare numbers. Apple and
Microsoft are two completely different companies when it comes to its financials. Apple creates
more revenue, but also has more liabilities. The ratios that will be calculated researched and
presented are basic earning power10, day’s sales in inventory11, day’s payables outstanding12,
current ratio13, quick ratio14 and net working capital-to-sales ratio15. While this is a large number
of ratios, by comparing these ratios with the totals 2015 and 2016 of both companies, one will be
able to determine how well a company is doing financially.
10
The basic earning power ratio is the ratio of earnings before tax and interest to total assets.
The days’ sales in inventory ratio are the ratio of the amount of inventory on hand to the average day’s cost of
goods sold.
12
The day’s payables outstanding ratio is the ratio of accounts payable to the average day’s purchases.
13
The current ratio is the ratio of current assets to current liabilities.
14
The quick ratio is also known as the acid-test ratio. The quick ratio is the ratio of current assets to current
liabilities; however, inventory is excluded because it is the least liquid of current asset accounts (Drake, Fabozzi,
2009).
15
The net working capital-to-sales ratio is exactly what the name entails, the ratio of net working capital to sales.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
2015
2016
Current Assets
Current Liabilities
Microsoft
124.7
49.6
Apple
89.4
80.6
Current Assets
Current Liabilities
Microsoft
139.7
59.3
Apple
106.9
79.0
Current Ratio
2.51
1.11
Current Ratio
2.36
1.35
Current Assets
Inventory
Current Liabilities
Microsoft
124.7
2.9
49.6
Apple
89.4
2.3
80.6
Current Assets
Inventory
Current Liabilities
Microsoft
139.7
2.25
59.3
Apple
106.9
2.1
79
Quick Ratio
2.46
1.08
Quick Ratio
2.32
1.33
EBIT
Total Assets
Microsoft
18.5
174.4
Apple
72.5
290.3
EBIT
Total Assets
Microsoft
19.75
193.69
Apple
61.37
321.68
Basic Earning Power
0.106
0.250
Basic Earning Power
0.102
0.191
According to Pamela Drake and Frank Fabozzi, the current ratio is important to
determining a firm’s liquidity. More specifically, the current ratio “describes a firm’s ability to
meet or cover its current liabilities using its current assets” (Drake, Fabozzi, 2009). From 2015 to
2016, the current ratio for Apple Inc. increased by 0.24 while Microsoft’s decreased by 0.20.
Microsoft’s decreased slightly due to the increased number of assets and liabilities that were
incurred during 2016, while Apple increased their assets while slightly decreasing their
liabilities.
The quick ratio is similar to the current ratio except inventory, which is the least liquid of
current assets, is excluded. According to Investopedia, “the quick ratio is more conservative than
the current ratio…the ratio derives its name presumably from the fact that assets such as cash and
marketable securities are quick sources of cash” (Investopedia, n.d.). However, trying to convert
inventory to cash is a harder task than using marketable securities to pay bills. Therefore, it is
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
helpful to see what both the quick and current ratios are for each company. Even though there is
a slight difference between a current ratio and a quick ratio, the results are the same for 2015 and
2016. Apple’s quick ratio increased by 0.25 while Microsoft’s decreased slightly by 0.14.
Basic earning power represents a business’ ability to generate long-term profit from
operations. Apple’s basic earning power decreased by 0.04 while Microsoft’s basic earning
power from 2015 to 2016 only decreased by 0.004.
2015
# Inventory On-Hand
Cost of Goods Sold
Average Days COGS
2016
Microsoft Apple
2.9
2.3
27.1
131.0
0.0742
0.3589
# Inventory On-Hand
Cost of Goods Sold
Average Days COGS
Microsoft Apple
2.25
2.13
26.2
121.0
0.0718 0.33151
Days Sales in Inventory
39.06
6.41
Days Sales in Inventory
31.35
6.43
Accounts Payable
COGS
Depreciation
Average Day’s Purchases
Microsoft
12.38
27.1
17.6
0.026
Apple
60.67
131.0
11.3
0.328
Accounts Payable
COGS
Depreciation
Average Day’s Purchases
Microsoft
13.06
26.2
6.6
0.054
Apple
59.3
121.0
10.5
0.303
Days Payable Outstanding
475.65
185
Days Payable Outstanding
243.21
195.878
Net working Capital
Sales
Microsoft
75.1
93.0
Apple
8.8
231.3
Net working Capital
Sales
Microsoft
80.4
84.7
Apple
27.9
214.2
Net working Capital to Sales
0.807527 0.03805
Net working Capital to Sales
0.949233 0.13025
Day’s sales in inventory are used to represent the number of days it takes to sell the
company’s inventory on hand. This is one of the numbers where there is significant difference
between Apple and Microsoft. In 2015, it took Microsoft an average of 40 days to sell the
amount of inventory they have on hand. In 2016, this number decreased to 31.35 days. However,
Apple has a significantly lower amount; the average is close to 6.5 days for both 2015 and 2017.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
This is an interesting number because the inventory amounts for both companies are in the two
billions. Therefore, Apple has a much lower inventory turnover period than Microsoft.
Days payable outstanding represents the number of days that it takes for a company to
“pay out cash for a purchase” (Drake, Fabozzi, 2009). In other words, this number represents
how long it takes a company to pay their suppliers for the product or pieces to create the product.
In 2015, Microsoft was paying its supplies at an outstanding 475.65 days on average while Apple
was paying theirs in 185 days. The number of days for Microsoft decreased down to 243 days in
2016. This is a number that more research needs to be conducted in order to see which number is
a trend. If Microsoft is taking 475 days to pay their suppliers, this could be a red flag to HTC.
Hence they should consider Apple for the job.
The last ratio to look at is net working capital to sales. The net working capital to sales
ratio is one more way to look at a company’s ability to pay short-term obligations. According to
Pamela Drake and Frank Fabozzi, “this ratio tells us the ‘cushion’ available to meet short-term
obligations” (Drake, Fabozzi, 2009). Microsoft’s net working capital to sales in 2015 was .807 or
80.7 percent, which is very high compared to Apple’s 0.038 or 3.8 percent. In 2016, Apples ratio
increase to 13percent as well as Microsoft’s ratio which increased to 0.949 or 94.9 percent.
Return on Equity – DuPont Analysis
While financial ratios are important to calculate, it is also important to determine the net
profit margin16, total assets17, turnover equity multiplier18 and return on equity19.
16
The net profit margin is calculated by the ratio of net income to revenue.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
2015
Net Income
Revenue
Net Profit Margin
Microsoft
12.19
93.58
2016
Apple
53.39
233.7
0.130263 0.228455
Microsoft
174.47
Apple
290.34
Microsoft
Total Assets
174.47
Shareholders Equity
80.08
Apple
290.34
119.35
Total Assets
Equity Multiplier
2.178696 2.432677
Net Income
Revenue
Net Profit Margin
Microsoft
16.79
52.54
Apple
45.68
215.64
0.319566 0.211835
Microsoft
193.69
Apple
321.68
Microsoft
Total Assets
193.69
Shareholders Equity
71.99
Apple
321.68
128.25
Total Assets
Equity Multiplier
Net Income
Revenue
Total Assets
Shareholders Equity
Microsoft
12.19
93.58
174.47
80.08
Apple
53.39
233.7
290.34
119.35
Net Income
Revenue
Total Assets
Shareholders Equity
Return on Equity
0.152223
0.44734
Return on Equity
2.690513 2.508226
Microsoft
16.79
52.54
193.69
71.99
Apple
45.68
215.64
321.68
128.25
0.233227 0.356179
Net profit margin is a number that is used to show a business’ net income that comes
from each dollar of revenue. In 2015, Apple’s net profit margin was 22.8 percent, while
Microsoft’s had a lower net profit margin of 13 percent. In 2016 Microsoft’s net profit margin
increased by 18.9 percent while Apple’s margin fell by 1.7 percent.
The total number of assets that a company possesses helps to show how ‘liquid’ a
company may be. If the company gets into financial trouble, it is possible for the company to sell
off their assets to create additional money to pay off their liabilities. According to the balance
sheets, both Microsoft and Apple’s assets increased from 2015 to 2016. Apple increased their
assets by 30 billion while Microsoft increased their assets by 20 billion.
17
Total assets are given on the balance sheet of both companies.
The turnover equity multiplier is the ratio of total assets to shareholders’ equity.
19
Return on equity is the ratio of net income to the book value of shareholders’ equity.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
The equity multiplier shows, “how a company finances its assets” (Drake, Fabozzi,
2009). From 2015 to 2016, the equity multiplier of both Apple and Microsoft increased by 0.078
and 0.52, respectively. According to Steven Nickolas, “a lower equity multiplier indicates a
company has lower financial leverage…a company uses less debt to finance its assets” (Nickolas,
2015). Therefore, in 2015, Apple used more debt to finance its assets than Microsoft. However,
in 2016, Microsoft’s equity multiplier increased making Apple the company to use less debt to
finance its assets.
Return on equity can be calculated multiple different ways depending on how a company
wishes to break down their financials. In the calculation listed above, it was completed by the
following: ROE = (Net Income/Revenue) x (Revenue/Total Assets) x (Total
Assets/Shareholders’ Equity). The return on equity gives management an idea of the net income
that is returned to shareholders’ equity. From 2015 to 2016, Apples’ return on equity decreased,
while Microsoft’s return on equity increased. In order for management to continue to increase
the return on equity, Apple should focus on increasing profit margins and asset turnover and
increasing their financial leverage.
Financial Analysis
While looking at the financials of a company, it is also important to look at capital
spending20 and beta values21. Looking at the financials of a company’s previous year gives a
good idea about performance; however, these two metrics will give an idea of how a company is
doing today. The capital spending of each company in 2015 and 2016 is in the table below.
20
Capital spending refers to the amount that a company spends on research, development and engineering. This
information for each company was gathered from Marketwatch.
21
The beta of a company is used to determine the risk a consumer is taking to invest within the company. The
lower the beta, the lower the risk and reward for the investor. The beta values for each company were taken from
Yahoo Finance.
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
Research & Development
2015
2016
Microsoft Corporation
12.05 B
11.99 B
Apple, Inc.
8.07 B
10.05 B
Capital spending consists of the amount of money a company spends on research and
development. This is an important figure to examine as it helps to show the direction that a
company is moving towards; if research and development is low, the company is not spending as
much money investing into the future. However, if research and development is high, it means
that the company is healthy (because they have enough money to spend in this category) and
they are looking to see what products (or services) they can offer in the future. Interestingly
enough, Apple has spent a considerable amount of money on research and development in 2016,
even though they have a higher amount of revenue. This is not the case for Microsoft which
spent more money on research and development, this could be contributed to the fact that
Microsoft is looking into launching the next ‘big product’ or that they may be trying to compete
with Apple’s technology.
Beta
2016
Microsoft Corporation
1.39
Apple, Inc.
1.36
The beta of a company helps an investor see the risk involved within a specific company.
The beta for both Microsoft and Apple are listed in the chart above. The betas for both
companies are fairly close; which as a company looking to commit to a long-term deal with
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Running Head; APPLE INC. – FINANCIAL RESEARCH PROJECT
Apple is a good thing. Looking at these betas, a consumer or investor can assume that the risk for
both of these companies is pretty sim …
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