Financial Statement Group Analysis
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Financial Statement Analysis “Apple Inc.” Instructor: Prof. Qin Xu Group Members: Intan Purnama Sari MEW2011559011 Ricky Christian Chairunas MEW2011559035
Transcript of Financial Statement Group Analysis
Financial Statement Analysis
“Apple Inc.”
Instructor: Prof. Qin Xu
Group Members:Intan Purnama Sari MEW2011559011Ricky Christian Chairunas MEW2011559035Yenny Chitra Dewi Widjojo MEW2011559041Neville Kok MEW2011559057Wisnu Tejakusuma MEW2012553005
University of International Business and EconomicsInternational Master Business Administration
China – Beijing
1 Executive Summary
The objective of this paper is to provide information about financial position,
performance and changes in financial position of an enterprise and then to make an
analysis based on that information. In this paper, the team chose Apple Inc. as the
company for case study.
Apple Inc. is an American multinational corporation that designs and sells
consumer electronics, computer software, and personal computers. It is one of the most
established and healthy IT brands in the world, and has a very loyal set of enthusiastic
customers that advocate the brand. This company also has a very strong research and
development department that always keep researching and doing innovation to invent
new products.
Besides those strengths, Apple also has weaknesses in terms of the products.
Some of the products have some defects. For example, Apple iPod Nano have faulty
screen, which later explained that a batch of its products has screens that break under
impact, but the company replaced all those faulty items. Apple Inc. also has the ability to
improve their products in terms of increasing the capabilities such as enabling flash
player to be played in the iPad and so on. However, being successful can attract
competition, and Apple works very hard on research and development and marketing in
order to retain its competitive position.
Apple Inc. has a lot of competitor in terms of products. Even though there are a
lot of companies that has a business in this technology segment, the growth of this
company is very high. As a result, Apple has no competitor and is considered as one of
the most valuable companies in the world. Moreover, on January 18, 2011 Apple made
announcement about its financial results. This company reported that it has revenue
$26.74 billion and its quarterly profit of $6 billion, or $6.43 per diluted share.
The balance sheet and income statement of Apple Inc. showed good results. It has
high Retained Earnings and the Long-term Marketable Securities also increased. In
addition, the cash flow statement of the company depicted that Apple Inc. was becoming
better and better. However, it can be seen that the outflow of the company significantly
increased in 2011 due to the fact that it has new products, advertising, and stores.
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Almost all of the short-term liquidity ratio, operating efficiency, capital structure
and long-term solvency, profitability, and market measure of Apple displayed good
results. Nevertheless, the total asset turnover and price to earnings of Apple are not that
great compared to HP, one of Apple’s competitors. DuPont analysis is one of the most
useful methods in analyzing the performance of the company. In this case, all the ratios in
the DuPont analysis also presented great results.
In summary, the team suggests that people should invest their money in Apple
Inc. due to the fact that it has promising future in the technology market. Nonetheless, as
a creditor, the team does not suggest for the creditors to loan their money to Apple Inc.
This is due to the fact that Apple’s debt history was very good and there is small
possibility that the creditors can get any profit from this.
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Table of Contents
1 Executive Summary......................................................................................................... 1
2 Introduction....................................................................................................................... 52.1 Objective.................................................................................................................................. 52.2 Summary of the Findings.................................................................................................... 5
3 Firm, Industry, and Environment.................................................................................63.1 Description of firm and its management..........................................................................63.2 SWOT Analysis...................................................................................................................... 7
3.2.1 Strength................................................................................................................................................. 73.2.2 Weaknesses..........................................................................................................................................83.2.3 Opportunities.......................................................................................................................................83.2.4 Threats................................................................................................................................................... 8
3.3 Discussion of Competitive Environment..........................................................................93.4 Economic Climate and Outlook.......................................................................................103.5 Other factors, e.g. labor relations, litigation.................................................................12
4 Financial Statement Analysis....................................................................................... 144.1 Common Size Financial Statement.................................................................................14
4.1.1 Balance Sheet Analysis.................................................................................................................144.1.2 Income Statement Analysis.........................................................................................................164.1.3 Cash Flow Statement.....................................................................................................................18
4.2 Short-Term Liquidity........................................................................................................ 214.2.1 Current ratio......................................................................................................................................214.2.2 Quick or Acid Test Ratio..............................................................................................................224.2.3 Cash Flow Liquidity.......................................................................................................................234.2.4 Average Collection Period...........................................................................................................234.2.5 Days Inventory Held......................................................................................................................244.2.6 Days Payable Outstanding...........................................................................................................244.2.7 Cash Conversion or Net Trade Cycle.......................................................................................25
4.3 Operating Efficiency.......................................................................................................... 264.3.1 Account Receivable Turnover....................................................................................................264.3.2 Inventory Turnover.........................................................................................................................264.3.3 Payables Turnover..........................................................................................................................274.3.4 Fixed Asset Turnover.....................................................................................................................274.3.5 Total Asset Turnover.....................................................................................................................28
4.4 Capital Structure and Long-Term Solvency.................................................................284.4.1 Debt Ratio..........................................................................................................................................284.4.2 Long-term debt to total capitalization......................................................................................294.4.3 Debt to equity...................................................................................................................................294.4.4 Financial Leverage Index.............................................................................................................304.4.5 Times Interest Earned....................................................................................................................304.4.6 Cash Interest Coverage..................................................................................................................314.4.7 Fixed Charge Coverage.................................................................................................................314.4.8 Cash Flow Adequacy.....................................................................................................................32
4.5 Profitability.......................................................................................................................... 324.5.1 Gross Profit Margin........................................................................................................................32
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4.5.2 Operating Profit Margin................................................................................................................334.5.3 Effective Tax Rate..........................................................................................................................334.5.4 Net Profit Margin............................................................................................................................344.5.5 Cash Flow Margin...........................................................................................................................344.5.6 Return on Total Asset (ROA).....................................................................................................354.5.7 Return on Equity (ROE)...............................................................................................................354.5.8 Cash Return on Assets...................................................................................................................36
4.6 Market Measure.................................................................................................................. 374.6.1 Earnings per Common Share.......................................................................................................374.6.2 Price to Earnings..............................................................................................................................374.6.3 Dividend Payout..............................................................................................................................384.6.4 Dividend Yield.................................................................................................................................38
4.7 DuPont Analysis.................................................................................................................. 394.8 Projected Financial Statement.....................................................................................44
5 Outlook, Summary, and Conclusions........................................................................445.1 Investment Potential...........................................................................................................445.2 Credit Assessment...............................................................................................................455.3 Summary and Conclusions...............................................................................................45
6 Appendix.......................................................................................................................... 466.1 Appendix A: Balance Statement......................................................................................466.2 Appendix B: Income Statement.......................................................................................496.3 Appendix C: Statement of Cash Flow............................................................................51
7 Appendix D: Projected Financial Statement............................................................53
8 References........................................................................................................................ 55
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2 Introduction
2.1 Objective
The objective of this paper is to provide information about financial position,
performance and changes in financial position of an enterprise, in this case Apple Inc.
and then to make an analysis based on that information. Different users can use financial
statements for different purposes:
Prospective investors, use of financial statements to determine the viability of
investment in a line. Financial analyses can provide the investors with the ground
for making finance decisions.
Financial institutions (banks and other lending companies) use them to decide
whether to grant a company with fresh working capital or extend debt securities
(such as a long-term bank loan or debentures) to finance the expansion of
company and other significant expenditures.
Government entities (tax authorities) need financial statements to ascertain the
propriety and accuracy of taxes and other duties declared and paid by a company.
Vendors who extend credit to a business require financial statements to assess the
creditworthiness of the business.
Media and the general public are also interested in financial statements.
In this research, the team will take the role as an investor and decide whether to
invest in this company or not.
2.2 Summary of the Findings
In general, Apple has no problem with its liquidity. Apple’s performance,
especially with regard to current ratio, quick or acid-test ratio, and cash flow liquidity, is
actually much better compared to Hawlett-Packard. In addition, the overall ROE index of
the company is also higher than its competitor, HP. It proves that this company has
promising future.
While Apple’s performance was becoming better in 2011, HP’s performance was
decreasing compared to 2010. Based on the findings, Apple Ins. is one of the market
leaders in technology industry and its products have strong brand image. Apple Inc. is
definitely a good company to invest on according to this research.
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3 Firm, Industry, and Environment
3.1 Description of firm and its management
Apple Inc. (NASDAQ: AAPL; formerly Apple Computer, Inc.) is an American
multinational corporation that designs and sells consumer electronics, computer software,
and personal computers. Some of the products that are best known from this company are
Macintosh line of computers, iPod, iPhone and iPad. It also has some accessories that are
already in the market. Its software includes the Mac OS X operating system; the iTunes
media browser; the iLife suite of multimedia and creativity software; the iWork suite of
productivity software; Aperture, a professional photography package; Final Cut Studio, a
suite of professional audio and film-industry software products; Logic Studio, a suite of
music production tools; the Safari web browser; and iOS, a mobile operating system.
As of July 2011, Apple has 357 retail stores in ten countries, and an online store.
It is the largest publicly traded company in the world by market capitalization, also the
largest technology company in the world by revenue and profit, more than Google and
Microsoft combined. As of September 24, 2011, the company had 60,400 permanent full-
time employees and 2,900 temporary full-time employees worldwide. Its worldwide
annual revenue in 2010 totaled $65 billion, growing to $108 billion in 2011.
This company was established on April 1, 1976 in Cupertino, California by Steve
Jobs, Steve Wozniak and Ronald Wayne, and then incorporated January 3, 1977. The
company was named Apple Computer, Inc. for its first 30 years. The word "Computer"
was removed from its name on January 9, 2007, as its traditional focus on personal
computers shifted towards consumer electronics.
Below are the tables regarding the executive profiles and board directors of the
company.
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Table 1 Executive Profiles
Name Position Held
Tim Cook CEO
Eddy Cue Senior Vice President Internet Software and Services
Scott Forstall Senior Vice President iOS Software
Jonathan Ive Senior Vice President Industrial Design
Bon Mansfield Senior Vice President Hardware Engineering
Peter Oppenheimer Senior Vice President and Chief Financial Officer
Philip W. Schiller Senior Vice President Worldwide Marketing
Bruce Sewell Senior Vice President and General Counsel
Jeff Williams Senior Vice President Operations
Table 2 Board of Directors
Name Position Held
Arthur D. Levinson, Ph. D. Chairman of the Board, Apple Chairman and former CEO Genentech
Bill Campbell Chairman and former CEO Intuit Corp.
Tim Cook CEO Apple
Millard Drexler Chairman and CEO J. Crew
Albert Gore Jr. Former Vice President of the United States
Robert A. Iger President and CEO the Walt Disney Company
Andrea Jung Chairman and CEO Avon Products
Ronald D. Sugar, Ph. D. Former Chairman and CEO Northrop Grunman
Source: http://www.apple.com/pr/bios/
3.2 SWOT Analysis
3.2.1 Strength
Apple is very successful. When this company launched iPod in 2005, the sales of
this player had increased its second quarter profits to $320. The favorable brand
perception had also increased sales of Macintosh computers. IPod gives the company
access to a whole new series of segments that buy into other parts of Apple brand. The
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sales of its notebooks product are also very strong giving a huge contribution to income
of apple.
This company already built its brand. It is one of the most established and healthy
IT brands in the world, and has a very loyal set of enthusiastic customers that advocate
the brand. Such a powerful loyalty means that Apple not only recruits new customers but
also retains old customer. This company also has a very strong research and development
department that always keep researching and doing innovation to invent new products.
3.2.2 Weaknesses
Some of the products have some defects. For example, Apple iPod Nano have
faulty screen, which later explained that a batch of its products has screens that break
under impact, but the company replaced all those faulty items.
There is a pressure on Apple to increase the price of its music download file from
the music industry in iTunes. The company is resolute, but if it gives in to the music
producers, it may be perceived as a commercial weakness.
Early in 2005 Apple announced that it was to end its long-standing relationship
with IBM as a chip supplier, and that it was about to switch to Intel. Some industry
specialists commented that the swap could confuse Apple's consumers
3.2.3 Opportunities
The company can enable flash media player in tablet and cell phone, because
some of people are not willing to buy apple product because it cannot play video that is
using adobe flash. By enabling flash media player in tablet and cell phone, there will be
more customer that are willing to buy Apple’s products.
Apple also can add some feature to their product such as USB dock or memory
card to iPad.
3.2.4 Threats
The biggest threat to IT companies, such as Apple, is the high level of
competition in the technology markets. Being successful can attract competition, and
Apple works very hard on research and development and marketing in order to retain its
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competitive position. The popularity of iPod and Apple Mac are subject to demand, and
will be affected if economies begin to falter and demand falls for their products.
There is also a high product substitution effect in the innovative and fast moving
IT consumables market. As a result, iPod and MP3 rule today, but only yesterday it was
CD, DAT, and Vinyl. Tomorrow's technology might be completely different. Wireless
technologies could replace the need for a physical music player.
One of the threats for this company is war of lawsuit from other companies.
3.3 Discussion of Competitive Environment
Apple Inc. has a lot of competitor in terms of products. There are a lot of
companies that has a business in this technology segment, but the growth of this company
is very high thus, there is almost no competitor to this company.
Apple has a lot of product line, for example computers, iPod, iPhone and iPad.
For iPad and iPhone, Samsung is the biggest competitor for Apple, which has Galaxy Tab
and Android. But iPhone is still leading the market. The biggest competitor for
Macintosh is another computer company for example HP, Dell, Lenovo, Acer, Sony and
others, but the main competitor is Microsoft as the operating system.
In 2011, Apple closed out with a commanding 52.1% share of mobile devices
tracked browsing the Web, while Google’s Android had just 16.2%,
For iPhone versus iPad, Apple's smartphone took 25.2% to lead all mobile
devices. The iPad, though, was the second most popular device, with a 24.5%
representation.
According to the statistics, the Mac finished with 6.4% in December of 2011, well
behind the 92.2% share Microsoft held with Windows.
In terms of PC operating systems shows that Windows XP, although have been in
technology for 10 years old, still leads the way with 46.5%. Windows 7 is in
second with 37%, while Windows Vista holds 8.44%. (Apple Insider, 2012)
Apple's Mac OS X 10.6 Snow Leopard remains its most popular at 3%. Lion
closed out 2011 with 2% share in December.
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Figure 1 Sales of some mobile devices
Apple strategy to against its competitor
Apple has 3 factors that make Apple stands out from its competitors, its products
are hot, it got $60 billion in cash, and it is a big company. These three factors allow it to
get more of its fair share of components, and ultimately market share. Apple uses its size
and vast array of resources to get deals from component makers. Apple's supply chain
also leads this company to be more successful.
There are lots of big companies out there. What separates Apple from the rest is
its ability to sell a lot of products while selling remarkably few different kinds of
products.
3.4 Economic Climate and Outlook
Apple Reports First Quarter Results
All-time record Mac, iPhone, iPad Sales Drive Highest Revenue and Earnings
EverRevenue Grows 71 Percent; Earnings Grow 78 Percent
Apple is one of the most valuable companies in the world. On January 18, 2011
Apple made announcement about its financial results. This company reported that it has
revenue $26.74 billion and its quarterly profit of $6 billion, or $6.43 per diluted share.
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International sales accounted for 62% of this quarter's revenue. Apple sold 4.13
million Macs during the quarter, a 23% unit increase over the year-ago quarter. The
Company sold 16.24 million iPhones in the quarter, representing 86% unit growth over
the year-ago quarter. Apple sold 19.45 million iPods during the quarter, representing a
7% unit decline from the year-ago quarter. The Company also sold 7.33 million iPads
during the quarter. This company also generated $9.8 billion in cash flow operations
during this quarter. Apple also expected revenue of $22 billion and diluted earnings per
share of $4.90.
Apple designs Macs, the best personal computers in the world, along with OS X,
iLife, iWork, and professional software. Apple leads the digital music revolution with its
iPods and iTunes online store. Apple is reinventing the mobile phone with its
revolutionary iPhone and App Store, and has recently introduced its magical iPad which
is defining the future of mobile media and computing devices (Apple, 2011)
Market Performance
According to Gartner research firm, Apple leads the market share in PC market
for the third quarter of 2011. This result gives a picture of Apple's market performance
during this quarter. Because of this company's product such as MacBook Air, Apple
experienced aggressive 21.5% year-over-year growth to take the third place in US market
that grew by only 1.1% overall. (Macrumors, 2012)
Apple also experienced the strongest growth among the top 5 vendors in the US
PC Market. Apple's market share in the U.S. grew to 12.9% during the third quarter, up
from 10.8% in the year-ago quarter and 10.7% last quarter.
Below is the graph depicting Apple’s US Market share.
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Figure 2 Apple's U.S. Market Share Trend: 1Q06-3Q11 (Gartner)
Table 3 Gartner's Preliminary U.S. PC Vendor Unit Shipment Estimates for 3Q11
(Thousands of Units)
3.5 Other factors, e.g. labor relations, litigation
Apple is famous not only because of its products but criticism for the alleged use
of sweatshop labor, environmental destruction, and unethical business practices.
Additionally, it has been criticized for its litigious legal policy of suing before first
gathering all the facts necessary to pursue a legitimate lawsuit
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Litigation
Apple faced a lot of antitrust action from another company. In 2004, Apple faced
antitrust litigation due to other vendors’ music file incompatible and inoperable on the
iPod. For example, Apple and AT&T Mobility antitrust class action, where the customers
are locked with contract. Another example is Apple and other publishing companies also
got sued by US Justice Department because of the price it sets in eBook.
There are also some class action suits that were filed by customers. It is because
of the iPod battery life. It did not have the battery life represented and/or that the battery's
capacity to take and hold a charge substantially diminished over time
Apple also got sued by other technology companies because of the patents
problem. The companies that sued apple for example are Creative Technology because of
the menu structure; Typhoon Touch technologies because of the touch screen; Nokia
because of wireless technology; HTC because of iPhone's user interface, underlying
architecture and hardware; Kodak because of digital imaging; Samsung related to android
phones and tablets.
Labor Relations
According to Mail on Sunday 2006 alleged that sweatshop conditions existed in
factories in China, where the contract manufacturers, Foxconn and Inventec, operate the
factories that produce the iPod. It indicated that one iPod factory did not give proper
treatment to the labors in the factory. After these allegations, Apple slowly audited the
manufacturing conditions of its entire supplier then slowly raising standards of the
working conditions. In 2009, there was also couple Chinese factory worker employed by
Apple’s manufacturing partner Foxconn that committed suicide. This explained how
labor relations in Apple are not satisfying.
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4 Financial Statement Analysis
4.1 Common Size Financial Statement
4.1.1 Balance Sheet Analysis
In financial accounting, a balance sheet or statement of financial position is a
summary of the financial balances of a sole proprietorship, a business partnership or a
company. Assets, liabilities and ownership equity are listed as of a specific date, such as
the end of its financial year. A balance sheet is often described as a "snapshot of a
company's financial condition". Of the four basic financial statements, the balance sheet
is the only statement which applies to a single point in time of a business' calendar year.
A standard company balance sheet has three parts: assets, liabilities and
ownership equity. The main categories of assets are usually listed first and typically in
order of liquidity. Assets are followed by the liabilities. The difference between the assets
and the liabilities is known as equity or the net assets or the net worth or capital of the
company and according to the accounting equation, net worth must equal assets minus
liabilities.
Analysis of The Balance Sheet
The complete Balance Sheet of Apple Inc. can be seen in Appendix A page 44.
Current Assets
Current asset is the list of assets that have short-term liquidity rate. Current asset
consist of cash and cash equivalents, short-term marketable securities, accounts
receivable, inventories, deferred tax assets, vendor non-trade receivables, and some other
current assets
In Apple’s case, the total current assets in 2011 increased from the one in 2010.
There are several factors that affect the change in total of the current assets. Cash and
cash equivalents and inventories decreased significantly. However, other current assets
are increasing, which yield to the increase of Apple’s current assents. It is possible that
the company used its cash to get more long-term marketable securities. In addition, cash
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is also used to create more inventories (IPhone 4 and IPad 2 came out in 2011), which
were sold out in an incredible rate increasing their income significantly.
Long-Term Marketable Securities
Long-Term Marketable Securities represent the company’s assets in securities
such as government’s bond, or corporate securities. Apple has a lot of assets in the form
of securities which can be used in the future.
Goodwill
Goodwill represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses acquired.
Moreover, goodwill arising from businesses acquire unassigned to the reporting units that
are expected to benefit from the synergies of the acquisition.
In Apple’s case, goodwill is acquired by a lot of company that creates
applications, or use Apple’s product in their company especially the music production
house working together with Apple.
Liabilities
Liability is an obligation of an entity arising from past transactions or events, the
settlement of which may result in the transfer or use of assets, provision of services or
other yielding of economic benefits in the future.
Compared to 2010, Apple’s current liabilities, such as account payable and
accrued expenses were higher in 2011. It is possible that the company needs more
sources to launch their newest product at that time. Furthermore, Apple also launched
some new products, opened new stores in the worldwide, and did some advertisement
during the year.
Long-term debt has also increased in 2011 compared with 2010 because the
company had acquire some more debts to other source.
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Shareholder’s Equity
Shareholder’s equity represents the remaining interest in assets of a company,
spread among individual shareholders of common or preferred stock. Shareholder’s
equity increased a lot from 2010 to 2011 due to the retained earnings.
Retained earnings of Apple significantly increased from 2010 to 2011 because of
their sales and so does their stock value. It was surely a very good year for Apple as they
become better player in its industry because of their run in 2011.
4.1.2 Income Statement Analysis
Financial accounting Income statement (also referred as profit and loss statement
(P&L), statement of financial performance, earnings statement, operating statement or
statement of operations) is a company's financial statement that indicates how the revenue
(money received from the sale of products and services before expenses are taken out,
also known as the "top line") is transformed into the net income (the result after all
revenues and expenses have been accounted for, also known as the "bottom line").
It displays the revenues recognized for a specific period, and the cost and
expenses charged against these revenues, including write-offs (e.g., depreciation and
amortization of various assets) and taxes. The purpose of the income statement is to show
managers and investors whether the company made or lost money during the period
being reported.
The important thing to remember about an income statement is that it represents a
period of time. This contrasts with the balance sheet, which represents a single moment in
time.
Analysis of Income Statement
The complete Income Statement of Apple Inc. can be seen in Appendix B page
46.
Revenues
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Revenue is an income that a company receives from its normal business activities,
usually from the sale of goods and services to customers. The increase in revenues in
2011 compared with 2010 and 2009 primarily was due to an improvement in the
development of software hardware in the company. Combination of price and product
mix and favorable applications for the customers brings a lot of income to the company.
Apple’s revenue comes mainly from the net sales itself. Even though in 2011,
Apple has a significant increase on its cost of sales, the net sales increased even more,
this created a very significant increase in its gross margin. This increase in gross margin
makes a huge difference in its net income even though its operating expenses are higher
than the year before.
Cost of Sales
Cost of sales is the cost that needing to be p1aid in order to get sales. It is the
expense of the company for the whole period of which the income statement is made. The
increase in cost of sales in 2011 compared with 2011 mainly was due to higher raw
material and manufacturing costs. Total manufacturing expenses increased by 63% in
2011 compared with 2010 primarily due to an unfavorable currency impact, increased
utilities, higher salaries and benefits.
Similarly, Apple’s cost of sales also increased from 2009 to 2010 because of the
same reason where material cost and manufacturing costs increased significantly which
influence the cost of sales.
Gross Profit
Gross profit is the profit after cost of sales is taken away from the amount of net
sales that was made in the whole period. Apple’s gross profit increased by more than $18
million in 2011 compared with 2010, as improvements in the combination of price and
product mix and manufacturing costs and high volume. Gross profit percentage increased
by more than 60% in 2010-2011 compared with 50% in 2009-2010 as the increase in
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revenues from pricing improvements to recover higher raw material and manufacturing
costs was substantially greater than the increase in cost of sales.
Selling, General and Administrative Expenses
Selling and administrative expenses are some of the operating expenses in the
company that are connected to selling processes, such as, advertisements and so on. In
Apple, selling and administrative expenses has increased by around 50% in 2011
compared with 2010. The increase primarily reflects a growth in incentive compensation
expense, partially offset by an unfavorable currency impact.
Selling and administrative expenses also increased by around 30% in 2010
compared with 2009 primarily due to higher incentive compensation expense, deferred
compensation expense.
Research and Development Expenses
Research and development expenses are some of the operating expense in the
company that is connected to developing process of Apple, such as the development in its
hardware and software. Apple’s research and development expense has increased by 20%
in 2011 compared with 2010 primarily due to an increase in salaries and benefits and
higher inside or outside testing expenses.
Furthermore, research and development expenses increased by 20% in 2010
compared with 2009 primarily due to an increase in salaries and benefits and higher
inside or outside testing expenses.
4.1.3 Cash Flow Statement
In financial accounting, a cash flow statement, also known as statement of cash
flows or funds flow, statement is a financial statement that shows how changes in balance
sheet accounts and income affect cash and cash equivalents, and breaks the analysis down
to operating, investing, and financing activities. Essentially, the cash flow statement is
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concerned with the flow of cash in and cash out of the business. The statement captures
both the current operating results and the accompanying changes in the balance sheet. As
an analytical tool, the statement of cash flows is useful in determining the short-term
viability of a company, particularly its ability to pay bills.
The cash flow statement is partitioned into three segments, namely:
1. Cash flow resulting from operating activities
Operating activities include the production, sales and delivery of the company's
product as well as collecting payment from its customers. This could include
purchasing raw materials, building inventory, advertising, and shipping the
product.
2. Cash flow resulting from investing activities
Examples of investing activities are:
o Purchase or Sale of an asset (assets can be land, building, equipment,
marketable securities, etc.)
o Loans made to suppliers or received from customers
o Payments related to mergers and acquisitions
3. Cash flow resulting from financing activities
Financing activities include the inflow of cash from investors such as banks and
shareholders, as well as the outflow of cash to shareholders as dividends as the
company generates income. Other activities which impact the long-term liabilities
and equity of the company are also listed in the financing activities section of the
cash flow statement.
Analysis of Cash Flow
The complete cash flow of Apple Inc. can be seen in Appendix C page 47.
Operating Activities
According to the data obtained from the company, the cash of the operating
activities of the company significantly increases from $18,595 to $37,529 in the year of
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2010 and 2011, respectively. This is due to the fact that the debt of the company
decreases significantly from $6,307 to $2,515 and the increase in the account receivable
from -$2,142 to $143. In addition, in the last few years Apple Inc. has develop
remarkably. It gains more and more population compare to the other brands. As a result,
the net income of the company also increased notably from $14,013 to $25,922.
Even though the other current and non-current liabilities were increased from
$778 to $4,495, the cash obtained from the operating activities still increased higher than
those liabilities. As a result, the operating activities of the company were considered as
great.
Investing Activities
The cash used in the investing activities of the company increased significantly
from $13,854 to $40,419 in the year of 2010 and 2011, respectively. The purchases of
marketable securities became much greater from $57,793 to $102,317 resulting in more
bonds and stocks sold. The increasing number of the investing activities is due to the fact
that the company’s research and development spending is focused on investing in new
hardware and software products, and in further developing its existing products,
including iPhone, iPad, Mac, and iPod hardware; iOS and Mac OS X operating systems;
and a variety of application software and online services.
Financing Activities
Cash generated by the financing activities for Apple Inc. primarily consisted of
the proceeds from issuance of common stock and excess tax benefits from equity awards.
The financing activities in the year of 2011 are greater than that in the year of 2010. The
financing activities are $1,444 and $1,257 in the year of 2011 and 2010, respectively.
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Analysis of Inflow and Outflow
The complete common size inflow and outflow of Apple Inc. can be seen in
Appendix C page table 48.
Inflow
The inflow of the company has increased remarkably from $66,976 to $109,346
in the year 2011. In the year of 2010, the inflow of the company mostly consisted of
operating activities, proceeds from maturities of marketable securities, and proceeds from
sales of marketable securities. However, in the year of 2011 the inflow is dominated by
the operating activities and the proceeds from sales of marketable securities. In this time,
we can see that the company is getting more popular and a lot of new customers have
bought the products.
Outflow
As the inflow increased, the outflow of the company also increased. The outflow
increased almost doubled the original value from $60,978 to $110,792. Most of the
outflow was influenced by the purchases of marketable securities which went up by
$44,452. In the year of 2011, Apple Inc. launched some new products requiring big
advertisements and also opened a lot of stores in the worldwide. Apple Inc. opened more
than 50 stores around the world including in the Philadelphia, Amsterdam, and Even
Perth.
4.2 Short-Term Liquidity
4.2.1 Current ratio
Current ratio measures short-term liquidity, the ability of a firm to meet needs for
cash as they arise. A current ratio of current assets to current liabilities of 2:1 is usually
considered to be acceptable. The higher the current ratio, the better the liquidity will be.
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Current ratio = current assets ÷ current liabilities
2011 2010
Apple 1.61 2.01
HP 1.01 1.10
In 2010, Apple showed a good result in current ratio of 2.01 because the
company’s current assets were twice its current liabilities. Nevertheless, the ratio went
down to 1.61 in 2011 due to the fact that the cash and cash equivalent were decreasing
while the current liabilities rose significantly than the current assets in 2011.
Compared to HP, Apple’s current ratio showed a good result than HP’s in both
2011 and 2010.
4.2.2 Quick or Acid Test Ratio
Quick or acid-test ratio measure short-term liquidity more rigorously than the
current ratio by eliminating inventory, usually the least liquid current asset. In general, a
quick ratio of 1 or more is accepted by most creditors. The higher the quick or acid-test
ratio, the better the liquidity will be.
Quick or acid-test ratio = (current assets – inventories) ÷ current liabilities
2011 2010
Apple 1.58 1.96
HP 0.86 0.97
Apple also showed good result in quick or acid - test ratio of 1.96 in 2010.
However, it slightly decreased to 1.58 in 2011 because a bit drop in current assets,
especially in cash and cash equivalent and significant increase in current liabilities. In
addition, Apple still showed better result than HP in both years.
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4.2.3 Cash Flow Liquidity
Cash flow liquidity measure short-term liquidity by considering as cash resources
(numerator) cash plus cash equivalents plus cash flow from operating activities. Cash
flow liquidity equals to 1 means that for every dollar the company owes it has $ 1 cash to
pay them. The higher the cash flow liquidity, the better the liquidity will be.
Cash flow liquidity = (cash + marketable securities + operating cash flow)
÷ current liabilities
2011 2010
Apple 2.27 2.13
HP 0.41 0.46
In 2010, Apple displayed excellent result of cash flow liquidity in 2.13.
Interestingly, it grew up until 2.27 in 2011. Apple’s total assets in 2011 rose significantly
from the one in 2010 due to the increasing of marketable securities.
Moreover, Apple’s cash flow liquidity showed much better result than HP in 2010
and 2011. HP was still lack behind in 2010 and 2011 with 0.46 and 0.41, respectively.
4.2.4 Average Collection Period
Average collection period indicates days required to convert receivables into cash.
The lower the average collection period, the better its effects on the company since it
means reducing the possibility of bad debt risk faced by the company.
Average collection period = net account receivable ÷ average daily sales
2011 2010
Apple 18.10 30.83
HP 52.28 53.52
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Both of the company’s average collection periods decreased in the year of 2011.
While HP’s average collection period slightly decreased, the Apple’s average collection
periods decreased significantly. Due to the fact that the better it is if the company has the
lower average collection period, Apple has better average collection period than HP.
4.2.5 Days Inventory Held
Days inventory held indicates days required to sell inventory. The lower the days
inventory held, the better its effects on the company.
Days inventory held = inventory ÷ average daily cost of sales
2011 2010
Apple 4.4 9.7
HP 28.03 24.60
Apple’s days inventory held was very awesome during both 2010 and 2011. Even
though Apple had a low days inventory held during 2010, in 2011 the number still went
down from 9.7 to 4.4. They showed that the daily cost of sales increased in 2011
indicating the more efficient management of Apple.
In addition, the difference in the days inventory held between Apple and HP is
quite large confirming that Apple’s daily sales are bigger than HP’s.
4.2.6 Days Payable Outstanding
Days payable outstanding is the average number of days it takes to pay accounts
payables in cash. Delaying payment of payables as long as possible, but still making
payment by the due date, is desirable.
Days payable outstanding = account payable ÷ average daily cost of sales
2011 2010
Apple 82.89 110.91
HP 55.20 54.64
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Overall, days payable outstanding ratio of Apple showed good result in 2010 and
2011. The result in 2010 was good because if the company could delay the payment to
supplier, company could save money for others investment. Moreover, in 2011, the ratio
went down from 110.91 to 82.89. It was also good because the company would like to
shorten the days of payment to suppliers, because company did not want to make the
suppliers angry for late payments.
Furthermore, compared to HP, Apple still showed better result because Apple
could delay payment more than HP while still minimizing the late payments.
4.2.7 Cash Conversion or Net Trade Cycle
Cash conversion or net trade cycle indicates the days in the normal operating
cycle or cash conversion cycle of a firm.
Cash conversion or net trade cycle = average collection period + days
inventory held – days payable outstanding
2011 2010
Apple -78.01 -113.19
HP 25.10 23.48
Cash conversion or net trade cycle of Apple showed negative result in 2010 and
2011. They were good because Apple’s days payable outstanding were longer than days
inventory held and average collection period. It is good because you can use other
people’s money to generate more money for the company while paying the payments on
time.
In addition, HP’s net trade cycles were significantly larger that Apple’s showing
that HP needed more days than Apple before they can collect the money.
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4.3 Operating Efficiency
4.3.1 Account Receivable Turnover
Account receivable turnover shows how many times receivables are collected
during a year, on average. It also measures the ability of company to collect cash from
credit customers.
Account receivable turnover = net sales ÷ net account receivable
2011 2010
Apple 20.16 11.84
HP 6.98 6.82
Apple’s account receivable turnover was getting higher in 2011. It means that the
company was able to collect many account receivables during a year. It was good
because it could increase the assets as well. On the other hand, HP generated lower
account receivable turnover than Apple in both years.
4.3.2 Inventory Turnover
Inventory turnover measures efficiency of the firm in managing and selling
inventory. High ratio indicates the ability of company to sell inventory quickly, but too
high ratio may show inadequate inventory level. Thus, comparison to historical data and
industry averages is very important.
Inventory turnover = cost of sales ÷ inventory
2011 2010
Apple 83.03 37.62
HP 13.02 14.84
Inventory turnover ratio of Apple was good in 2010 and 2011. It went up from
37.62 to 83.03 in the year of 2011. Due to the fact that the inventory ratio in 2011 was
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decreasing, it means that the company could sell inventory fast. However, HP showed
worse result than Apple because it could not sell many inventories like Apple did.
4.3.3 Payables Turnover
Payables turnover measures efficiency of the firm in paying suppliers. If turnover
ratio is falling from one period to another, this is a sign that the company is taking longer
to pay off its suppliers than it was before. On the other hand, if the turnover ratio is
increasing, this means that the company is paying off its suppliers at a faster rate.
Payable turnover = cost of sales ÷ account payable
2011 2010
Apple 4.40 3.29
HP 6.61 6.68
Apple showed good payables turnover increasing in 2011 from 3.29 to 4.40. It
means that Apple was able to pay the supplier faster than last year.
Compared to HP, Apple performance was still better due to the fact that Apple’s
payables turnover increased while HP’s slightly decreased.
4.3.4 Fixed Asset Turnover
Fixed asset turnover measures efficiency of the firm in managing fixed asset. It
also assesses effectiveness in generating sales from investment in fixed assets. The higher
the ratio, the smaller is the investment required to generate sales and thus, the more
profitable is the firm.
Fixed asset turnover = net sales ÷ net property, plant, and equipment
2011 2010
Apple 13.92 13.68
HP 10.35 10.71
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Apple generated higher ratio in 2011 than in 2010. Net sales of Apple increased
significantly in 2011 generating higher profit as well. Moreover, Apple generated higher
ratio than HP in both 2 years.
4.3.5 Total Asset Turnover
Total asset turnover measures efficiency of the firm in managing fixed assets. It
also assesses effectiveness in generating sales from investment in total assets. The higher
the ratio, the smaller is the investment required to generate sales and thus, the more
profitable is the firm.
Total asset turnover = net sales ÷ total asset
2011 2010
Apple 0.93 0.87
HP 0.98 1.01
Apple’s total asset turnover was getting higher in 2011. It showed that Apple could
generate higher net sales in 2011 making higher profit to the company. There was no big
difference between Apple and HP in total asset turnover. However, HP’s total asset
turnover slightly decreased in 2011.
4.4 Capital Structure and Long-Term Solvency
4.4.1 Debt Ratio
Debt ratio shows the proportion of all assets that are financed with debt. If the
ratio is less than 0.5, most of the company's assets are financed through equity. If the
ratio is greater than 0.5, most of the company's assets are financed through debt. The
lower the debt ratio, the better it is for the company.
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Debt ratio = total liabilities ÷ total assets
2011 2010
Apple 0.34 0.36
HP 1.00 1.00
Apple debt ratio was less than 0.5 in both years. It means that the company
generated low debt in both 2010 and 2011. However, HP showed bad results in those 2
years. The debt ratio of HP was 1.00, more than 0.5 generating higher debts that Apple in
those 2 years.
4.4.2 Long-term debt to total capitalization
Long-term debt to total capitalization measures the extent to which long-term debt
is used for permanent financing.
Long-term debt to total capitalization = L.T debt ÷ (L.T debt +
shareholders’ equity)
2011 2010
Apple 0.00 0.00
HP 0.37 0.27
Apple did not have long-term debt during the last five years. As a result, Apple
does not need to have debt and has enough cash flow to run its business. In conclusion,
Apple had much better result than HP.
4.4.3 Debt to equity
Debt equity indicates the relative proportion of shareholders' equity and debt used
to finance a company's assets.
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Debt to equity = total liabilities ÷ shareholders’ equity
2011 2010
Apple 0.52 0.57
HP 0.79 0.55
Apple had a good debt to equity ratio during 2010 and 2011. Having lower ratio
in 2011, Apple generated lower debt. Although HP had almost similar result with Apple
in 2010, HP failed to maintain their performance resulting in higher debt with ratio of
0.79.
4.4.4 Financial Leverage Index
Financial leverage index indicates if a firm is employing debt successfully.
Financial leverage index = ROE ÷ adjusted ROA
2011 2010
Apple 1.52 1.57
HP 3.32 3.05
Apple’s financial leverage index showed good results in 2 years. Moreover, it
even decreased in 2011 by 0.05 points resulting in lower risk generated. Nevertheless, HP
showed higher result generating higher risk than Apple.
4.4.5 Times Interest Earned
Times interest earned measures how many times interest expense get covered by
operating earnings. A lower times interest earned ratio means less earnings are available
to meet interest payments and that the business is more vulnerable to increases in interest
rates.
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Times interest earned = operating profit ÷ interest expense
2011 2010
Apple - -
HP 13.92 22.73
Apple has no interest expense because it could pay the bondholders on time.
Hence, Apple did not need to pay the interest expense during these 2 years. In addition,
Apple’s operating profit depicted outstanding result in both 2 years.
On the other hands, HP result declined and was poor in 2011. HP probably had
difficulties to pay the bondholders and did not have enough money to pay the interest
expense.
4.4.6 Cash Interest Coverage
Cash interest coverage measures how many times interest payment are covered by
cash flow from operating activities.
Cash interest coverage = (op. cash flow + interest paid + taxes paid) ÷ interest paid
2011 2010
Apple - -
HP 21.93 28.99
Again, Apple had no interest paid. Apple’s operating cash flow generated higher
amount of money. On the other hand, HP’s result was bad compare to Apple during 2010
and 2011.
4.4.7 Fixed Charge Coverage
Fixed charge coverage measures coverage capability more broadly than times
interest earned by including operating lease payments as fixed expenses. It also indicates
the risk involved in ability to pay fixed costs when business activity falls.
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Fixed charge coverage = (op. profit + lease payment) ÷ (interest exp
+ lease payment)
2011 2010
Apple - -
HP 2.07 2.44
Apple did not need to pay both interest expense and lease payment. Still, its
operating profit had generated higher money.
4.4.8 Cash Flow Adequacy
Cash flow adequacy measures how many times capital expenditures, debt
repayments, and cash dividend are covered by operating cash flow.
Cash flow adequacy = op. cash flow ÷ (capital expenditures +
debt repayment + dividend paid)
2011 2010
Apple 2.21 0.89
HP 0.41 0.53
Apple’s cash flow adequacy was quiet good in 2010. Moreover, it increased up to
2.21 in the year of 2011 indicating that company could cover capital expenditures, debt
repayment, and dividend paid by operating cash flow. In addition, the operating cash flow
of Apple increased significantly in 2011.
4.5 Profitability
4.5.1 Gross Profit Margin
Gross profit margin measures profit generated after consideration of cost of
products sold.
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Gross profit margin = gross profit ÷ net sales
2011 2010
Apple 0.40 0.39
HP 0.23 0.24
Apple generated quiet stable results during 2010 and 2011. Nevertheless, HP
reflected poor results compare to Apple in both 2010 and 2011.
4.5.2 Operating Profit Margin
Operating profit margin measures profit generated after consideration of operating
expenses.
Operating profit margin = operating profit ÷ net sales
2011 2010
Apple 0.31 0.28
HP 0.08 0.09
Apple had good stable results in operating profit margin during 2010 and 2011
with 0.28 and 0.31, respectively. Apple generated good result in this ratio because it
could generate high operating profit in 2010 and 2011. On the other hand, HP still
provided worst result than Apple.
4.5.3 Effective Tax Rate
Effective tax rate is the ratio of taxes paid to a given tax base. For corporate
income taxes, it is the ratio of taxes to book profits. Effective tax rate can be used as an
indication of how good the company’s income is. The lower the effective tax rate, the
better the company’s income and vice versa.
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Effective tax rate = income taxes ÷ earnings before income taxes
2011 2010
Apple 0.24 0.24
HP 0.60 0.53
Apple had lower effective tax rate than HP. It shows that Apple had better income
than HP and vice versa.
4.5.4 Net Profit Margin
Net profit margin measures profit generated after consideration of all expenses
and revenues.
Net profit margin = net profit ÷ net sales
2011 2010
Apple 0.24 0.21
HP 0.06 0.07
The results of Apple’s net profit margin were generally good compare to HP.
Moreover, the net profit margin of Apple increased from 0.21 to 0.24 while HP’s net
profit margin slightly decreased.
4.5.5 Cash Flow Margin
Cash flow margin measures the ability of a firm to generate cash from sales. Since
expenses and purchases of assets are paid from cash, this is an extremely useful and
important profitability ratio. Knowing that a company is continually improving its cash
flow margin is extremely valuable and is a key indicator of performance. Companies that
end up generating a negative cash flow are losing money as they generate sales and any
company cannot keep this up over an extended period of time. With a negative cash
flow, the company will have to rely on cash reserves or take on more debt as they
continue the business.
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Cash flow margin = operating cash flow ÷ net sales
2011 2010
Apple 0.35 0.29
HP 0.10 0.09
Overall, the company’s cash flow margins were good from 2010 to 2011. No
negative cash flow generated. However, in this case Apple still had better cash flow
margin than HP.
4.5.6 Return on Total Asset (ROA)
Return on total assets (ROA) measures overall efficiency of firm in managing
assets and generating profit. It also tells an investor how much profit a company
generated for each $1 in assets. Thus, it is the most stringent and excessive test of return
to shareholders.
ROA = net earnings ÷ total assets
2011 2010
Apple 0.22 0.19
HP 0.05 0.07
Apple generated good results of ROA during 2010 and 2011 with no negative
ROA. Nonetheless, HP produced worse results of ROA than Apple’s ROA during those
years.
4.5.7 Return on Equity (ROE)
Return on equity (ROE) measures rate of return on stockholders (owner)
investment. A higher return on equity means that surplus funds can be invested to
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improve business operations without the owners of the business (stockholders) having to
invest more capital. It also means that there is less need to borrow.
ROE = net earnings ÷ shareholders’ equity
2011 2010
Apple 0.34 0.29
HP 0.18 0.21
Apple also had brilliant result in ROE. There was no negative result in ROE
because there was no loss in its operations. Again, HP still lacked behind compare to
Apple.
4.5.8 Cash Return on Assets
Cash return on assets measures the return on assets on a cash basis. A higher cash
return on assets ratio indicates a greater cash return.
Cash return on assets = operating cash flow ÷ total assets
2011 2010
Apple 0.32 0.25
HP 0.10 0.10
Again, Apple still showed excellent result in cash return on assets. There was an
increasing in 2011 at 0.32 point. It was good because Apple was able to generate cash
from utilizing its assets. Operating cash flow also generated good result in effecting cash
return on assets higher than last year.
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4.6 Market Measure
4.6.1 Earnings per Common Share
Earnings per common share shows return to common stock shareholder for each
share owned.
Earnings per common share = net earnings ÷ average shares outstanding
2011 2010
Apple 27.89 15.28
HP 3.56 3.90
Apple’s earning per common share was much higher than HP. In 2011 Apple’s
result was really high compare to 2010. It was great because it could receive more net
earnings in 2011. In this case, Apple was far better than HP.
4.6.2 Price to Earnings
Price to earnings ratio expresses a multiple that the stock market places on firm
earnings. The higher the P/E ratio, the more the market is willing to pay for each dollar of
annual earnings. In general, a low P/E is considered a sign that a stock may be
undervalued, or that investors expect poor future earnings. By contrast, a high P/E is
thought to indicate an over-valued stock, or one that is expected to post significant
earnings increases.
Price to earnings = market price of common stock ÷ EPS
2011 2010
Apple 12.11 14.89
HP 12.25 13.45
Apple’s price to earnings was decreasing in 2011. The ratios of Apple were quite
similar with HP. However, price to earnings is not too important for investor to analyze
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the company performance because each technology companies had different growth of
prospects.
4.6.3 Dividend Payout
Dividend payout shows percentage of earning paid to shareholders. An
excessively high payout ratio suggests that the company might be paying out more than it
can comfortably afford. Not only does this leave just a small percentage of profits to plow
back into the business, but it also leaves the firm highly susceptible to a decline in future
dividend payments. In some cases, a company will even pay out more than it earns, thus
yielding a dividend payout ratio in excess of 100%. Such extremely high payouts are
rarely sustainable and should warn investors that a dividend cut may be on the horizon.
Because the act of reducing dividends is usually interpreted as a sign of weakness, when
a dividend cut announcement is made, it also usually triggers a decline in the share price.
Dividend payout = dividend per share ÷ EPS
2011 2010
Apple 0.00 0.00
HP 0.11 0.08
The founder of Apple, Steve Jobs, never paid the dividends to the shareholders.
After Steve Jobs passed away, many shareholders wanted to get the dividends. Thus,
there is a probability that in 2012 there will be the data for dividend payment.
4.6.4 Dividend Yield
Dividend yield shows the rate earned by shareholders from dividends relative to
current price of stock. High-growth companies usually have a low or no dividend yield,
because most or all of their earnings are reinvested in their business. For a slow-growth
firm with fewer prospects of substantial price appreciation, the higher dividend yield
serves to make the stock more attractive and support the stock price.
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Dividend yield = dividend per share ÷ market price of common stock
2011 2010
Apple 0.00 0.00
HP 0.75 0.64
Just like the dividend payment, there was no data for dividend per share in Apple
due to the fact there was no dividend payment until 2011.
4.7 DuPont Analysis
DuPont analysis is a method of performance measurement that was started by the
DuPont Corporation in 1920s, and has been used ever since. This method examines a
company’s Return on Equity (ROE) by breaking it into three main components, such as
profit margin, asset turnover and leverage factor. By breaking the ROE into distinct parts,
investors can examine how effective a company is using equity, since poorly performing
components will drag down the overall figure. In details, DuPont analysis helps analyst to
see how the firm’s decisions and activities over the course of an accounting period, which
is what financial ratios are measuring-interact to produce overall firms’ shareholders, or
the ROE.
The three components that are needed in doing DuPont analysis:
1. Net profit margin
Earnings of a company often do not tell how good a company is. For
example, increasing in earnings is good, but it does not mean that the profit
margin of a company is improving. Other example, company has costs that have
increased at a greater rate than sales. Thus, it leads to a lower profit margin. In
order to solve the problem, net profit margin is a very useful, especially when
comparing companies in similar industries. It is calculated as:
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Net profit margin= net salesnet income
This higher ratio of profitability ratio when comparing two or more
company indicates more profitable company. It shows that the company has better
control over its cost and covers who has a higher profit margin.
2. Total asset turnover ratio
Asset turnover means that the amount of sales generated for every dollar’s
worth of assets. It is calculated as:
Asset Turnover= salestotalassets
It measures a firm’s efficiency using its assets in generating sales or
revenue. The higher the number of asset turnover ratios is, the better it is. It also
indicates pricing strategy: companies with low profit margins tend to have high
asset turnover, while those with high profit margins have low asset turnover.
3. Financial leverage or equity multiplier
Equity multiplier is a measure of financial leverage. It is calculated as:
Equity Multiplier= total assets
total stockholder s' equity
This ratio shows a company’s total assets per dollar of stockholders’
equity. A higher equity multiplier indicates higher financial leverage, which
means that the company is relying more on debt to finance its assets
DuPont analysis system:
ROE=net incomeequity
¿ net incometotalassets
×total assetstotal equity
¿ ROA× EM
¿ net incomesales
×sales
total assets× EM
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Hence,
ROE=NPM ×TAT × EMWhere,
ROE = Return on Equity
ROA = Return on Assets
NPM = Net Profit Margin
TAT = Total Assets Turnover Ratio
EM = Equity Multiplier
After a short explanation about DuPont Analysis, there are Apple and Hewlett-
Packard comparison results from 2010 to 2011 shown below.
Table 4 Comparison of Apple and HP Performance
Apple2011 2010
(in million) (in million)
Net Sales 108,249 65,225
Net Income 25,922 14,013
Total Assets 116,371 75,183
Shareholder's Equity 76,615 47,791
Apple 2011 2010
NPM 24% 21%
TAT 93% 87%
ROA (NPM*TAT) 22% 19%
EM 1.52 1.57
ROE 34% 29%
Hewlett-Packard 2011 2010
(in million) (in million)
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Net Sales 127,245 126,033
Net Income 7,074 8,761
Total Assets 129,517 124,503
Shareholder's Equity 39,004 40,781
Hewlett-Packard 2011 2010
NPM 6% 7%
TAT 98% 101%
ROA (NPM*TAT) 5% 7%
EM 3.32 3.05
ROE 18% 21%
Net Profit Margin
In 2010, Apple’s net profit margin is 21%. Afterwards, it succeed making a
slightly increase on its net profit margin to the number of 24% along the year of 2011.
While Apple got an increase from 2010 to 2011, Hewlett-Packard was experiencing
slightly decrease in its net profit margin from 7% to 6%.
Apart from iPad 2 and iPhone 4 launching during 2010 and 2011, Apple’s
increased on its net profit margin was also because of increasing in market share, which
leaded to increasing sales.
Total Assets Turnover
Total assets turnover of Apple was increasing in about 3% from 2010 to 2011.
However, Hewlett-Packard’s total assets turnover decreased from 101% to 98%, but still
had higher total asset turnover compare to Apple in 2010 and 2011.
In general, both of the company had a very good ratio in total assets turnover. It is
very competitive between these two companies.
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Return on Assets
In connection with net profit margin and total assets turnover, return on assets of
Apple and Hewlett-Packard can be determined easily. Apple’s return on assets increased
into 22%, while Hewlett-Packard’s dropped two percent into 5%.
These numbers of return on assets mean Apple management were more efficient
in generating earnings from its assets. It made large profits with little investment or in
short, Apple is more profitable.
Equity Multiplier
As shown on the table, equity multiplier of Apple decreased from 2010 to 2011. It
was from 1.57 to 1.52. In the contrary, Hewlett-Packard had increasing number from 3.05
into 3.32 in 2011.
The equity multiplier shows how far the company relies on debt to finance its
assets. In this case here, Apple did not rely much on its debt for financing its assets and it
is better than Hewlett-Packard.
Return on Equity
In order to get the percentage of return on equity, the team needs to use the
numbers from net profit margin, total assets turnover and equity multiplier. For Apple
company, it made an increase on return on equity from 29% to 34% and as for the
Hewlett-Packard, it decreased by three percent to 18%.
Apple had the bigger number on return on equity compare to Hewlett-Packard
both in the year of 2010 and 2011. It means that Apple was more preferable to be
invested in.
4.8 Projected Financial Statement
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As it was reported in the report, Apple’s balance statement, income statement, and
financial statement shows an incredible performance. This section will explain about the
projected financial statement of Apple. It can be seen how this company will perform
better in the future. However, as it was explained, Apple has undergone a change in
managerial position, mainly the CEO.
In the prediction, it is shown that the sales of Apple would increase far beyond the
previous year, so does its net earnings. Even though the liabilities may also grow, but we
expect their asset would grow even further. Especially if we look closely at the prediction
of the cash-flow statement, net income and net cash flow will definitely increase if
Apple’s condition stays the same through the year.
The future may not be as the prediction has shown. However, as Apple keeps on
innovating and creating new products, hardware and software, for example, IPad 3 and
new IOS comes out in 2012, Apple would be able to stay strong.
5 Outlook, Summary, and Conclusions
5.1 Investment Potential
As an investor, there are several aspects required to consider before doing the
investment. One of the aspects need to be considered is the economic climate and global
trend. Apple recently got ranked 20th in 2009, ranked 17th in 2010 and jumped into ranked
7th in 2011 as the best global brands (surveyed by Interbrand). It showed the consistency
of Apple by growing rapidly from 2009 to 2011. It becomes market-leading company in
its industry, which is consumer electronics industry, including smartphone, personal
computers and music media player.
The other important factor that also very important to be looked at is the financial
statement. Annual reports of Apple’s in year 2010 and 2011 showed that Apple did very
good performance during those prior years. Return on equity and earning per shares of
Apple were increasing, while Hewlett-Packard was keeping decreased from year to year.
Therefore, from those two aspects, we find that there is a big opportunity to invest
in this company.
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5.2 Credit Assessment
In term of credit assessment, the team should position ourselves as creditor. As a
creditor who wants to lend money to company, we need to make sure that related
company have enough money to repay the loan and the interest. In this case here, Apple
has a very good records and performances to repay the loan. However, this is not that
beneficial for the creditors to lend money to this kind of company. It’s better to lend the
money to Hewlett-Packard, which is a bit risky but can bring more income for the
creditors.
5.3 Summary and Conclusions
Apple is now being the leading company in its business segment. It has good
performance in its historical data and projected results. In the other hand, it showed
outstanding achievement in international stages, such as best global brands and best
global green brands. Furthermore, Apple maintains its old consumers by keep inventing
new products and also updates its old products.
However those notable success need to be observed further, because chief
executive officer of Apple Inc. was just replaced by Tim Cook recently. But after all,
with all analysis and the facts that the team have gathered and exposed, the team
recommends investors to invest in Apple Inc.
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6 Appendix
6.1 Appendix A: Balance Statement
Consolidated Statements of Balance Statement
(In millions, except number of shares which are reflected in thousands)
Assets:
Current assets: 2011 2010
Cash and cash equivalents $ 9,815 $ 11,261
Short-term marketable securities $ 16,137 $ 14,359
Accounts receivable, less allowances of 53 and 55, respectively $ 5,369 $ 5,510
Inventories $ 776 $ 1,051
Deferred tax assets $ 2,014 $ 1,636
Vendor non-trade receivables $ 6,348 $ 4,414
Other current assets $ 4,529 $ 3,447
Total current assets $ 44,988 $ 41,678
Long-term marketable securities $ 55,618 $ 25,391
Property, plant and equipment, net $ 7,777 $ 4,768
Goodwill $ 896 $ 741
Acquired intangible assets, net $ 3,536 $ 342
Other assets $ 3,556 $ 2,263
Total assets $ 116,371 $ 75,183
Liabilities and Shareholder’s Equity
Current liabilities: 2011 2010
Accounts payable $ 14,632 $ 12,015
Accrued expenses $ 9,247 $ 5,723
Deferred revenue $ 4,091 $ 2,984
Total current liabilities $ 27,970 $ 20,722
Deferred revenue – non-current $ 1,686 $ 1,139
Other non-current liabilities $ 10,100 $ 5,531
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Total liabilities $ 39,756 $ 27,392
Commitments and contingencies
Shareholders’ equity: 2011 2010
Common stock, no par value; 1,800,000 shares authorized;
929,277 and 915,970 shares issued and outstanding, respectively
$ 13,331 $ 10,668
Retained earnings $ 62,841 $ 37,169
Accumulated other comprehensive income/(loss) 443 (46 )
Total shareholders’ equity $ 76,615 $47,791
Total liabilities and shareholders’ equity $ 116,371 $ 75,183
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Common Size Balance Sheet:
Assets: 2011
2010
Cash and cash equivalents 8.43% 14.98%Short-term marketable securities 13.87% 19.10%Accounts receivable, less allowances of 53 and 55, respectively 4.61% 7.33%
Inventories 0.67% 1.40%Deferred tax assets 1.73% 2.18%Vendor non-trade receivables 5.45% 5.87%Other current assets 3.89% 4.58%Total current assets 38.66% 55.44%Long-term marketable securities 47.79% 33.77%Property, plant and equipment, net 6.68% 6.34%Goodwill 0.77% 0.99%Acquired intangible assets, net 3.04% 0.45%Other assets 3.06% 3.01%
Total assets 100.00% 100.00%
Liabilities and Shareholder’s Equity
Accounts payable 12.57% 15.98%Accrued expenses 7.95% 7.61%Deferred revenue 3.52% 3.97%Total current liabilities 24.04% 27.56%Deferred revenue – non-current 1.45% 1.51%Other non-current liabilities 8.68% 7.36%Total liabilities 34.16% 36.43%
Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares issued and outstanding, respectively
11.46% 14.19%
Retained earnings 54.00% 49.44%Accumulated other comprehensive income/(loss) 443 (46 )Total shareholders’ equity 65.84% 63.57%
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Total liabilities and shareholders’ equity 100.00% 100.00%
6.2 Appendix B: Income Statement
Consolidated Statements of Income Statement
(In millions, except number of shares which are reflected in thousands and per share
amounts)
Three years ended September 24, 2011 2011 2010 2009
Net sales $ 108,249 $ 65,225 $ 42,905
Cost of sales $ 64,431 $ 39,541 $ 25,683
Gross margin $ 43,818 $ 25,684 $ 17,222
Operating expenses:
Research and development $ 2,429 $ 1,782 $ 1,333
Selling, general and administrative $ 7,599 $ 5,517 $ 4,149
Total operating expenses $ 10,028 $ 7,299 $ 5,482
Operating income $ 33,790 $ 18,385 $ 11,740
Other income and expense $ 415 $ 155 $ 326
Income before provision for income taxes $ 34,205 $ 18,540 $ 12,066
Provision for income taxes $ 8,283 $ 4,527 $ 3,831
Net income $ 25,922 $ 14,013 $ 8,235
Earnings per common share:
Basic $ 28.05 $ 15.41 $ 9.22
Diluted $ 27.68 $ 15.15 $ 9.08
Shares used in computing earnings per share:
Basic $ 924,258 $ 909,461 $ 893,016
Diluted $ 936,645 $ 924,712 $ 907,005
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Consolidated Statements of Cash Flows 2011 2010 2009
Net sales 100.00% 100.00% 100.00%Cost of sales 59.52% 60.62% 59.86%Gross margin 40.48% 39.38% 40.14%Operating expenses:Research and development 2.24% 1.65% 1.23%Selling, general and administrative 7.02% 5.10% 3.83%Total operating expenses 9.26% 6.74% 5.06%Operating income 31.22% 16.98% 10.85%Other income and expense 0.38% 0.14% 0.30%Income before provision for income taxes 31.60% 17.13% 11.15%
Provision for income taxes 7.65% 4.18% 3.54%Net income 23.95% 12.95% 7.61%
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6.3 Appendix C: Statement of Cash Flow
Consolidated Statements of Cash Flows
(In millions)
Three years ended September 24, 2011 2011 2010
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Cash and cash equivalents, beginning of the year $11,261 $5,263
Operating activities:
Net income $25,922 $14,013
Adjustments to reconcile net income to cash generated by operating activities
Depreciation, amortization and accretion $1,814 $1,027
Share-based compensation expense $1,168 $879
Deferred income tax expense $2,868 $1,440
Changes in operating assets and liabilities:
Accounts receivable, net $143 -$2,142
Inventories $275 -$596
Vendor non-trade receivables -$1,934 -$2,718
Other current and non-current assets -$1,391 -$1,610
Accounts payable $2,515 $6,307
Deferred revenue $1,654 $1,217
Other current and non-current liabilities $4,495 $778
Cash generated by operating activities $37,529 $18,595
Investing activities:
Purchases of marketable securities -$102,317 -$57,793
Proceeds from maturities of marketable securities $20,437 $24,930
Proceeds from sales of marketable securities $49,416 $21,788
Payments made in connection with business acquisition, net of cash
acquired
-$244 -$638
Payments for acquisition of property, plant, and equipment -$4,260 -$2,005
Payments for acquisition of intangible assets -$3,192 -$116
Other -$259 -$20
Cash used in investing activities -$40,419 -$13,854
Financing activities:
Proceeds from issuance of common stock $831 $912
Excess tax benefits from equity awards $1,133 $751
Taxes paid related to net share settlement of equity awards -$520 -$406
Cash generated by financing activities $1,444 $1,257
(Decrease)/increase in cash and cash equivalents -$1,446 $5,998
Cash and cash equivalents, end of the year $9,815 $11,261
Supplemental cash flow disclosure:
Cash paid for income taxes, net $3,338 $2,697
Common Size of Cash Flow
2011 % 2010%
Inflow (In Millions)
Operating activities 34.32% 27.76%
Proceeds from maturities of marketable securities 18.69% 37.22%
Proceeds from sales of marketable securities 45.19% 32.53%
Proceeds from issuance of common stock 0.76% 1.36%
Excess tax benefits from equity awards 1.04% 1.12%
Total 100.00% 100.00%
Outflow (In Millions)
Purchases of marketable securities 92.35% 94.78%
Payments made in connection with business acquisition, net of cash
acquired
0.22% 1.05%
Payments for acquisition of property, plant, and equipment 3.85% 3.29%
Payments for acquisition of intangible assets 2.88% 0.19%
Other 0.23% 0.03%
Taxes paid related to net share settlement of equity awards 0.47% 0.67%
Total 100.00% 100.00%
Change in cash and marketable securities
7 Appendix D: Projected Financial Statement
Projected Balance Sheet in millions 2012 2011 2010Cash 166627 9815 11261Receivables 8911 5369 5510Inventories 1288 776 1051Other current assets 4529 4529 3447 Total current assets 16130 44988 41678PPE 12776 7777 4768Accumulated depreciation 6950 3991 2466Net PPE 5826 3786 2302Other assets 3556 3556 2263Total assets 24109 52330 46243Accounts payable 24284 14632 12015Current portion of long term debt 0 0 0Accrued expenses 15347 9247 5723
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Income taxes & other 13840 8283 4527 Total current liabilities 53470 32162 22265Deferred income taxes and other liabilities 2868 2868 1440Long term debt 0 0 0 Total liabilities 56338 35030 23705Common stock 13331 13331 10668Additional paid in capital 17018 17018 20956Retained earnings 104050 62841 37169 Shareholders' equity 134399 93190 68793Total liabilities and net worth 190736 128220 92498
Growth RatioSales growth 65.962%Gross profit margin 40.479%S G & A/sales 7.020%Depreciation expense/gross prior year ppe 38.045%Interest expense/prior year long term debt 0.000%Income tax expense/pretax income 24.216%
Projected Income Statement in millions 2012 2011 2010Sales 179653 108249 65225COGS 106931 64431 39541Gross profit 72721 43818 25684SG & A 12611 7599 5517D & A 2959 1814 1027Interest expense 0 0 0Income before tax 57151 34205 18540Income tax expense 13840 8283 4527Income from extraordinary items and discontinued operations
0 0 0
Net income 43312 25922 14013Outstanding shares 6783.775594 6783.775594 5428.649
Growth RatioAccounts receivable turnover rate 20.162Inventory turnover rate 83.030Accounts payable turnover rate 4.403
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Accrued expenses turnover rate 11.706Tax payable/tax expense 100.000%Dividend per share 0.31Capital expenditures--in millions 3012Capital expenditures/sales 2.782%
Projected Cash-Flow Statement in millions 2012Net income 43312D&A 2959Receivables -3542Inventories -512Accounts payable 9652Accrued expenses 6100Income taxes and other 5557Net cash flow from operations 63525Capital expenditures -4999Net cash flow from investing activities -4999Long term debt 0Dividends -2103Net cash flow from financing activities -2103Net change in cash 56423Beginning cash 9815Ending cash 66238
8 References
Apple Inc. (2012). Apple Press Info. Retrieved from: http://www.apple.com/pr/bios/
Apple Inc. (2012). Apple Reports First Quarter Results. Retrieved from:
http://www.apple.com/pr/library/2011/01/18Apple-Reports-First-Quarter-
Results.html
Goldman, David. (2011). How Apple Block its Competition. CNN. Retrieved from:
http://money.cnn.com/2011/04/22/technology/apple_supply_chain/index.htm
Hodson, Steve. (2011). Is Apple Competition with Anyone. Retrieved from:
http://www.inquisitr.com/84506/is-apple-in-competition-with-anyone/
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Marketing Teacher. n.d. SWOT Analysis of Apple. Retrieved from:
http://www.marketingteacher.com/swot/apple-swot.html
Oliver, Sam. (2012). Apple's iOS finishes 2011 with 52% share of mobile Web browsing.
Apple Insider. Retrieved from:
http://www.appleinsider.com/articles/12/01/02/apples_ios_finishes_2011_with_5
2_share_of_mobile_web_browsing/
Slivka, Eric. (2011). Apple's Share of U.S. PC Market Leaps to 12.9% in 3Q 2011.
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