Apple Inc.

Financial Analysis of Apple, Inc.

Udhayakumaran
Siddharthan.

Surenthiran Theannilawu.

Accounting

Dat : May 16th 2011 Lecturer :

Nalini Rajaratnam
Table of Contents

1. Introduction……………………………………………………………………
…………03
2. Ratio
Analysis…………………………………………………………………………
….03
2.1. Profitability……………………………………………………………
………….05
2.1.1. Net Profit
Margin……………………………………………………..05
2.1.2. Gross Profit
Margin………………………………….................05
2.1.3. Asset
turnover………………………………………………….........05
2.1.4. Return on
Assets…………………....................................06
2.1.5. Shareholder’s
Equity……………….................................06
2.1.6. Earnings per
Share………………………............................06
2.2. Financial
Stability………………………………………………………….....06
 2.2.1. Current
Ratio…………………………………………………………..07

2.2.2. Quick
Ratio………………………………………………………………07
2.2.3. Debt to
Equity………………………………………………………….07
2.2.4. Debt to Total
Assets………………………………………………...07
2.2.5. Leverage
Ratio………………………………………………………...08
2.2.6.Interest
Coverage……………………………………………………….08
2.3. Conclusion..........................................................................
08
2.4. Income
Statement………………………………………………………......09
Balance
Sheet.....................................................................10

2.5. Appendix..............................................................................1
3

1. Introduction
The purpose of this report is to critically analyze the financial statements for the
years 2007, 2008, 2009 and 2010 of Apple Inc. Also this report is constructed to
understand how Apple Inc managed to survive the global financial crisis in 2008.
Finally this report will advise investors whether Apple Inc is worth investing in.

In order to understand this report in detail, one should be aware of the global
financial crisis we faced in 2008; also known as the Credit Crunch. This
catastrophic phenomenon which affected companies across the world was
 mainly caused due to a meltdown in the United States banking system. Having
affected many companies, this report will target how Apple Inc was hit by the
credit crunch.

Apple Inc. was established in 1976 by Steve Jobs, Steve Wozniak, and Ronald
Wayne. It was later incorporated in 1977 and sold basic personal computer kits.
Since then it has grown into a multinational corporation, famous for its
innovative, trend setting designs. Some of the company’s best known hardware
products are the iPod, iPad and the iPhone. The company currently enjoys a
magnificent market share of 87.3% in the MP3 industry with its iPod. Over the
years Apple Inc. has successfully been able to reach their customers and making
it a common household name. Recently with the introduction of its new iPad,
Apple reassured their presence in the market as a competitive, innovative
company.

2. Ratio Analysis
We have conducted a concise analysis for the years 2007, 2008, 2009 and 2010
with Apple’s Income statements, Statement of Financial Position and Statement
of Change in Owner’s Equity using the below shown table. We used two main
types of ratios for analysis.

• Profitability
• Financial Stability

Ratio Name 2007 2008 2009 2010

PROFITABILITY
Net profit margin 14.22% 16.32% 19.19% 21.48%
Gross profit margin 33.17% 35.20% 40.14% 39.38%
Asset turnover 1.16 1.22 1.03 1.06
Return on assets 16.43% 19.89% 19.68% 22.84%
Return on Ordinary 30.54% 33.23% 28.51% 22.8%
Shareholder’s Equity
Earnings per share 3.93 6.78 9.08 15.5

FINANCIAL STABILITY
Short term Solvency
Current ratio 2.37 2.64 2.74 2.01
Quick ratio 2.28 2.55 2.68 2.01
Long Term Solvency 2.28 2.55 2.68 1.96
Debt to equity 0.74 0.62 0.50 0.57
Debt to total assets 0.43 0.38 0.33 0.36
Leverage ratio 1.74 1.62 1.50 1.57
Interest Coverage n/a n/a n/a n/a

1.1. Profitability Ratios

This is one of the most straight forward approaches in evaluating a

company’s financial situation. Here we use ratios that asses the
company’s ability to earn profits compared to its expenses and other
external costs during a particular period. The following ratios were
calculated in order to evaluate Apple’s profitability.

1.1.1.Net Profit Margin – shows the amount of profits a company makes

from $1 of revenue in percentage. The ratio could be calculated by the
following equation.

Net Profit Margin = [Net Profit (Net Income)/Sales]*%

Apple Inc.’s Net Profit Margin has progressively increased for the past
five years. In 2006 they had a NPM of 14.22%, which increased to
 21.48% in 2010. Through the annual NPM vales we could identify that it’s
increasing at an average rate of 2.7% every year. Although there is an
increase in NPM during the credit crunch period (2008), it isn’t as
significant as Apple Inc has enjoyed in the past. This was due to the slag
in demand of desktop computers.

1.1.2.Gross Profit Margin – gives a good indication of the financial

stability of a company. It could be defined as the residue amount after
deducting the variable costs from the revenue, in relation to the
company’s sales. This ratio is given in a percentage and can be
calculated using the following equation.

Gross Profit Margin = (Gross Profit/Sales)*%

Apple’s GPM has gradually increased year to year from 2007 to 2010.
However there is only a small increase from 2007 to 2008 when
compared to any other period. The main reason for this unusual pattern
is due to the steep rise in operating cost during the credit crunch period.

1.1.3.Asset Turn Over – shows the sales generated from the value of the
assets. The ratio could also show the efficiency of a company using
their assets to generate maximum economic benefits. The ratio could
measure using the following equation.

Asset Turnover = Sales/Average Total Assets

Apple’s ATO has increased by 0.06 in 2008 and it has eventually

decreased by 0.02 in 2010.

1.1.4.Return On Assets– shows the profitability of a company in relation to

its assets. The ratio indicates the earning based on the assets owned.
The ratio could be calculated by the following equation.

Return on Assets = (Net profit before interest before

tax)/Average Total Asset

Return on assets has gradually increased from 2007-2010.That means

Apple’s profitability has been increasing throughout the last four years.

1.1.5.Return on Ordinary Shareholder’s Equity - Return on equity shows a

company's profitability by revealing how much profit a company generates with the money
shareholders have invested.
 Return Of Ordinary Shareholder’s Equity= (net profit – preference
dividend)/Average
ordinary shareholder’s equity

Apple’s ROE has increased by 6.77% from 2007 to 2010.Highest profitability has been
achieved in 2010 and lowest has been in 2007.

1.1.6.Earnings per Share – shows the earnings received from each outside
share of the company. It could be calculated from the following
equation.

Earnings per Share = (net profit – preference

dividend)/Number of ordinary shares

Apple’s EPS has increased rapidly from 2007 to 2010.And it has achieved
a record breaking 15.5% in 2010 which means Apple’s EPS has been
really good throughout the last five years

1.2.Financial Stability

Financial stability ratios are tools for gauging ability to meet long-term
obligations with enough working capital left to operate. These ratios
concentrate on the long-term health of a company particularly the effect
of the capital, finance structure of a company

1.2.1.Current Ratio – shows the company’s ability to pay its short term
liabilities. It could be calculated by the following equation.

Current Ratio = Current Assets/Current Liabilities

The current ratio of Apple has a positive incline every year. Through this
analysis we could identify that the credit crunch did not pose a threat to
the current ratio. But in there is a drop in current ratio in the year 2010.
This could be due to the sudden increase in current liabilities Apple had
to incur.
1.2.2.Quick Ratio – shows a company's short-term liquidity. In other words
the ratio indicates the ability of a firm to meet its short term liabilities
with the most liquid assets. This could be calculated by the following
equation.

Quick Ratio = Quick Assets/ Current Liabilities

Just like the current ratio analysis for Apple, the quick ratio also has
increased in the same degree. There is a reduction in 2010 which could
be due the increase in current liabilities.

1.2.3.Debt to equity – shows the extent to which the assents are financed
by either debt or equity. This could be calculated by the following
equation.

Debt to Equity = Total Liabilities/ Shareholders Equity

This ratio has increased over the years. However all the values were less
than 1, indicating that Apple’s assets were mostly financed by the
shareholders equity and not the liabilities. This is a positive aspect for
the company. But Apple is prone to finance its assets through debt since
the ratio is increasing gradually every year.

1.2.4.Debt to Total Assets - shows the amount of assets have been

financed by debt. The ratio could be calculated by the following
equation.

Debt to Total Asset = Total Liability/Total Asset

Apple’s DTTA has increase in 2008

compared to 2007 and again it has increased upto 0.36 in
2010.Basically, Apple’s DTTA is fairly good according to last four years.

1.2.5.Leverage Ratio – shows a company's methods of financing or to

measure its ability to meet financial obligation.

Leverage Ratio = Total Assets/Total Share Holders’

Equities

Apple’s leverage has gradually fallen down according to table and

there’s an average of 7 % reduction on each year.
 1.2.6.Interest Coverage –This ratio is used to determine how easily a
company can pay interest on outstanding debt.
Interest Coverage = Net
Profit Before Tax & Interest/Interest Expense

Since there was no interest expense during the last four years we come
to conclusion that interest coverage is 0.

2. Conclusion
After tediously analyzing Apple’s financial background, we would strongly
recommend to invest in the company. Their profitability has reached an all time
high level in the year 2010 and is on the upward trend. In spite of the 2008
financial crisis, Apple managed to make higher profits compared to 2007.

We also would recommend investing in Apple Inc due to it fairly strong financial
stability. Furthermore the company’s financial stability is very promising in the
future as they have invested a lot in their research and development section.
Apple is al so well managed with regard to debt to equity measure. The company
has sufficient equity to maintain their short term liabilities at a comforting level.

In our professional opinion, we think Apple will grow steadily for the next couple
of financial periods, therefore we would advise investors to seriously consider
Apple Inc.
INCOME STATEMENT 2010 2009 2008 2007 2006
Period End Date 09/25/20 09/26/20 09/27/20 09/29/20 09/30/20
10 09 08 07 06
Period Length 52 52 52 52 53
Weeks Weeks Weeks Weeks Weeks
Stmt Source 10-K 10-K/A 10-K/A 10-K/A 10-K
Stmt Source Date 10/27/20 01/25/20 01/25/20 01/25/20 12/29/20
10 10 10 10 06
Stmt Update Type Updated Updated Restated Reclassifi Updated
ed

Revenue 65,225.0 42,905.0 37,491.0 24,578.0 19,315.0

Total Revenue 65,225. 42,905. 37,491. 24,578. 19,315.
0 0 0 0 0

Cost of Revenue, Total 39,541.0 25,683.0 24,294.0 16,426.0 13,717.0

Gross Profit 25,684. 17,222. 13,197. 8,152.0 5,598.0
0 0 0

Selling/General/Administrative 5,517.0 4,149.0 3,761.0 2,963.0 2,433.0

Expenses, Total
Research & Development 1,782.0 1,333.0 1,109.0 782.0 712.0
Depreciation/Amortization 0.0 0.0 0.0 0.0 0.0
Interest Expense (Income), 0.0 0.0 0.0 0.0 0.0
Net Operating
Unusual Expense (Income) 0.0 0.0 0.0 0.0 0.0
Other Operating Expenses, 0.0 0.0 0.0 0.0 0.0
Total
Operating Income 18,385. 11,740. 8,327.0 4,407.0 2,453.0
0 0

Interest Income (Expense), 0.0 0.0 0.0 0.0 0.0

Net Non-Operating
Gain (Loss) on Sale of Assets 0.0 0.0 0.0 0.0 0.0
Other, Net -156.0 -81.0 -33.0 -48.0 -29.0
Income Before Tax 18,540. 12,066. 8,947.0 5,006.0 2,818.0
0 0

Income Tax - Total 4,527.0 3,831.0 2,828.0 1,511.0 829.0

Income After Tax 14,013. 8,235.0 6,119.0 3,495.0 1,989.0
0

Minority Interest 0.0 0.0 0.0 0.0 0.0

Equity In Affiliates 0.0 0.0 0.0 0.0 0.0
U.S. GAAP Adjustment 0.0 0.0 0.0 0.0 0.0
Net Income Before Extra. 14,013. 8,235.0 6,119.0 3,495.0 1,989.0
Items 0

Total Extraordinary Items 0.0 0.0 0.0 0.0 0.0

Net Income 14,013. 8,235.0 6,119.0 3,495.0 1,989.0
0

0.0 0.0 0.0 0.0 0.0

Total Adjustments to Net
Income
Preferred Dividends 0.0 0.0 0.0 0.0 0.0
General Partners' Distributions 0.0 0.0 0.0 0.0 0.0

Basic Weighted Average 909.46 893.02 881.59 864.6 844.06

Shares
Basic EPS Excluding 15.41 9.22 6.94 4.04 2.36
Extraordinary Items
Basic EPS Including 15.41 9.22 6.94 4.04 2.36
Extraordinary Items

Diluted Weighted Average 924.71 907.01 902.14 889.29 877.53

Shares
Diluted EPS Excluding 15.15 9.08 6.78 3.93 2.27
Extrordinary Items
Diluted EPS Including 15.15 9.08 6.78 3.93 2.27
Extraordinary Items

Dividends per Share - 0.0 0.0 0.0 0.0 0.0

Common Stock Primary Issue
Gross Dividends - Common 0.0 0.0 0.0 0.0 0.0
Stock
Depreciation, Supplemental 815.0 606.0 387.0 259.0 213.0

Normalized EBITDA 19,317.0 12,424.0 8,787.0 4,714.0 2,678.0

Normalized EBIT 18,385.0 11,740.0 8,327.0 4,407.0 2,453.0
Normalized Income Before 18,540.0 12,066.0 8,947.0 5,006.0 2,818.0
Tax
Normalized Income After 14,013.0 8,235.0 6,119.0 3,495.0 1,989.0
Taxes
Normalized Income Available 14,013.0 8,235.0 6,119.0 3,495.0 1,989.0
to Common

Basic Normalized EPS 15.41 9.22 6.94 4.04 2.36

Diluted Normalized EPS 15.15 9.08 6.78 3.93 2.27
Amortization of Intangibles 117.0 78.0 73.0 48.0 12.0
BALANCE SHEET AS AT 2010 2009 2008 2007 2006
Period End Date 09/25/20 09/26/20 09/27/20 09/29/20 09/30/20
10 09 08 07 06

Stmt Source 10-K 10-K/A 10-K/A 10-K 10-K

Stmt Source Date 10/27/20 01/25/20 01/25/20 11/05/20 11/15/20
10 10 10 08 07
Stmt Update Type Updated Updated Restated Reclassifi Reclassifi
ed ed

Assets
25,620.0 23,464.0 22,111.0 15,386.0 10,110.0
Cash and Short Term
Investments
Cash & Equivalents 11,261.0 5,263.0 11,875.0 9,352.0 6,392.0
Short Term Investments 14,359.0 18,201.0 10,236.0 6,034.0 3,718.0
9,924.0 5,057.0 4,704.0 4,029.0 2,845.0
Total Receivables, Net
5,510.0 3,361.0 2,422.0 1,637.0 1,252.0
Accounts Receivable - Trade,
Net
Accounts Receivable - Trade, 5,565.0 3,413.0 2,469.0 1,684.0 1,304.0
Gross
Provision for Doubtful -55.0 -52.0 -47.0 -47.0 -52.0
Accounts
Receivables - Other 4,414.0 1,696.0 2,282.0 2,392.0 1,593.0
Total Inventory 1,051.0 455.0 509.0 346.0 270.0
Prepaid Expenses 0.0 309.0 475.0 417.0 208.0
Other Current Assets, Total 5,083.0 2,270.0 2,207.0 1,778.0 1,076.0
Total Current Assets 41,678. 31,555. 30,006. 21,956. 14,509.
0 0 0 0 0

Property/Plant/Equipment, 4,768.0 2,954.0 2,455.0 1,832.0 1,281.0

Total - Net
Goodwill, Net 741.0 206.0 207.0 38.0 38.0
Intangibles, Net 342.0 353.0 352.0 382.0 139.0
Long Term Investments 25,391.0 10,528.0 2,379.0 0.0 0.0
Note Receivable - Long Term 0.0 0.0 0.0 0.0 0.0
Other Long Term Assets, Total 2,263.0 1,905.0 772.0 1,139.0 1,238.0
Other Assets, Total 0.0 0.0 0.0 0.0 0.0
Total Assets 75,183. 47,501. 36,171. 25,347. 17,205.
0 0 0 0 0

Liabilities and
Shareholders' Equity
Accounts Payable 12,015.0 5,601.0 5,520.0 4,970.0 3,390.0
Payable/Accrued 0.0 0.0 0.0 0.0 0.0
Accrued Expenses 1,593.0 1,293.0 1,320.0 772.0 803.0
Notes Payable/Short Term 0.0 0.0 0.0 0.0 0.0
Debt
Current Port. of LT 0.0 0.0 0.0 0.0 0.0
Debt/Capital Leases
Other Current Liabilities, Total 7,114.0 4,612.0 4,521.0 3,538.0 2,250.0
Total Current Liabilities 20,722. 11,506. 11,361. 9,280.0 6,443.0
0 0 0

Total Long Term Debt 0.0 0.0 0.0 0.0 0.0

Deferred Income Tax 4,300.0 2,216.0 999.0 619.0 381.0
Minority Interest 0.0 0.0 0.0 0.0 0.0
Other Liabilities, Total 2,370.0 2,139.0 1,514.0 916.0 397.0
Total Liabilities 27,392. 15,861. 13,874. 10,815. 7,221.0
0 0 0 0

Redeemable Preferred Stock 0.0 0.0 0.0 0.0 0.0

Preferred Stock - Non 0.0 0.0 0.0 0.0 0.0
Redeemable, Net
Common Stock 10,668.0 8,210.0 7,177.0 5,368.0 4,355.0
Retained Earnings 37,169.0 23,353.0 15,129.0 9,101.0 5,607.0
(Accumulated Deficit)
Other Equity, Total -46.0 77.0 -9.0 63.0 22.0
Total Equity 47,791. 31,640. 22,297. 14,532. 9,984.0
0 0 0 0

Total Liabilities & 75,183. 47,501. 36,171. 25,347. 17,205.

Shareholders’ Equity 0 0 0 0 0

Total Common Shares 915.97 899.81 888.33 872.33 855.26

Outstanding
Total Preferred Shares 0.0 0.0 0.0 0.0 0.0
Outstanding
Financial data in U.S. Dollars
Values in Millions (Except for per share items)