Company Analysis Report -Business Analysis Apple Inc. (2014-2018

Company Analysis Report – Business Analysis Apple Inc. (2014-2018) Name: Changbo Wang ID: 6607962 Summer 2019 Company Overview This report analyses the financial statements of Apple Inc. (Apple) while using Samsung Electronics Co. Ltd. (“Samsung”) as a benchmark to determine financial flexibility and stability. Profitability ratios, Activity ratios, Liquidity ratios and Coverage ratios will be used to provide insight into the mentioned six characteristics of Apple. The report will enable analysts to arrive at conclusions and make recommendations in a professional manner and to provide the various stakeholders and consumers the information they need in making decisions related to the company. Apple is an American multinational technology company headquartered in Cupertino, California, that designs, develops, and sells consumer electronics, computer software, and online services. It is considered one of the Big Four tech companies along with Amazon, Google, and Facebook. Apple was founded on April 1, 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne as Apple Computer Company, incorporated on January 3, 1977 as Apple Computer, Inc and went public on December 12, 1980. In January 2007, Jobs renamed the company Apple Inc., reflecting its shifted focus toward consumer electronics. Since the IPO at price $22.00 per share Apple’s stock has split four times, split on a 7-for-1 basis on June 9, 2014 and split on a 2-for-1 basis on February 28, 2005, June 21, 2000, and June 16, 1987. On a split-adjusted basis the IPO share price was $0.39. Comparing to the price of $202.59 as of July 19, it’s been more than 500 times of growth. Now Apple is the world's largest technology company by revenue and one of the world's most valuable companies. It is also the world's third-largest mobile phone manufacturer after Samsung and Huawei. The company employs 123,000 full-time employees and maintains 504 retail stores in 24 countries as of 2018. The company also has a high level of brand loyalty and is ranked as the world's most valuable brand. Apple was at the top of Interbrand's annual Best Global Brands report for 6 years in a row: 2013, 2014, 2015, 2016, 2017 and 2018 with a valuation of $214.48 billion. Vision: “We believe that we are on the face of the earth to make great products and that's not changing.” Mission: “to bringing the best user experience to its customers through its innovative hardware, software, and services.” Values: Accessibility: Technology is most powerful when it empowers everyone. Education: Giving products, support, and opportunities to schools that need them most. Environment: Truly innovative products leave their mark on the world instead of the planet. Inclusion and Diversity: Different together. Privacy and Security: Apple products are designed to protect your privacy. Supplier Responsibility: People come first. In everything we do. Main Hardware Products: Mac, a line of desktop and portable personal computers iMac: Consumer all-in-one desktop computer, introduced in 1998. Mac Mini: Consumer sub-desktop computer, introduced in 2005. Mac Pro: Workstation desktop computer, introduced in 2006. MacBook Pro: Professional notebook, introduced in 2006. MacBook Air: Consumer ultra-thin, ultra-portable notebook, introduced in 2008. iPod, a line of digital music player, introduced in 2001 In late July 2017, Apple discontinued its iPod Nano and iPod Shuffle models, leaving only the iPod Touch available for purchase. iPhone, a line of smartphones, introduced in 2007 iPad, a line of multi-purpose tablets, introduced in 2010 Apple Watch, a personal electronic device, introduced in 2014 Apple TV, a set-top device that connects to consumers' TVs and enables them to access digital content directly for streaming video, playing music and games, and viewing photos, introduced in 2007 Apple AirPods, a smart wireless earphones, introduced in 2016 Apple HomePod, a smart speaker, introduced in 2018 Main Software and Services Operating Systems macOS for Mac personal computers iOS for iPhone smartphones and iPod music players iPadOS for iPad tablets watchOS for Apple Watch smartwatches tvOS for Apple TV digital media player iWork productivity suite Pages for writing on iOS and macOS Numbers for spreadsheets on iOS and macOS Keynote for presentations on iOS and macOS iMovie and Final Cut Pro X for video editing on macOS GarageBand and Logic Pro X for music creation on macOS iTunes Store, an app store that allows customers to purchase and download, or stream music and TV shows App Store, a digital distribution platform that allows users to browse and download apps on iPhone, iPod Touch and iPad iCloud, a cloud service, which stores music, photos, contacts, calendars, mail, documents, and others Apple Music, a subscription-based music streaming service Apple News, a news aggregator application on which users can read news articles based on publishers, websites and topics they select Apple Books, formerly iBooks, an e-book reading and store application Apple Pay, a cashless payment and digital wallet service Key Events since Jobs died 2011: Jobs died on October 5 marking the end of an era for Apple. 2012: Apple's rising stock price increased the company's market capitalization to a world-record $624 billion. 2013: Apple filed a patent for an augmented reality (AR) system that can identify objects in a live video stream and present information corresponding to these objects through a computer-generated information layer overlaid on top of the real-world image. 2014: Apple confirmed the acquisition of Beats Electronics—producer of headphones and speaker products, and operator of the music streaming service Beats Music—for $3 billion. 2015: Apple ranked third, overall in Fortune 500, with $233 billion in revenue as the top tech company. 2016: Apple invested $1 billion in DiDi, a Chinese transportation network company. 2017: Apple acquired Shazam by $400 million, a company specializing in music, TV, film and advertising recognition. The purchase was approved by EU later in September 2018. Global Smartphone Shipments Drop It used to be a foregone conclusion that smartphone makers would see substantial year-over-year sales increases. After all, everyone wanted smartphones. Today, everyone still wants smartphones, but they already have at least one. The market has plateaued, and companies like Samsung and Apple are seeing phone sales level off and even trend downward. For most of the last decade, smartphone sales have ticked upward at double-digit rates every year. The increase began levelling off in the last several quarters— even Apple recently warned that it expected iPhone sales to drop. The latest IDC report for the first quarter of 2019 says that worldwide phone shipments dropped 6.6 percent versus last year; 310.8 million smartphones down from 332.7 million in Q1 2018 as U.S. shipments had the biggest drop by 15 percent. SWOT Analysis Strengths Weakness Strong brand image High profit margins Effective rapid innovation processes Limited distribution network High selling prices Dependence of sales on high-end market segments Opportunities Threats Expansion of the distribution network Higher sales volumes based on rising demand Development of new product lines Aggressive competition Imitation Rising labour cost in various countries Financial Analysis Horizontal Analysis Net sales increased by 15.9% Cost of sales increased by 16.1% Gross margin increased by 15.5% Total operating expenses increased 15.3% Operating income increased by 15.6% Net income increased by 23.1% Total current assets increased by 2.1% Total non-current assets decreased by 5.0% Total assets decreased by 2.6% Total current liabilities increased by 15.9% Total non-current liabilities increased by 0.9% Total liabilities increased by 7.2% Total shareholder’s equity decreased by 20.1% Total Cash generated by operating activities increased by 20.6% Total Cash generated by investing activities increased by 134.6% Total Cash generated by financing activities decreased by 388.9% Vertical Analysis Gross margin rate is 38.3% of net sales Cost of sales takes 61.7% of net sales Total operating expenses take 11.6% of net sales Out of operating expenses, research and development expenses take 5.4% and other expenses take 6.3% Operating income takes 26.7% of net sales Net income takes 22.4% of net sales Total current assets take 35.9% of total assets Out of current assets, cash and cash equivalents take 7.1% of total assets Total non-current assets take 64.1% of total assets Total current liabilities take 32.0% of total assets Out of current liabilities, accounts payable take 15.3% of total assets Total non-current liabilities take 38.7% of total assets 70.7% of total assets was total liabilities Total shareholders’ equity take 29.3% of total assets Out of shareholders’ equity, owners’ capital takes 11.0% and retained earnings take 19.2% of total assets Trend Analysis Trend analysis is a method to predict the future with past trend here in this case 5 years of data has been analysed. It’s particularly based on the idea that what has happened in the past gives the consumers and traders idea of what will happen in the future. Chart No. 1: Financial Position From 2014 to 2017, the total assets of Apple increased continuously but witnessed a decline in 2018 because total owner’s equity decreased even though the total liabilities increased. Samsung’s assets expansion is continued from 2014 onwards especially after 2016 along with total owner’s equity growth while the total liabilities was relatively steady. Chart No. 2: Cash Flows (Financial Flexibility) From 2014 to 2018, Apple’s operating cash flows was stable. But in 2018, investing cash flows jumped up while financing cash flow decreased a lot. After 2016, the operating cash flows of Samsung started to grow along with the decrement of investing cash flows. Chart No. 3: Operating Cash Flow and Net Operating Profit (Financial Stability) From 2014 to 2018, the trend of operating cash flows of Apple was corresponding with net operating profit. But in 2018, the retained earnings dropped for the first time in last 5 years. For Samsung, operating cash flows and net operating profit have been continuously increasing while retained earnings followed the trend especially after 2016. Ratio Analysis Profitability analysis The analysis of profitability seeks to measure how good the company was at maximizing the return it gets from assets invested in the business. This is the primary goal of any business. Table No. 1: Profitability ratios Profitability Ratios Indicators Apple Samsung 2017 2018 2017 2018 Note: % % % % Return on Assets 12.9 16.3 14.0 13.1 Return on Equity 36.0 56.0 19.7 17.9 Return on Assets (CF) 17.0 21.2 20.6 19.8 Return on Equity (CF) 47.9 72.3 29.0 27.1 Earnings Per Share (EPS) 9.2 11.9 5.3 5.9 The return on Assets of Apple increased in 2018 to 16.3% while Samsung declined to 13.1%. The return on Equity of Apple increased in 2018 to 56% while Samsung declined to 17.9%. The return on Assets in terms of cash flows increased in 2018 to 21.2% while Samsung declined to 19.8%. The return on Equity in terms of cash flows increased in 2018 to 72.3% while Samsung declined to 27.1%. The EPS of Apple increased in 2018 to 11.9$ while Samsung increased to 5.9$. Liquidity analysis Liquidity determines the organization’s capacity to satisfy the payment of immediate, current, and short-term obligations. Having sufficient cash and delivering payment on time, financial institutions and vendor providers prefer and trust to do business, increase volume, and provide discount to such companies. Table No. 2: Liquidity ratios Liquidity Ratios Indicators Apple Samsung 2017 2018 2017 2018 Note: $ in Millions $ in Millions $ in Millions $ in Millions Net Working Capital 27831 14473 194956 225187 Net Working Capital (CF) -36589 -39432 15645 4426 Note: Ratio Ratio Ratio Ratio Current Ratio 1.28 1.12 2.2 2.5 Current Ratio (CF) 0.64 0.66 0.9 1.0 The net working capital of Apple decreased in 2018 while Samsung increased and the amount of Samsung is more 15 times than Apple. In terms of cash flows, the net working capital of Apple was negative. The current ratio of Apple decreased in 2018 to 1.12 while Samsung increased to 2.5, which was more 2 times than Apple. In terms of cash flows, the current ratio of Apple increased in 2018 to 0.66, which was less than 1.0 of Samsung. Debt management analysis Debt management is another factor that makes a company desirable for credit banks and equity owners since it shows the long-term survival of the company in paying dues as they mature in 10-20 years, for example. Table No. 3: Debt management ratios Debt Management Ratios Indicators Apple Samsung 2017 2018 2017 2018 Note: Ratio Ratio Ratio Ratio Debt Ratio 0.64 0.71 0.30 0.27 Note: Times Times Times Times Times Interest Earned (TIE) 26.4 21.9 81.9 87.2 The debt ratio of Apple increased in 2018 to 0.71 while Samsung decreased to 0.27, which much lower than Apple. The TIE of Apple decreased in 2018 to 21.9 while Samsung increased to 87.2, which is much higher than Apple. Activity analysis Activity ratios measures the company’s ability to turn its assets into cash, it shows how management utilizes their assets to generate revenues. Table No. 4: Activity ratios Activity Ratios Indicators Apple Samsung 2017 2018 2017 2018 Note: Times Times Times Times Assets Turnover 0.6 0.7 0.8 0.7 Receivable Turnover 12.8 11.5 7.5 6.6 The Assets Turnover of Apple increased in 2018 to 0.7 which was same with Samsung. The Receivable Turnover of Apple decreased in 2018 to 11.5 while Samsung decreased to 6.6, which still was much lower than Apple. Conclusions Recommendations Appendix Table No. 5: Horizontal Analysis Parameters 2018 2017 Increase/Decrease $ in Millions $ in Millions $ in Millions % Income Statement Net sales 265,595 229,234 36,361 15.9% Cost of sales 163,756 141,048 22,708 16.1% Gross margin 101,839 88,186 13,653 15.5% 　 　 　 　 　 Operating expenses: 　 　 　 　 Research and development 14,236 11,581 2,655 22.9% Selling, general and administrative 16,705 15,261 1,444 9.5% Total operating expenses 30,941 26,842 4,099 15.3% 　 　 　 　 　 Operating income 70,898 61,344 9,554 15.6% Other income/(expense), net 2,005 2,745 (740) -27.0% Income before provision for income taxes 72,903 64,089 8,814 13.8% Provision for income taxes 13,372 15,738 (2,366) -15.0% Net income 59,531 48,351 11,180 23.1% Balance Sheet ASSETS: 　 　 　 　 Current assets: 　 　 　 　 Cash and cash equivalents 25,913 20,289 5,624 27.7% Marketable securities 40,388 53,892 (13,504) -25.1% Accounts receivable, net 23,186 17,874 5,312 29.7% Inventories 3,956 4,855 (899) -18.5% Vendor non-trade receivables 25,809 17,799 8,010 45.0% Other current assets 12,087 13,936 (1,849) -13.3% Total current assets 131,339 128,645 2,694 2.1% 　 　 　 　 　 Non-current assets: 　 　 　 　 Marketable securities 170,799 194,714 (23,915) -12.3% Property, plant and equipment, net 41,304 33,783 7,521 22.3% Other non-current assets 22,283 18,177 4,106 22.6% Total non-current assets 234,386 246,674 (12,288) -5.0% Total assets 365,725 375,319 (9,594) -2.6% 　 　 　 　 　 LIABILITIES AND SHAREHOLDERS' EQUITY: 　 　 　 　 Current liabilities: 　 　 　 　 Accounts payable 55,888 44,242 11,646 26.3% Other current liabilities 32,687 30,551 2,136 7.0% Deferred revenue 7,543 7,548 (5) -0.1% Commercial paper 11,964 11,977 (13) -0.1% Term debt 8,784 6,496 2,288 35.2% Total current liabilities 116,866 100,814 16,052 15.9% 　 　 　 　 　 Non-current liabilities: 　 　 　 　 Deferred revenue 2,797 2,836 (39) -1.4% Term debt 93,735 97,207 (3,472) -3.6% Other non-current liabilities 45,180 40,415 4,765 11.8% Total non-current liabilities 141,712 140,458 1,254 0.9% Total liabilities 258,578 241,272 17,306 7.2% 　 　 　 　 　 Shareholders' equity: 　 　 　 　 Common stock and additional paid-in capital 40,201 35,867 4,334 12.1% Retained earnings 70,400 98,330 (27,930) -28.4% Accumulated other comprehensive income/(loss) (3,454) (150) (3,304) 2202.7% Total shareholders' equity 107,147 134,047 (26,900) -20.1% Total liabilities and shareholders' equity 365,725 375,319 (9,594) -2.6% Cash Flows Cash and cash equivalents, beginning of the year 20,289 20,484 (195) -1.0% 　 　 　 　 　 Operating activities: 　 　 　 　 Net income 59,531 48,351 11,180 23.1% Depreciation and amortization 10,903 10,157 746 7.3% Share-based compensation expense 5,340 4,840 500 10.3% Deferred income tax expense/(benefit) (32,590) 5,966 (38,556) -646.3% Other adjustments (444) (166) (278) 167.5% Changes in operating assets and liabilities: 　 　 　 　 Accounts receivable, net (5,322) (2,093) (3,229) 154.3% Inventories 828 (2,723) 3,551 -130.4% Vendor non-trade receivables (8,010) (4,254) (3,756) 88.3% Other current and non-current assets (423) (5,318) 4,895 -92.0% Accounts payable 9,175 8,966 209 2.3% Deferred revenue (44) (626) 582 -93.0% Other current and non-current liabilities 38,490 1,125 37,365 3321.3% Cash generated by operating activities 77,434 64,225 13,209 20.6% 　 　 　 　 　 Investing activities: 　 　 　 　 Purchases of marketable securities (71,356) (159,486) 88,130 -55.3% Proceeds from maturities of marketable securities 55,881 31,775 24,106 75.9% Proceeds from sales of marketable securities 47,838 94,564 (46,726) -49.4% Payments for acquisition of property, plant and equipment (13,313) (12,451) (862) 6.9% Payments made in connection with business acquisitions, net (721) (329) (392) 119.1% Purchases of non-marketable securities (1,871) (521) (1,350) 259.1% Proceeds from non-marketable securities 353 126 227 180.2% Other (745) (124) (621) 500.8% Cash generated by/(used in) investing activities 16,066 (46,446) 62,512 -134.6% 　 　 　 　 　 Financing activities: 　 　 　 　 Proceeds from issuance of common stock 669 555 114 20.5% Payments for taxes related to net share settlement of equity awards (2,527) (1,874) (653) 34.8% Payments for dividends and dividend equivalents (13,712) (12,769) (943) 7.4% Repurchases of common stock (72,738) (32,900) (39,838) 121.1% Proceeds from issuance of term debt, net 6,969 28,662 (21,693) -75.7% Repayments of term debt (6,500) (3,500) (3,000) 85.7% Change in commercial paper, net (37) 3,852 (3,889) -101.0% Cash used in financing activities (87,876) (17,974) (69,902) 388.9% Table No. 6: Vertical Analysis Parameters 2018 $ in Millions % Income Statement Net sales 265,595 100.0% Cost of sales (163,756) -61.7% Gross margin 101,839 38.3% Operating expenses: 　 　 Research and development (14,236) -5.4% Selling, general and administrative (16,705) -6.3% Total operating expenses (30,941) -11.6% Operating income 70,898 26.7% Other income/(expense), net 2,005 0.8% Income before provision for income taxes 72,903 27.4% Provision for income taxes (13,372) -5.0% Net income 59,531 22.4% Balance Sheet ASSETS: 　 　 Current assets: 　 　 Cash and cash equivalents 25,913 7.1% Marketable securities 40,388 11.0% Accounts receivable, net 23,186 6.3% Inventories 3,956 1.1% Vendor non-trade receivables 25,809 7.1% Other current assets 12,087 3.3% Total current assets 131,339 35.9% 　 　 　 Non-current assets: 　 　 Marketable securities 170,799 46.7% Property, plant and equipment, net 41,304 11.3% Other non-current assets 22,283 6.1% Total non-current assets 234,386 64.1% Total assets 365,725 100.0% 　 　 　 LIABILITIES AND SHAREHOLDERS' EQUITY: 　 　 Current liabilities: 　 　 Accounts payable 55,888 15.3% Other current liabilities 32,687 8.9% Deferred revenue 7,543 2.1% Commercial paper 11,964 3.3% Term debt 8,784 2.4% Total current liabilities 116,866 32.0% 　 　 　 Non-current liabilities: 　 　 Deferred revenue 2,797 0.8% Term debt 93,735 25.6% Other non-current liabilities 45,180 12.4% Total non-current liabilities 141,712 38.7% Total liabilities 258,578 70.7% 　 　 　 Shareholders' equity: 　 　 Common stock and additional paid-in capital 40,201 11.0% Retained earnings 70,400 19.2% Accumulated other comprehensive income/(loss) (3,454) -0.9% Total shareholders' equity 107,147 29.3% Total liabilities and shareholders' equity 365,725 100.0%  Table No. 7: Trend Analysis Data $ In Millions Apple Samsung Year 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Total Assets 231,839 290,479 321,686 375,319 365,725 208,805 218,887 226,044 274,268 308,448 Total Owner's Equity 111,547 119,355 128,249 134,047 107,147 154,384 159,673 166,371 194,956 225,187 Total Liabilities 120,292 171,124 193,437 241,272 258,578 54,421 59,214 59,673 79,312 83,261 Return on Assets (ROA) 17% 18% 14% 13% 16% 10% 8% 9% 14% 13% Return on Equity (ROE) 35% 45% 36% 36% 56% 14% 11% 12% 20% 18% Operating Cash Flows 59,713 81,266 66,231 64,225 77,434 34,540 35,124 40,855 56,500 60,926 Investing Cash Flows -22,579 -56,274 -45,977 -46,446 16,066 -23,423 (31,164) (25,571) (44,887) (47,482) Financing Cash Flows -37,549 -17,716 -20,890 -17,974 -87,876 -5,667 (2,904) (7,474) (11,416) (13,715) Earnings Per Share (EPS) 6.45 9.22 8.31 9.21 11.91 2.60 2.23 2.72 5.30 5.87 Total Sales (or Total Revenues) 182,795 233,715 215,639 229,234 265,595 195,882 173,001 174,047 217,754 221,568 Net Profits from Operations 39,510 53,394 45,687 48,351 59,531 22,223 16,433 19,594 38,344 40,305 Debt Ratio 52% 59% 60% 64% 71% 27% 26% 26% 29% 27% Dividends Per Share (DPS) 1.82 1.98 2.18 2.40 2.72 19.00 18.11 24.57 38.63 1.29 :  References: 17