Apple Inc. was established in April 1976 as a manufacturing company in the technology industry. Since its inception, Apple has become one of the most popular international organizations. The firm’s business model focuses on the design, development, manufacturing, and sale of its various computer software, electronics used by consumers, and online platforms. The company has its headquarters in Cupertino, California, in the United States of America. This research paper analysis Apple Inc.’s financial model and performance and models explicitly the company’s discounted cash flow (DCF), which is a critical tool for investors.
Presentation of Apple Inc.
Apple Inc.’s financial stand is massive since it is one of the renowned global companies. According to Macrotrends (2020), Apple’s market value is estimated to be over two trillion. The trend shows that the company continues to thrive in the industry despite having various competitors from across different parts of the world. The firm generates its revenues from product sales, subscriptions for different services, and extended warranties on the products it provides. Specifically, the company sells items such as iPhone Mac computers, iPod entertainment devices, Apple Watches, and Apple smart televisions. The company offers subscription services such as AppleCare, iTunes Store, iCloud, App Store, and Apple Pay. The firm also charges various fees for users who extend their warrantees, resulting in unmatched satisfaction among such items. Most of these products and services are highly priced, making it challenging for Apple to compete with other manufacturers who offer alternative products at lower prices. However, Apple has created a reputation for quality manufacturing, making it one of the firms with the best customer loyalty.
Some of Apple Inc.’s peers include Samsung, Google, and Microsoft, although other smaller competitors include Techno, Oppo, and Nokia. Samsung, Google, and Microsoft are considered chief contenders because they develop similar products to Apple. For instance, Google and Microsoft make mobile phones and computers and provide operating systems to run these devices. On the other hand, Samsung manufactures high-end mobile devices, which have been considered better than some closely related iPhones. However, Apple still performs well in the U.S. market, where foreign companies have not succeeded in outperforming the company. Thus, since the company’s profit margins continue yearly, it is positioned at a strategic point where it can continue safe operations without fearing the effects of other players.
Even though Apple Inc.’s success is seen in the present times, its operations began to outperform its competitors during the initial years of its operation. In particular, this relied on how its leadership and approach to manufacturing and marketing its products. Steve Jobs’s leadership style made Apple succeed beyond its initial expectation. When Jobs died in 2011, he left the mantle to Tim Cook, who took the company using the former leader’s vision and built a sustainable company, which has since become one of the greatest in the world.
Apple Inc. Fundamentals
The financial performance of Apple Inc. has been rising over the years. According to Macrotrends (2021), Apple’s net income rose from $1,328 million in 2005 to $57,411 million. This indicates that the company’s income increased by over 50 times within the last 15 years. Furthermore, the firm’s stock values have increased over the same period, indicating that the organization is performing well in the industry. For instance, some of the key stock values, which improved over the period, include earnings per share, though the shares outstanding reduced over the same time. Specifically, Apple’s earnings per share rose from $0.06 to $3.28 but share outstanding reduced from $23,993 million in 2005 to $17,528 million in 2020. Some of the key financial ratios which are critical in analyzing the performance of the company include working capital ratio, quick ratio, earnings per share (EPS), price-earnings (P/E) ratio, and debt-equity ratio. Each of these values is calculated below.
Working Capital Ratio
Working capital is financial, which indicates a firm’s ability to settle its present liabilities using its current assets. This ratio is crucial since it enables creditors to determine the company’s ability they wish to invest to pay its debts within one year of its financing (Aytac, Hoang, Lahiani, & Michel, 2020). Thus, the working ratio represents the difference between a business’s current assets and current liabilities. Based on Apple’s balance sheet, the 2020 current asset is valued at $143,713,000, 000 and a current liabilities of $105,392,000,000. Therefore, the company’s working capital ratio is given as
WCR= current assets / current liabilities = $143,713,000, 000/ $105,392,000,000 = 1.36
Since this ratio is positive, it shows that the firm is well placed to settle its current debts using its current assets.
The quick ratio is also known as the acid test and involves subtracting inventories from the current assets before dividing them into the respective liabilities. This helps show how easily current liabilities can be catered for by the firm’s available cash and its items with its cash values while inventories are converted into liquid assets (Valaskova, Kliestik, & Kovacova., 2018). Based on Apple’s 2020 balance sheet, the current asset is valued at $143,713,000, 000 and a current liabilities of $105,392,000,000, while the inventories are valued at $4,061,000,000.
Thus, the company’s quick is given as follows:
Quick ratio= (current assets- inventories)/ current liabilities = (143,713,000, 000- 4,061,000,000)/ 105,392,000,000 = 1.33
This value shows that the company converts its inventories quickly, making it easy for it to produce more products.
Earnings per Share
Buying a company’s stock implies participating in the firm’s future earnings or loss of investment if the business fails to perform as expected. According to Valaskova et al. (2018), earnings per share is used to measure the net revenue, that the firm earns from its common stock. It results from dividing the company’s net income by its weighted average of the common shares outstanding over the year. Valaskova et al. (2018) indicate that a company with zero earnings also has zero earnings per share. Based on the current values of Apple, its earnings per share are valued at $3.28, which indicates that the company is financially healthy.
The Price-earnings ratio reveals the assessment made by investors regarding a company’s future earnings. This is done by determining the firm’s stock share price and dividing the value by earnings per share. Based on the Macrotrends financial information on Apple Inc, this ratio can be calculated using the current closing price and dividing it by the latest earnings per share number. Consequently, using this method reveals that Apple’s PE ratio is 36.38.
Investors must consider how their target investment borrows too much from financial providers. This is critical as it informs the investors about the company’s future financial performance and debt-to-equity relations. For instance, if a company borrows too much, this behavior reduces the secure margins behind what the firm owes, hence reducing earnings that are available for dividends. Therefore, the debt-to-equity ratio is determined by summing short and long-term debts and dividing the answer by the shareholder’s equity book value. In this regard, Apple’s long-term debt is $98,667,000,000 and its shareholder equity is $65,339,000,000. Thus, the debt-equity ratio is given by;
Debt-equity ratio = long-term debt/ shareholder equity = 1.51.
This value is positive and shows that Apple’s debt is much higher than the acceptable value, which should be below 1. Thus, the company should work on reducing its long-term debts for it to attract more investors.
Price and Price Expectations
The discounted cash flow (DCF) model is one of the several frameworks used to perform a company’s valuation and the residual value, which is available to the firm’s shareholders. This model relies on the concept that the value of any asset is the present value of the asset’s future cash flows (Takács, Ulbert, & Fodor, 2020). An organization’s free cash flow can be used to determine the value of any firm using the DCF model. The current analysis utilized the following approaches to arrive at the answers available in the excel spreadsheet.
- Forecast the future cash flow of the company
- Discounting the cash flows using the weighted average cost of capital (WACC) of the firm.
- Using the concept that equity value is equal to the value of the organization less its debt value
During the calculations, some complications were noted, which resulted in making assumptions. Specifically, it was critical to note that the DCF model is used to calculate the company’s value and not necessarily the value of its stock. This indicates that the bondholders have senior claims on the organization’s value and that each of the shareholders has a pre-rata residual claim. In addition, the DCF framework requires forecasts of several complicated quantities with many inputs and assumptions. Thus, the values that the analysis arrives at the end are estimates based on the forecasts made on uncertain quantities. The inputs used in the DCF model include forecasts of future cash flows, which include initial cash flow, forecast near and long-term growth rates, and the discount rate (WACC). To determine the capital structure of the firm (debt-to-value ratios), assumptions on the market value of equity and the market value of debt were made. On the other hand, to determine the cost of equity capital, assumptions were made about the risk-free market rate, market risk premium, and equity beta. To get the cost of debt capital, debt assumptions were made on the pre-tax cost of debt and the effective tax rate. The DCF analysis and report are available in the excel sheet attached.
Risks and Headwinds
The analysis conducted in this paper reveals that Apple Inc. is likely to remain on top of the industry for an infinite period after the fifth year of the forecast. However, one of the main concerns, which was considered, is ensuring that the growth rate should not be higher than the economic growth of any nation, especially the United States of America, which is the firm’s host country. The technology industry is steadily on the rise, and new issues keep emerging. This makes it quite slippery to rely on the forecast made in this case. Thus, assuming that the company grows according to the bull market, it will enjoy a steady rise of 3% for an infinite time, making it one of the steadiest organizations. This will enhance the investors’ attitudes towards the company, hence becoming increasingly favorable. On the other hand, assuming a bear market trend in the firm, this analysis indicates that the firm will have a maximum annual growth rate of 3%, which may decline infinitely over the years (Frøystad & Johansen, 2017). This may divert potential investors who may see a fall in the company’s profitability.
Since technology is dynamic, it is critical to visualize a case in which a more advanced product may be introduced into the market, thus replacing Apple’s. A new entrant can develop more advanced software, computers, or operating systems, outperforming those produced by Apple. This can make Apple fall into the bear market, making investors go for a more promising company. On the other hand, Apple has been in the market for a long time and understands how to meet advance its technology and meet the market expectations, hence the possibility of remaining relevant at all times.
Conclusion and Recommendations
Based on the analysis conducted for Apple Inc., Bryant is still young and needs a company that will remain stable for a long time. Apple Inc. has a promising future in terms of its stock and leadership growth, hence stability. It is worth considering for a long-term investment when compared to other potential competitors. Nicole being 52 years can mainly focus on short-term financial stability. Apple Inc. shows a significant growth in dividends over the years. Specifically, the company’s earnings per share rose from $0.06 to $3.28 within 15 years, and it shows no signs of slowing, hence the need for Nicole to consider investing in the firm. Lastly, since Peter’s timeline is ten years, based on the analysis conducted, he can be confident that the company’s financial performance should grow by up to 12% over the next five years and an assumed rate of 3% afterward. This should be predictive of investing in the company over time, as the analysis reveals steady income for the investment. Therefore, Peter should consider buying Apple’s shares when they are available.
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Frøystad, A., & Johansen, J. S. (2017). An Analysis of Bull and Bear Markets in the US and Norway (Master’s thesis, Universitetet i Agder; University of Agder).
Macrotrends. (2021). Apple Balance Sheet 2005-2021 | AAPL. Web.
Takács, A., Ulbert, J., & Fodor, A. (2020). Have investors learned from the crisis? An analysis of post-crisis pricing errors and market corrections in US stock markets based on the reverse DCF model. Applied Economics, 52(20), 2208-2218. Web.
Valaskova, K., Kliestik, T., & Kovacova, M. (2018). Management of financial risks in Slovak enterprises using regression analysis. Oeconomia Copernicana, 9(1), 105-121. Web.