the analysis of apples financial performance

CFI, 2021 By using ratio analysis, consumers of financial statements like investors can assess a company''''s capacity to turn its assets into usable cash.. However, Apple’s receivables and

NATIONAL ECONOMICS UNIVERSITY ………o0o………

FIN 300

GROUP ASSIGNMENT

Lecturer: Le Duc Hoang

THE ANALYSIS OF APPLE’S FINANCIAL PERFORMANCE

Class: International Business Administrative 63A Program: Advanced Education Program

Ha Noi - 2023

3.1 Inventory turnover ratio 26

3.2 Days Sales Outstanding (DSO) 26

4.1 Fixed assets turnover ratio 27

4.2 Total assets turnover ratio 28

TABLE OF FIGURE

Figure 1: Apple's revenue by segment 12

Figure 2: Current ratio calculation 23

Figure 3: Quick ratio calculation 24

Figure 4: Inventory turnover ratio 26

Figure 5: Fixed assets turnover ratio 27

Figure 6: Total assets turnover ratio 28

ABSTRACT

Apple's annual report is strategically important to the industry as a whole because it serves as the benchmark, especially for financial data Understanding Apple Inc.'s annual financial performance is essential for stakeholders to evaluate the company's risk profile, growth potential, and financial performance Making informed investment selections requires having a thorough understanding of the company's strategy, operations, and governance processes Therefore, this report gathers relevant information to examine Apple’s financial statements and important ratios and then evaluates the risks and strategies of the organization

By analyzing some financial statistics, it is clear a company's success is the result of efficient use of assets and equity The examination of financial ratios is performed using information collected from CNBC All financial ratios are calculated over a 4-year period, from 2019 to 2022 According to the research, Apple Inc has excellent innovation skills and internal control, both of which help it maintain its dominant position in the electronics sector

COMPANY INTRODUCTION

1 About Apple Inc

The headquarters of Apple Inc are in Cupertino, California, an international business hub Consumer electronics, computer software, and personal computers are all products they design, create, and market The Mac series of computers, the iPod music player, the iPhone smartphone, and the iPad tablet computer are among the available items The OS X and iOS operating systems, the iTunes media browser, the Safari web browser, the iLife and iWork creativity and production suites, and the iOS operating system are all included in its software

The business was established on April 1st, 1976 by Steve Jobs, and is, after Samsung, the second-largest revenue-generating information technology corporation in the world Apple gained a reputation for being the industry leader in mobile technology The business has attained its standing as a result of its exceptional goods and global supply chain

Apple's business is divided into five main areas These segments are the Rest of Asia Pacific, Japan, Greater China, Europe, and Americas South and North America are both included in the Americas segments India, the Middle East, and all of Europe are all included in the segments for Europe China, Taiwan, and Hong Kong are included in the Great China segments The whole continent of Asia, Australia, and any additional territories not included by the other four segments are all included in the Asian Pacific segments (Reuters, 2021)

Apple's stock is denoted by the letters AAPL Apple distributes a $0.22 per share quarterly regular cash dividend Apple has 16,530,166,000 shares outstanding as of July 16, 2021 Arthur Levinson, who has been Apple's board chair since 2011, is the company's largest individual insider shareholder Levinson had 4.5 million Apple shares as of February 2, 2021 The Vanguard Group is Apple's largest institutional shareholder, holding 1.3 billion shares, or 7.8% of the company's outstanding stock, as of Jan 5, 2021, according to the company's most recent proxy statement (Matthew, 2023)

2 SWOT analysis

2.1 Strength

The most valuable brand in the world in 2020, according to Forbes, is Apple (Marty, 2020) Strong reputations and brand loyalty are built on high-quality items and a well-designed aesthetic Apple unquestionably has a sizable brand recognition and market impact, and these competitive advantages are founded on Apple's highly regarded product quality One of the key factors in Apple's success is the superb marketing techniques it uses to pique consumers' desire to buy Additionally, Apple has great capabilities for research and development, not just in terms of

product aesthetic design but also in terms of product performance that has a leading position, such as the A series CPUs and distinctive IOS system

2.2 Weaknesses

The enormous Research and Development costs each year might put profits at risk, and the fact that some ventures fail to produce anything, there may be considerable profit concerns Therefore, if the product cannot find a market, these high research expenditures might be an obstacle for the profit margin, in the short term, a significant amount of cash and labor are invested in some project that cannot guarantee any production In some ways, Apple may be facing a financial crisis and significant sunk expenses To have a good R&D capability with minimal R&D expenditures is paradoxical However, even while it makes up only about half of Apple's total operating expenses each year, it is fairly steady, thus this cannot be considered a serious problem, especially in the long run given their ability to generate significant revenue-boosting innovations

2.3 Opportunity

Apple may have additional prospects in the future market because of its strong brand impact, effective marketing plan, and high-quality products By offering clients top-notch items, the target market will grow steadily Apple is also working to create modems with lower costs due to the high price of Qualcomm's modems Additionally, Foxconn in China, one of Apple's subcontractors, assembles devices for the company at a very low cost Apple is exclusively in charge of invention and design, the rest of the production is handled by low-cost suppliers in developing nations Moreover, a variety of suppliers want to cooperate with Apple because they believe that if they do, their products will have ample proof of their high quality As a result, Apple has tremendous negotiating leverage

2.4 Threats

Apple focused on mobile devices such as smartphones, laptops, tablets, wearable technology, and accessories In addition to Samsung, Apple should take into account the risks posed by Xiaomi, Vivo, and OPPO as their market share has grown quickly (Apple Business Strategy: Plans that made it a Multi-Trillion dollar Company, 2022) The rivalry grows more ferocious as technology advances To keep ahead of rivals, Apple must release cutting-edge technologies Another factor is knockoffs, which are illegally manufactured mobile phones with a similar design and functionality that are produced by unofficial and small producers Despite the fact that this type of manufacturing is unlawful, the profit margin is substantial since the pricing is considerably cheaper than the actual items Therefore, imitation goods of very poor quality have the potential to harm Apple's brand if they significantly join the market

3 Literature review

Ratio analysis is an analytical approach for learning about the profitability, operational effectiveness, and liquidity of a corporation Information on this firm was gathered through looking at its financial records over time The balance sheet and income statements of the corporation are among the financial documents used in the ratio analysis (CFI, 2021) By using ratio analysis, consumers of financial statements like investors can assess a company's capacity to turn its assets into usable cash (CFI, 2021)

Many shareholders, managers, and investors have utilized financial measures to estimate a company's profitability and financial health The examination of financial ratios is also used by researchers, rivals, suppliers, and customers The main goal of ratio analysis, according to Shaikh (2020), is to apply the study's result in decision-making Financial ratios are another approach Husain and Sunardi believe may be used to pinpoint and emphasize a company's strong and weak performance areas (Husain & Sunardi, 2020) Ratios allow management to see where there are strengths and weaknesses as well as where further work or operational changes are needed (Lyn & Aileen, 2016)

The many applications of financial ratio analysis are revealed by much research The research shows that decision-making is the main use of ratio analysis (Easton, 2018)

Managers and investors require a method or instrument that enables them to predict the future success of the business The study' findings help managers decide on the best course of action for the business with efficiency and effectiveness The initiatives can take the shape of fresh financial commitments, innovative operational approaches, or necessary adjustments to the personnel (Wadhwa, 2019) The findings of the ratio analysis are used by investors to choose which firms to include in their portfolios

Apple Inc is a publicly traded firm with several stockholders throughout the globe Therefore, a large number of investors throughout the world are affected by the company's success Investors can determine whether to add Apple's stocks to their portfolios or sell their shares at a particular time by using ratio analysis Investors can contrast Apple Inc.'s performance with that of other publicly traded firms using ratio analysis (Allad, 2017)

FINANCIAL STATEMENTS

1 Balance sheet

2022 9/24/22

2021 9/25/21

2020 9/26/20

2019 9/28/19

LIABILITIES

Short Term Debt & Current Portion of Long Term Debt 21,239 15,692 13,793 16,240

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY 352,755 351,002 323,888 338,516 SHARE INFORMATION

One possible reason for this decrease is that Apple has been using its excess cash to repurchase its own shares and pay dividends to its shareholders Share repurchases and dividends are ways to return value to shareholders and increase earnings per share Another possible reason is that Apple has been investing more in long-term assets, such as property and equipment Long-term assets are expected to generate future benefits for the company (Mike, 2022)

On the other hand, Apple’s receivables and other current assets have increased from $58.1 billion in 2019 to $82.2 billion in 2022 One possible reason for this increase is that Apple has been selling more products and services on credit or subscription basis This means that customers can pay later or over time for their purchases This can boost sales and customer loyalty but also increase the risk of bad debts and delayed payments (Kif, 2022)

In conclusion, Apple’s current assets have decreased from $162.8 billion in 2019 to $135.4 billion in 20222, mainly due to a reduction in cash and short-term investments However, Apple’s receivables and other current assets have increased over the same period, reflecting its growing sales and subscription revenues

1.1.2 Other assets

Apart from its current assets, Apple also owns other assets that are classified as non-current or long-term These assets include property, plant and equipment, other investments, and other tangible assets In this part, we will examine Apple’s other assets over a period of 2019 to 2022 based on the statistics from CNBC

We can see that Apple’s PP&E has increased steadily over the past four years In particular, Apple’s PP&E - gross have increased from $96 billion in 2019 to $124.9 billion in 2022, representing a compound annual growth rate (CAGR) of 8.7% This indicates that Apple has been investing heavily in expanding and upgrading its physical infrastructure to support its production and distribution capabilities

However, Apple’s PP&E - net has increased at a slower pace than its PP&E - gross, from $37.4 billion in 2019 to $52.5 billion in 2022, representing a CAGR of 11.6% This is because Apple’s accumulated depreciation has also increased over the same period, from $58.6 billion in 2019 to $72.3 billion in 2022, reflecting the aging and obsolescence of its existing assets

We can see that Apple’s other investments have fluctuated over the past four years In general, Apple’s other investments have increased from $106.7 billion in 2019 to $120.8 billion in 2022, representing a CAGR of 4.3% This suggests that Apple has been diversifying its portfolio of financial assets to generate additional income and hedge against market risks

According to the statistics from CNBC, Apple’s other tangible assets for the fiscal years 2019 to 2022 are as follows (in millions of US dollars):

We can see that Apple’s other tangible assets have increased steadily over the past four years In particular, Apple’s other tangible assets have increased from $31.6 billion in 2019 to $44 billion in 2022, representing a CAGR of 11.3% This indicates that Apple has been increasing its prepaid expenses and deferred revenue to secure its future supply and demand

In conclusion, Apple’s other assets have increased from $175.7 billion in 2019 to $217.4 billion in 2022, representing a CAGR of 7.3% This shows that Apple has been investing in its physical and financial assets to support its operations and growth However, Apple’s other assets have also increased at a slower rate than its total assets, which increased from $338.5 billion in 2019 to $352.8 billion in 2022, representing a CAGR of 1.4% This implies that Apple’s other assets have become a smaller proportion of its total assets over time

1.2 Total liabilities

We can see that Apple’s total liabilities have increased over the past four years In particular, Apple’s total liabilities have increased from $248 billion in 2019 to $302.1 billion in 2022, representing a compound annual growth rate (CAGR) of 6.5% This indicates that Apple has been increasing its external financing to fund its operations and growth

However, Apple’s total liabilities have increased at a slower rate than its total assets, which increased from $338.5 billion in 2019 to $352.8 billion in 2022, representing a CAGR of 1.4% This implies that Apple’s total liabilities have become a smaller proportion of its total assets over time

The main drivers of Apple’s total liabilities are its current liabilities and its long-term debt Apple’s current liabilities have increased from $105.7 billion in 2019 to $154 billion in 2022, representing a CAGR of 13% This is mainly due to an increase in accounts payable and other current liabilities, which reflect the amounts that Apple owes to its suppliers and other parties for purchasing goods or services or for fulfilling contractual obligations Apple’s accounts payable have increased from $46.2 billion in 2019 to $64.1 billion in 2022, representing a CAGR of 11% This suggests that Apple has been purchasing more goods or services on credit or delaying

payments to its suppliers Apple’s other current liabilities have increased from $43.2 billion in 2019 to $68.6 billion in 2022, representing a CAGR of 16%

Apple’s long-term debt has increased from $91.8 billion in 2019 to $99.8 billion in 2022, representing a CAGR of 2.7% This is mainly due to Apple issuing more bonds and notes to take advantage of the low interest rate environment and to finance its activities such as share buybacks and dividends Apple’s bonds and notes have various maturities and interest rates, ranging from 0.75% to 4.45% Apple’s long-term debt is manageable given its large equity base and earnings power

The other components of Apple’s total liabilities are its capitalized lease obligations and its other liabilities Apple’s capitalized lease obligations are the present value of the future lease payments for assets that Apple leases under long-term agreements, such as land and buildings Apple’s capitalized lease obligations have increased from $0 in 2019 to $812 million in 2022, representing a CAGR of 100% This indicates that Apple has been leasing more assets rather than owning them, which may reduce its upfront costs and increase its flexibility

Apple’s other liabilities are the liabilities that do not fit into any of the other categories, such as deferred income taxes, employee benefits, environmental liabilities, and legal contingencies Apple’s other liabilities have decreased from $50.5 billion in 2019 to $48.3 billion in 2022, representing a CAGR of -1.4% This is mainly due to a decrease in deferred income taxes, which are the taxes that Apple expects to pay or receive in the future based on the differences between the book value and the tax value of its assets and liabilities Apple’s deferred income taxes have decreased from $32.3 billion in 2019 to $28.6 billion in 2022, reflecting the changes in tax laws and rates

In conclusion, Apple’s total liabilities have increased from $248 billion in 2019 to $302.1 billion in 2022, mainly due to an increase in current liabilities and long-term debt However, Apple’s total liabilities have increased at a slower rate than its total assets, implying that Apple has been increasing its internal financing relative to its external financing Apple’s total liabilities also affect its liquidity, solvency, and profitability ratios

1.3 Stockholders’ equity

The total equity of a company indicates how much the company is worth to its shareholders The total equity of a company also affects its liquidity, solvency, and profitability ratios

We can see that Apple’s total equity has decreased over the past four years In particular, Apple’s total equity has decreased from $90.5 billion in 2019 to $50.7 billion in 2022, representing a compound annual decline rate (CADR) of -16% This indicates that Apple has been decreasing its net worth to its shareholders

However, Apple’s total equity has decreased at a slower rate than its total liabilities, which increased from $248 billion in 2019 to $302.1 billion in 2022, representing a CAGR of 6.5% This implies that Apple’s total equity has become a larger proportion of its total liabilities over time

The main drivers of Apple’s total equity are its paid-in capital and its retained earnings Apple’s paid-in capital has increased from $45.2 billion in 2019 to $65 million in 2022, representing a CAGR of 12% This is mainly due to an increase in capital surplus, which reflects the excess amount that shareholders have paid for the company’s shares over their par value Apple’s capital surplus has increased from $45.2 billion in 2019 to $64.8 billion in 2022, reflecting the issuance of new shares or the repurchase of existing shares at prices above their par value

Apple’s retained earnings have decreased from $45.9 billion in 2019 to -$3.1 billion in 2022, representing a CADR of -32% This is mainly due to a decrease in net income, which reflects the amount that the company has earned after deducting all expenses and taxes Apple’s net income has decreased from $55.3 billion in 2019 to $95.2 billion in 2022, representing a CADR of -13% This is mainly due to an increase in operating expenses, which reflect the costs of running the business, such as research and development, selling, general and administrative, and other expenses Apple’s operating expenses have increased from $34.5 billion in 2019 to $49.6 billion in 2022, representing a CAGR of 12% This suggests that Apple has been spending more on innovation, marketing, and administration to maintain its competitive edge and customer loyalty

The other components of Apple’s total equity are its other appropriated reserves and its unrealized gains or losses on foreign exchange and marketable securities Apple’s other appropriated reserves are the reserves that the company has set aside for specific purposes, such as legal contingencies or future dividends Apple’s other appropriated reserves have fluctuated over the past four years In particular, Apple’s other appropriated reserves have changed from -$11.1 billion in 2022 to $163 million in 2021, reflecting the changes in the company’s policies and plans

Apple’s unrealized gains or losses on foreign exchange and marketable securities are the gains or losses that the company has not realized yet from holding foreign currencies or marketable securities, such as stocks, bonds, mutual funds, and exchange-traded funds Apple’s unrealized gains or losses on foreign exchange and marketable securities have also fluctuated over the past four years In particular, Apple’s unrealized gains or losses on foreign exchange and marketable securities have changed from -$585 million in 2019 to $0 in 2022, reflecting the changes in the market prices and exchange rates

In conclusion, Apple’s total equity has decreased from $90.5 billion in 2019 to $50.7 billion in 2022, mainly due to a decrease in retained earnings However, Apple’s total equity has decreased at a slower rate than its total liabilities, implying that Apple has been decreasing its external financing relative to its internal financing

2 Income statement

2022 9/24/22

2021 9/25/21

2020 9/26/20

2019 9/28/19

Current Foreign Income Tax 8,996 9,424 3,134 3,962

NET INCOME BEFORE EXTRA ITEMS/PREFERRED

NET INCOME USED TO CALCULATE BASIC

Shares used in computing earnings per share - Fully Diluted 16,326 16,865 17,528 18,596

2.1 Revenue

Figure 1: Apple's revenue by segment

2019 2020 2021 2022

The revenue of Apple witnessed gradual growth over the period From 2019 to 2020, the company’s revenue rose slightly from $260.174 billion to $274.515 billion which is about 5.5% However, from 2020 to 2021, Apple’s revenue increased sharply by 33.3% from $274.515 billion to $385.817 billion There are plenty of reasons for this significant rise in Apple’s revenue from 2020 to 2021 This was due to strong demand for Apple’s products during the Covid-19 pandemic in which people relied on technology for work at home, remote learning, entertainment and communication Another factor was the successful launch of new products, Apple released several new products in 2020 with strong new improvements, especially the new Macbook Air and Pro with the M1 chip The growth in the service segment which includes the App Store, Apple Music, Apple TV+, Icloud was also a reason for the remarkable increase, in 2021, the service segment generated $68.42 billion in revenue, an increase of 27.24% compared to 2020 The revenue of Apple continues to grow from 2021 to 2022, from $365.817 billion to $394.328 billion due to the success of the new series of iPhones and other products

In general, Apple's recent revenue increase indicates the company's capacity to innovate and adapt to changing market conditions Revenue growth, particularly in the services area, demonstrates Apple's effectiveness in diversifying revenue streams and lessening its reliance on hardware sales

2.2 Cost of goods sold

As can be seen from the tables, the COGS of Apple increased during the period while Apple's COGS to revenue ratio declined year after year from 2019 to 2022 The proportion stayed stable in 2019 and 2020, but it decreased dramatically in 2021 and 2022, with percentages of 55.1% and 53.87%, respectively According to the Apple Q4 2021 Earnings Call Transcript, the rationale for this adjustment appears to be that, while product costs were higher, the business was able to balance them by using a different product mix, resulting in lower COGS to revenue ratio (Fool, 2021) The primary influencing factor is the increase in earnings from services, which have a higher gross margin than other products According to the report, services hit an all-time high of $18.3 billion in revenue, a 26 percent increase over the previous year, with September quarter records in every geographic division and service category The gross margin for services was 70.5 percent, up 70 basis points from the previous quarter, owing to a different mix Meanwhile, product gross margin was 34.3 percent, a 170 basis point reduction sequentially as higher cost structures were somewhat offset by leverage and mix Apple's steady drop in COGS % suggests that the company spent a smaller proportion of its revenue on COGS each year, demonstrating that Apple was able to reduce the cost of goods sold

2.3 Gross profit margin

During the period, Apple's gross profit margin gradually climbed from 42.6% to 46.1% According to the statistics provided, Apple's gross profit margin has remained continuously high over the last four years with a slight decrease from 42.6% in 2019 to 42.2% in 2020, followed by a notable increase to 44.8% in 2021 and further to 46.1% in 2022 This shows that Apple is becoming more efficient in the production and sale of its products or services, as it can create a bigger percentage of revenue after deducting the cost of goods sold Possible reasons for the growth of profit margin could be the ability of Apple to maintain medium pricing for its products and services, also their capability to control manufacturing and shipping costs

Research and Development

Over the last four years, Apple's operational expenses, which include selling, general and administrative (SG&A) and research and development (R&D) costs, have steadily gone up The corporation spent $34.5 billion on SG&A in 2019, increasing to $38.7 billion in 2020 and then to $43.9 billion in 2021 This upward trajectory continues in 2022, when SG&A spending will exceed $51.3 billion This demonstrates that Apple has consistently invested in marketing, advertising, payroll, and other administrative costs to grow its business and increase its market share Apple's R&D spending, which are critical for developing new products and technology, have, on the other hand, climbed dramatically In 2019, the firm invested $16.2 billion on R&D, which increased to $18.8 billion in 2020 and $21.9 billion in 2021 In the following year, R&D spending of Apple continue to rising which reach $26.3 billion This reflects Apple's dedication to innovation and its substantial expenditure in developing new products and technologies in order to stay ahead of its rivals

Overall, Apple has been increasing their expenses which may lead to some anxiety of investors about the company's profitability However Apple’s sales are still rising remarkably, showing that the company is still doing great

2.5 Operating income (EBIT)