Finance, Apple Inc.

Introduction

This report consists of the financial analysis of Apple Inc. using Apple annual report of 2018. It explains the key sources of finance for the business and the business’s risk of failure from the gearing point of view. The second part of the report discusses the working capital and the strength and weaknesses the company has in this area from the author's point of view. It further explains the risk in particular as the result of their involvement in the international market. And lastly, it evaluates the corporate reconstructing taken by the company for the past five years.

1. Key sources of finance for the Apple Inc and gearing

Apple has two key sources of finance, both internal and external. They use equity capital as their internal source of finance and both short term and long term debt as an external source.

• Equity Capital

“Equity financing is the most important source of finance”, says Mclaney. It represents the business’s ownership by adding both common stock and retained profit. According to Apple’s annual report of 2018, “total stockholder’s equity is $107.15 billion. It includes 40.2 billion common stock at par value and additional paid in capital and $70.4 billion retained earnings”.

• Debt Capital

A company can finance its operations by borrowing additional funds from banks and other financial institutes if they cannot fund using the equity, plus it is cheaper to borrow from lenders than raise funds by using equity. In 2018, Apple has total current liabilities of $116.87 billion and a total noncurrent liability of $141.71 billion.

• Gearing ratios

“A gearing ratio is a type of financial ratio that compares company debt relative to different financial metrics, such as total equity” (Peavler, 2019). Investors and businesses use this type of ratios to predict how well a business can survive during an economic recession or to measure the risk of investment.

Apple gearing ratio =  x 100 =  = 57%   (2018)[pic 1][pic 2]

          (2017)[pic 3]

          (2016)[pic 4]

          (2015)[pic 5]

Previous year Interest Coverage Ratio  =  =  21.8 times[pic 6][pic 7]

Previous year Debt to Equity Ratio = [pic 8]

Apple offers many electronics devices and competes with some of the largest electronic manufacturers such as Dell and Samsung. Samsung has a gearing ratio of 8.0% ( ), and Dell has 98% (). There is a huge difference between these ratios, as Samsung has a lower gearing because their borrowings are very low compared to Apple and their equity capital is higher than the Apple. Moreover, Dell has shareholders’ equity deficit this year and that brought their gearing ratio as high as possible. [pic 9][pic 10]

• Risk appraisal

Since the US tax reform last year, “foreign earnings are subject to 15.5% for the one-time repatriation of cash and noncash assets is even less at 8%” (Marketwatch, 2018). Even though Apple has more cash overseas than any other company in the US, “because of 35% higher corporate tax before Apple had to borrow money in the US to pay for their massive shareholder return program” (Bloomberg, 2018).  However, there is no disclosure of whether apple brought overseas earning back to the US yet.

This indicates the accumulation of debt by Apple has changed its capital structure considerably, raising the gearing ratio at a moderate level. This seems to be the result of continuous borrowing to pay higher dividends to their shareholders and the drop in shareholders’ equity due to growth in buybacks for the past few years. Thus, by looking at the interest coverage ratio we can see that Apple is able to meet its’ interest payment obligations by 21 times and the company's ability to meet its short-term financial obligations.  Moreover, debt to equity ratio is closer to one and it indicates the company is not in risk at all and Apple is able to cover its obligations very well.

[pic 11]

Figure 01. Apple capital return (Financial Times, 2018)

[pic 12]

Figure 2 Apple buybacks (Financial Times, 2018)

1. Key elements of working capital and its strength and weaknesses

Key elements of working capital

• Cash: Cash is considered anything you can tender at the value immediately. Apple has $25.91 billion of cash in 2018.
• Marketable securities are financial instruments the business can sell or redeem within 12 months such as deposits, bonds or stock. Apple has $40.39 billion of marketable securities invested in highly rated securities. the reason was to avoid any potential risk of principal loss.
• Accounts receivable is incoming cash that vendors or customers owe to the business and Apple has $23.18 billion of receivables.
• Inventories are the once that is available to sell or stored in storage areas and warehouses. Apple has $3.95 billion worth of inventories at the end of the financial year of 2018. Working capital ratio

Working capital is defined as current assets minus current liabilities. Apple’s key elements of working capital are cash, marketable securities, accounts receivable and inventories. Working capital plays a vital part in the day to day business operations. As McLaney explains, “an increase in sales usually means that the trade receivable will increase. However, a general increase in business operations tends to imply a need for greater levels of cash available”. Similarly, like all investments, working capital also disclosures the business to risk if it cannot cover its short term obligations.

                    Net Working Capital = Current Assets – Current Liabilities

                            = 131.33 -116.86 = $14.48 billions

“The Apple believes that their existing cash, cash equivalents and marketable securities will be enough to satisfy its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months” (Apple, 2018). In 2018, Apple has $14.48 billion of working capital to cover its obligations.

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