Balance Sheet Analysis

The American technology company Apple is currently in financial trouble. Even if a company appears stable from a general standpoint, analysis of its balance sheet shows otherwise. This research uses Apple as a case study to provide a financial analysis of its balance sheet and off-balance sheet disclosures. Examine the company's Return on Assets, Return on Equity, and Capital Turnover to assess the company's financial health. For this purpose, both horizontal and competitive analysis of the annual financial statements are performed. To support this, the study also looks at capital structures, solvency positions, and off-balance sheet items such as leases and contingent liabilities that Apple is a company that appears big and successful but is a indeed becoming a financial dwarf from the accounting point of view. In conclusion, the study reveals that if corrective measures are not taken, Apple could soon go under water; it might have to liquidate.

Milestone 2-Balance Sheet Analysis

Company Background and Thesis Statement

Apple Inc., an American technology company, designs and as well develops computer software and consumer electronics (Linzmayer, 2004). Headquartered in California, the entity manufactures hardware and software products ranging from its popular iPhone smartphone, iPad tablet, Apple TV, HomePod , web browsers and operating systems to media players. The firm was established by Ronald Wayne, Steve Wozniak and Steve Jobs in the year 1976 with the major objective of selling personal computers after developing them (Linzmayer, 2004). Apple saw its main breakthrough in 1980 when it went public for the first time. In fact, in year 2005, the entity boasted being the first American company to get valued at more than $ 700 billion in the stock market. As such, Apple has made significant financial breakthroughs, marked by large revenues since that time. 2011 to the current period marks the era of post-Steve Jobs, former Apple C.E.O who passed away. The demise of Jobs who was the brains behind the entity’s success, marked a major blow to the giant’s financial performance which has since been troubled. Linzmayer (2004) points out that in year 2016, one million devices from Apple were in active use globally (this data and others make Apple appear healthy from an outsider’s point of view).

http://financials.morningstar.com/balance-sheet/bs.html?t=AAPL®ion=usa&culture=en-US is the link that leads to the organization’s current and previous disclosures, especially financial statements, which are cash flow, income and financial position. Financial analysis can either be quantitative or qualitative (Vajen, 2016). This study analyzes Apple Inc’s balance sheet from both perspectives. In addition it looks at the off-balance sheet items in the company like leases and contingent liabilities.

Apple Inc., dwelling on employees molded by Steve Jobs, is no longer reaping high net profits in the technology market as before. In 2016, Forbes released companies’ listing, ranking the firms based on generation of revenue (Ezeaku and Anisuba, 2017). Apple was the best technology company. However, revenue alone does not depict financial growth. Other factors in the financial statements as analyzed in this study are better indicators of success. For instance, the firm’s net profit reduced from $53.394 billion in 2015 to $ 45.687 billion, a whopping 7.71 billion adverse margin ("Income Statement for Apple Inc (AAPL) from Morningstar.com", 2017). As a hypothesis, Apple is a poor financial performer whose going concern will soon become shaky.

Horizontal Analysis of Return on Assets

This type of analysis entails comparing a firm’s financial results over consecutive financial reporting periods (Babalola&Abiola, 2013). One of the most vital measures of a firm’s financial health, return on assets, abbreviated ROA, indicates profitability of a company with regards to the total assets. It depicts how effective a firm’s management is by gauging how they (managers and employees) generate income using assets. The formula for ROA is derived by taking the firm’s annual earnings and dividing the figure by total assets (Babalola & Abiola, 2013). Apple’s net income as at end of financial year 2016 was $ 45.687 billion while its total assets as shown in its balance sheet amounted to $ 321.686 billion ("Balance Sheet for Apple Inc (AAPL) from Morningstar.com", 2017). This means the entity’s ROA was 0.14 from the division of the two figures. A higher ROA is better than a lower one because it shows that the invested capital is used wisely. Assets consist of debt as well as equity injection components.

In year 2015, the company’s net income was $ 53.394 billion; its total assets amounted to $ 290.479 billion, giving rise to a return of assets of 0.18 ("Balance Sheet for Apple Inc (AAPL) from Morningstar.com", 2017). A time comparison of the two periods show that the firm performed slightly better in year 2015 than in year 2016. This shows that even though Apple increased its asset base by a whopping $ 17.49 billion as depicted in the balance sheet, the new assets were underutilized, a scenario which shows failure in the management’s obligation. The main role of management is to ensure that resources are optimally utilized.

Horizontal Analysis of Return on Equity

Next in importance after ROA in gauging a company’s financial health is Return on Equity (ROE) as observed by Babalola & Abiola (2013). Net income of a firm divided by its shareholders’ equity derives ROE. It refers to the net income amount associated with shareholders’ equity. The figure gauges the profitability of an organization by measuring the level of profit it generates using the shareholder investments. Investors are interested in deriving alpha returns, that is, when their investment returns are higher than the break-even figure (Babalola & Abiola, 2013).

In 2016 the shareholders’ equity in Apple was $ 128.249 billion as compared to 2015’s $ 119.355 billion ("Balance Sheet for Apple Inc (AAPL) from Morningstar.com", 2017). This means the Return on Equity in 2016 was 0.36 as compared to 2015’s 0.44. This is yet another scenario that shows the firm’s dwindling performance because the shareholder’s funds efficient utilization has deteriorated.

Horizontal Analysis of Asset Turnover Ratio

Asset turnover ratio, derived by dividing a firm’s sales with its total assets, shows how efficient it is in using assets to generate revenue (Babalola & Abiola, 2013). Apple’s sales in year 2016 are $ 215.639 billion as compared to 2015’s $ 233.715 billion. On the other hand, the technology company’s total assets were $ 321.686 billion in 2016 and $ 290.479 billion in 2015 ("Balance Sheet for Apple Inc (AAPL) from Morningstar.com", 2017). As such the Asset Turnover Ratio was 0.80 in 2015 against 0.67 in 2016. A comparison of these two financial years proves that the company is only getting financially unhealthier. Moreover, for a firm its size, generating $ 0.67 per dollar of assets is not efficient as Babalola & Abiola (2013) point out.

Multi-Company Analysis of Asset Turnover Ratio, ROE and ROA (Competitor Analysis)

Multi-company comparison is the act of comparing financial ratios between organizations, normally from one industry (Babalola & Abiola, 2013). The intention of this is to derive the two firms’ comparative weaknesses as well as strengths, basing this aspect on the financial disclosures. It is advisable to compare a firm with its competitors. Apple could be falsely blamed yet the industry dynamics are generally harsh to the technology businesses.

Table 1.1 Competitor Analyses for Year 2016

Apple Inc.

Samsung Electronics

Sony Corporation

Asset Turnover Ratio

0.67

0.80

0.50

Return on Equity (ROE)

0.36

12.49

6.16

Return on Assets

0.14

8.89

0.91

Adapted from Growth, Profitability, and Financial Ratios for Sony Corp (SNEJF) from Morningstar.com. (2017). Financials.morningstar.com. Retrieved 1 October 2017, from http://financials.morningstar.com/ratios/r.html?t=SNEJF®ion=usa&culture=en-US.

The table above depicts competitor analyses for Apple against two of its top rivals, Samsung Electronics and Sony Corporation. Apple has a very marginally better performance than Sony if only Asset Turnover is considered. This shows that the firm used its assets efficiently to generate revenue as compared to its competitor. However, revenue is not the major final aspect of accounting. The core objective is to maximize profits while maintaining shareholder value as observed by Vajen (2016). As such, return on equity and Asset turnover Ratios are better indicators of efficiency. As compared to its rivals, Apple is performing poorly in terms of how it utilizes the shareholders’ funds. The large margin depicted by the table through ROE shows that the company is falling apart slowly.

Supporting this scenario further is the return on assets observations. Return on assets, contrary to Assets Turnover Ratio which only considers revenue, portrays how well a firm utilizes its assets to generate income. As compared to Samsung Electronics at ROA of 8.89 and Sony’s at 0.91, Apple, which appears like a giant, is headed towards financial dwarfism as Accounting would call it.

Liquidity Analysis

Current Ratio

Liquidity, in Apple’s case refers to how fast it can be able to settle its obligations (Vajen, 2016). Current ratio, derived by dividing current assets and current liabilities is the major way of testing a firm’s strength regarding its liquidity. Majorly used by financial institutions to gauge whether a company qualifies for credit, the ratio, if more than 1, shows that the firm’ liabilities are lesser than its assets. As such, it would be able to settle its obligations (Vajen, 2016).

Apple’s current assets in 2015 amount to $ 89.378 billion as compared to $ 106.869 billion in 2016 ("Balance Sheet for Apple Inc (AAPL) from Morningstar.com", 2017). On the other hand, the firm’s current liability is $ 89.378 billion in 2015 and $ 79.006 billion in 2016. This produces a current ratio of 1.11 in 2015 against 1.35 in 2016. As such, the company is slightly better in 2016 than 2015. A figure above 1 is sufficient to prove liquidity. However, the general solvency ratio is better at gauging this aspect as it caters for many perspectives as compared to other specific solvency or liquidity ratios.

Solvency Analysis

A firm that is solvent is that which is likely to exist in the foreseeable future (Kajananthan & Velnampy, 2014). To gauge Apple’s solvency, the best financial test for this, solvency ratio, will be employed.

Solvency Ratio = (Net Income + Depreciation)/ Total Liabilities (Kajananthan&Velnampy, 2014).

Therefore, Apple’s solvency ratio = ($ 45,687 Million + $ 8.3Billion)/ $ 193.437 Billion

= 0.28

Other ratios of solvency include those like debt to equity ratio but the general solvency ratio comprehensively covers solvency. A figure of 0.28 shows that the management should express concern as the firm is slowly becoming insolvent.

Capital structure

Debt to Equity Ratio

The capital structure of a company shows how much funds in a firm are financed using different sources, the main ones being equity and debt (Kajananthan & Velnampy, 2014). This can be depicted using debt to equity ratio, which shows the level of financial leverage. It is measured by dividing total liabilities by shareholders’ equity. From Apple’s balance sheet the total liabilities in 2016 is $ 193.437 billion while its shareholders equity for the same period is $ 128.249 billion ("Balance Sheet for Apple Inc (AAPL) from Morningstar.com", 2017). A division of these two results into a figure of 1.51. For each dollar of shareholders’ equity in Apple, there exists $1.51 in debts. When this figure approaches 1, the management should be cautious not to finance the firm using more debt. However, Apple’s management has let this figure shoot up to 1.51, creating a dire financial state.

Off-balance Sheet Items

Contingent Liabilities

These refer to liabilities whose occurrence depends on some uncertain event in the future (Song, 2016). Apple has taken third party claims to indemnify some third parties, an occurrence which is uncertain. Its contingent liabilities also include company-related litigations or lawsuits which are uncertain. Contingent liabilities can be included in the financial statements or included as footnotes as in the case of Apple. In essence, the inclusion of these as footnotes has no financial implication whatsoever in a company (Song, 2016).

Leases

Capital lease obligations refer to the amount which is due for a long-term asset lease agreements that are almost equal to purchase of an asset as Song (2016) points out. As such, a firm can make use of this lease to finance an asset purchase without ever undertaking its (the asset’s) one-time purchase. In its obligations, Apple has undertaken operating leases whose future value amount to $ 6.54 billion ("Apple Inc. (AAPL) | Operating Leases", 2017).In operating leases, one does not eventually own the asset once the term is complete. Given that their fixed asset base is expanding, Apple leasing more assets amounts to financial misappropriation.

Conclusion

Apple is a technology company that was established on a strong financial basis but could soon be out-competed by its rivals. Considering the status of its financial health as evident via the financial analysis, especially the balance sheet, the firm’s solvency is nearing dire state. If corrective measures are not taken, the firm will cease to be a going concern in the future.

References

Apple Inc. (AAPL) | Operating Leases. (2017). Stock Analysis on Net. Retrieved 1 October 2017, from https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Analysis/Operating-Leases.

Babalola, Y. A., &Abiola, F. R (2013). Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1 (4). Balance Sheet for Apple Inc (AAPL) from Morningstar.com. (2017). Financials.morningstar.com. Retrieved 1 October 2017, from http://financials.morningstar.com/balance-sheet/bs.html?t=AAPL®ion=usa&culture=en-US

Ezeaku, H. C., & Anisiuba, C. A. (2017). New Evidence on Share Prices and The Stock Market Trends: A Case of Selected US Firms, The S&P 500 and The Dow Jones. European Journal of Economic and Financial Research.

Growth, Profitability, and Financial Ratios for Sony Corp (SNEJF) from Morningstar.com. (2017). Financials.morningstar.com. Retrieved 1 October 2017, from http://financials.morningstar.com/ratios/r.html?t=SNEJF®ion=usa&culture=en-US.

Income Statement for Apple Inc (AAPL) from Morningstar.com. (2017). Financials.morningstar.com. Retrieved 1 October 2017, from http://financials.morningstar.com/income-statement/is.html?t=AAPL®ion=usa&culture=en-US

Kajananthan, R., &Velnampy, T. (2014). Liquidity, Solvency and Profitability Analysis Using Cash Flow Ratios and Traditional Ratios: The Telecommunication Sector in Sri Lanka. Research Journal of Finance and Accounting, 5(23).

Linzmayer, O. W. (2004). Apple confidential 2.0: The definitive history of the world's most colorful company. No Starch Press.

Song, X. (2016). Changes in lease financing practice during lease accounting standard overhaul (2005-2014). American Journal of finance and Accounting, 4(3-4).

Vajen, L. (2016). Under Armour(Doctoral dissertation).