Introduction

Apple Inc., headquartered in California, is a well-known company that makes products using cutting edge technology. Apple was established in the year 1976 but took off in 1977. The company has produced some of the best personal computers including the Macintosh, Power Mac, and Apple Brand. The company produces the Mac line of computers, the iPad tablet, iPod music player, and the iPhone. The company developed the OSx and iOS and used these as its operating systems. In addition, it has deployed Safari web browser, iTunes media browser, and iWork and iLife production and creativity suites (Isaacson, 2011).

Apple became the most valuable company in 2008. In terms of revenue, the company is ranked second after Samsung Electronics. After entering into mobile phones market, the company rose to the third largest phone maker after Samsung and Nokia. The company has maintained its most valuable record until 2013. The company sells its products worldwide as they are in high demand. It operates in more than 400 retail stores in fifteen countries. In addition, Apple operates an online i-Tune store and Apple store. Recently, the company lost the position of being the most valuable in the world and it is currently the second most valuable company when measured in terms of market capitalization, which is estimated at $415 billion. The annual report for 2012 showed that Apple’s gross revenue reached $155.8975 billion (Shea, 2013).

The company has 75,200 permanent and full-time employees; it also has 3,500 full-time but temporary employees worldwide. The company developed the Lisa and Macintosh from 1981 to 1985 it had a decline in revenue from 1986-1997. However, from 1998 to 2005, it returned to profitability. It the year 2007 to 2011, the company’s performance grew exponentially. The company’s goal is being independent and leading in technology.

Company’s History

Apple was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in 1976. The business began with the sale of Apple 1 computer kit. Consequently, the company was incorporated in 1977, and Wayne sold his part of the company to Wozniak and Jobs. Mike Markkula provided the venture capital to start the business. He also provided business expertise necessary to ensure that the firm is well managed. During this period, the competitors of Apple were TRS-80 and Commodore PET. In the 1980’s, Apple introduced the Apple 111 aiming to compete in the computing market with the market giants such as IBM and Microsoft (Gilbert, 2012).

The company sold its shares to the public in December 1980. During this period, the company generated the highest capital for an American corporation since 1956, when Ford Motor Company had an IPO. The shares were sold at $22, and this enabled the company to make 280 million more than any other company’s IPO during the same period. Apple Lisa was introduced in the market in 1978. The product was very expensive, and the software titles were limited. The company then introduced the Macintosh; it was a backbone for the success of the company. It was introduced in the market through a television ad during the Super Bowl’s XVIII third quarter. The product sales rose significantly but there were no follow-up sales. The lack of follow-up sales was due to the product’s high price and lack of software titles. However, Macintosh was popular in desktop publishing due to the graphical capabilities, which were advanced when compared to other products in the market (Isaacson, 2011).

In the year 1985, Steve Jobs resigned from Apple as a result of a power struggle with the then CEO John Sculley. After Jobs left, the company saw a decline in terms of sales and the quality of products sold. During this period, Apple continued to maximize its sales through the marketing of Macintosh LC. The company gained in market share when competitors such as Microsoft concentrated on development of cheap software. In contrast, Apple concentrated on expensive and richly developed products.

In 1994, the company merged with IBM and Motorola to form the AIM alliance with an aim of competing with Microsoft and creating a new computing platform through the PowerPC Platform. In 1997, after the purchase of NeXT by Apple, Steve Jobs returned as an Advisor. Later, Jobs became the CEO. The impact of Jobs was felt after the company returned to profitability within a period of one financial year. Later the company introduced the iMac, the iPod, and the iPhone. As a result of such huge success, Apple bought several other companies. The major purchases included Nothing Real for its digital applications, Final Cut for its video editing programs, and Macromedia’s Final Cut for their software.

In 2006, the company began the development of Intel-based Mac computers. As a result, the company’s share price increased from $7 to $80 (Shea, 2013). In the same year, the Apple market capitalization increased significantly and surpassed that of Dell.

After the introduction of the Apple TV and the iPhone, Apple’s stock price rose to $97.80 and later to $100 per share. The company introduced a unique marketing strategy after it had launched the App Store for selling applications for various products. The company has continued to produce richly developed gadgets with the release of the iPhone 4S and the iPhone 5. In addition, the company has an online storage service referred to as iCloud (Isaacson, 2011).

Competitive Nature

Apple has created a unique market for its products due to its emphasis on quality. Moreover, the company enjoys an efficient supply chain created by Steve Jobs. As a result, Apple Inc. is assumed to operate as a Monopsony, which means that there is no single seller but several ones. Therefore, Apple is able to control the suppliers. Apple has also developed its own university that was inspired by Steve Jobs’ management style. The university develops the leadership skills of the company’s employees. So as to minimize its production cost, all Apple products are manufactured by outsourced companies outside the United States (Shea, 2013). Most of the companies are located in countries with cheap labor. There is stiff competition from Samsung although there are bilateral trading agreements between these two technological companies. The company’s employees are the best brains in the industry.

Financial Performance

Apple’s financial performance for the last four years has been very impressive. The company has continued to make a new level of revenues and profits. Apple reported a total revenue of $42.905 billion in 2009; it increased to $65.225 billion in 2010, $108.249 billion in 2011, and $156.508 billion in 2012. The cost of goods sold also increased during the same period from $25.683 billion in 2009 to $87.846 billion in 2012 (Shea, 2013). During this period, the company’s sales devoted to the costs of goods sold declined from 59.563% in 2009 to 56.12% in 2012. Operating expenses increased from $5.482 billion in 2009 to $13.421 billion. This was attributed to the rise in the administrative costs of expansion in different countries. Apple paid income tax of $3.831 billion in 2009 and $14.030 billion in 2012. This was attributable to the higher income levels of the company’s employees. The continuing operations gave the company an income of $8.238 billion in 2009 and $41.433 billion in 2012. The resultant net income after consideration of all the expenses amounted to $8.235 billion in 2009, 14.013 billion in 2010, 25.922 billion in 2011, and $41.733 billion in 2012. These figures indicate a tremendous increase in the value of net income earned (Gilbert, 2012). This is attributed to the efficient marketing strategy that reduced costs and increased the demand for innovative Apple products.

The company’s statement of financial position indicates that the amount of cash available to the company increased from $5.23 billion in 2010 to $11.261 billion in 2009. The cash declined in 2011 but increased to $10.746 billion in 2012. After a short-term investment decline from $18.201 billion to $16.137 billion, they increased to $18.383 in 2012 (Shea, 2013). This indicates that the company preferred long-term investments, especially after the purchase of several other companies. The receivables increased significantly from $5.057 billion in 2009 to $18,692 billion in 2012. The inventory increased to $1,051 billion in 2010. However, the amount of inventories reduced to $791 billion in 2012. The value of inventory reduced the efficiency of the supply chain. The value of current assets increased from $31.555 billion in 2009 to $57.653 billion in 2012. The Gross plant and equipment value increased from $4.667 billion in 2009 to $21.887 billion in 2012. The company’s value of goodwill increased given the positive performance from 0.26 billion to 1.135 billion. As a result, the value of total assets increased significantly from $47.501 billion in 2009 to $176.064 billion in 2012 (Isaacson, 2011).

The value of the accounts payable increased from $5.601 billion in 2009 to $21.175 billion in 2012. The amount of accrued expenses increased from $2.602 to $6.749; as a result, the value of total current liabilities increased from $11.506 billion in 2009 to $38.542 billion. Apple had long-term debts that composed of deferred tax and non-current unearned revenue. The total debt increased from $15.861 billion to $57.854 billion. The value of the common stock increased from $8.12 billion to $16.422 billion. This is because more and more investors were interested in investing funds in the company because of certain returns in the short term. The company was able to retain $23.353 billion of earnings in 2009 and this value increased to $101.289 billion.

Apple’s cash from operation amounted to $10.159 billion in 2009, $18.59 billion in 2010, $37.529 billion in 2011, and $50.856 billion in 2012. Consequently, the company had a cash outflow of $-17.434 billion from its investing activities in 2009 while in 2012 it stood at $-8.227 billion. The financing activities had cash inflows from 2009 to 2011. However, in 2012, the company incurred a cash outflows of $-1.698 billion (Gilbert, 2012). This is attributable to the huge amount of dividends paid out in 2012.

Financial Analysis

Liquidity Ratios

They evaluate the possibility of the company to convert its current assets into cash easily.

Liquidity Ratios

Current Ratio

2009

2010

2011

2012

Current Assets

31555

41678

44988

57653

Current Liabilities

11506

20722

27970

38542

Ratio

2.742482183

2.0112923

1.608438

1.495849

Apple is highly liquid such that its current assets were twice the amount of current liabilities in 2009. The liquidity position of the company has improved over the years to 1.4 in 2012 this is better because less money is held in assets (Duffhues, 2006).

Quick Ratio

2009

2010

2011

2012

Current Assets

31555

41678

44988

57653

Less: Inventories

455

1051

776

791

31100

40627

44212

56862

Current Liabilities

11506

20722

27970

38542

Ratio

2.702937598

1.9605733

1.580694

1.475326

Apple is highly liquid when evaluated using the quick ratio. As a result, it can meet its current obligations effectively.

Trend Analysis

The below figure indicates the trend of the value of total assets and total liabilities. Assets have significantly increased when compared to the liabilities.

Profitability Ratios

Profitability Ratios

Gross Margin Ratio

2009

2010

2011

2012

Gross Profit

17222

25684

43818

68662

Sales

42905

65225

108249

156508

Ratio

0.401398438

0.3937754

0.404789

0.438712

The gross margin ratio remained relatively at the same rate of 4%. This is the amount of profits attributable to the sales.

Net Profit Margin

2009

2010

2011

2012

Net Profit

8235

14013

25922

41733

Sales

42905

65225

108249

156508

Ratio

0.191935672

0.2148409

0.239466

0.266651

The net profit margin identifies the amount of profits attributable to the sales net of all expenses. The ratio indicates that the company’s net margin has improved in for each of the years.

Leverage Ratio

Total Debt To Equity Ratio

2009

2010

2011

2012

Total Debt

15861

27392

39756

57854

Total Equity

31640

47791

76615

118210

Ratio

0.501295828

0.5731623

0.518906

0.489417

This ratio indicates the amount debt that can be covered equity and that the debt can only be covered with the equity adequately.

Total Debt To Assets Ratio

2009

2010

2011

2012

Total Debt

15861

27392

39756

57854

Total Assets

47501

75183

116371

176064

Ratio

0.33390876

0.3643377

0.341632

0.328596

The ratio also indicates that the debt can be adequately covered with the total assets available in case the company becomes insolvent.

Return Ratios

Return Ratios

Return On Assets

2009

2010

2011

2012

Total Sales

42905

65225

108249

156508

Total Assets

47501

75183

116371

176064

Ratio

0.903244142

0.8675498

0.930206

0.888927

This ratio indicates the amount of revenue attributable to the total assets. The company’s return has declined due to the significant increase in the value of total assets.

Return On Equity

2009

2010

2011

2012

Total Sales

42905

65225

108249

156508

Total Equity

31640

47791

76615

118210

Ratio

1.356036662

1.3647967

1.412896

1.323983

This ratio evaluates the amount of return attributable to funds invested by the owners. The owners are getting a significant return from their investments.

Recommendations

Apple performance has been great up to the financial year ended September 2012. The company has been very competitive with positive returns to its stakeholders. Moreover, the risk of investing in Apple is minimal as analyzed through leverage ratios. My recommendation would be to buy the company’s stock since, from my estimate, it is currently undervalued. Investors who own the stock should hold for dividend and capital gains if the price increases.

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