Apple - Financial Analysis

BRIEF GLANCE AT THE FY2005 RESULTS

In the fiscal year that ended September 2005, Apple reported revenues of US$13,931M, an increase of 68.3% over the preceding year. The Operating Income in FY2005 was US$1650M, an increase of 406.1% over the 2004 figure. Net Income also similarly increased by 383.7% in FY2005 to US$1335M.

Additionally, Total Assets increased by 43.49% to US$11,551M. Total Liabilities increased by 37.36% to US$4,085M, but Total Debt remained at US$0. Shareholders benefited in FY2005, as Shareholder's Equity increased by 47.08% to US$7,466M.

Several factors to explain the upward financial trend were the increase in net sales of iPods by US$3.2B, which was a 248% increase. Other music related products and services also had an increase in net sales of 223%. The company also experienced smaller increases in the net sales n retail, peripherals and other hardware, Macintosh computers, and software, services and other sales. There were no decreases in the net sales of all products, but Net sales per Macintosh and iPod fell due to new pricing strategies and the introduction of lower end products such as the iPod Shuffle.

FINANCIAL STATEMENT ANALYSIS - RATIO ANALYSIS

SHORT TERM SOLVENCY APPLE SIC 3571 SIC 7352

Quick Ratio 2.91 1.058 2.86

Current Ratio 2.96 1.321 2.89

LONG TERM SOLVENCY APPLE SIC 3571 SIC 7352

Debt-Equity Ratio - 0.1172 0.01

Equity Multiplier 1.00 1.1172 1.01

ASSET UTILIZATION APPLE SIC 3571 SIC 7352

NWC Turnover 2.04 8.576 1.25

PROFITABILITY APPLE SIC 3571 SIC 7352

Profit Margins 0.0958 0.0033 0.26

Return on Assets (ROA) 0.1174 0.0045 0.14

Return on Equity (ROE) 0.1174 0.0055 0.16

MARKET VALUE APPLE SIC 3571 SIC 7352

Earnings per Share (EPS) 1.56 0.02 0.55

Price-Earnings Ratio 40.34 22.88 24.19

Market-Book Value Ratio 6.79 2.31 6.04

(SIC 3571 and 7352 industry averages denote the median of our sample companies.)

In our analysis, Apple's financial ratios are compared to two different industries because of the wide range of products that Apple competes in. In our case, we have chosen SIC 3571 - Computer Hardware, and SIC 7352 - Pre-packaged Software.

Of particular interest is the fact that while Apple's Profitability ratios, which denotes the level of management competency, are lower that of the SIC 7352 industry average, Apple's Market Value Ratios are all far higher than those of the two industry averages.

Additionally, Apple's is relatively solvent in the short term. Apple has no long term debt, resulting in an equity multiplier of 1.00. This may denote the fact that Apple may be able to benefit its operations by attempting to increase its level of financial leverage.

ANALYSE HISTORICAL RETURNS (15 YEARS)

Apple has experienced a mean monthly increase of 2.24% with regards to its share price, with a median monthly increase of 1.49%, since being publicly listed in 1984. Interestingly, a mean monthly increase of 3.74% and a median monthly increase of 4.23% have been experienced since current CEO and founder Steve Jobs returned to the CEO position in 1997. However, as a whole, Apple's share prices have fluctuated quite wildly throughout its history.

Correspondingly, share prices have also increased dramatically since 1997. The previous stock price high was US$16.14 in Feb 1992, while the post-1997 stock price high was US$75.51 in Jan 2006.

HISTORICAL CORRELATION BETWEEN PRICE AND RATIOS

CORRELATION (1986-2005) GRADIENT

%∆Price vs %∆ROE 0.731

%∆Price vs %∆ROA 0.792

%∆Price vs %∆EPS 0.727

Apple's share price appears to have a fairly strong positive correlation with ROE, ROA and EPS. In other words, when ROE, ROA or EPS increases in one period relative to the previous period, Apple's share price is likely to increase.

CORRELATION (1997-2005) GRADIENT

%∆Price vs %∆ROE 0.614

%∆Price vs %∆ROA 0.740

%∆Price vs %∆EPS 0.772

Interestingly, Apple's share price correlation with ROE, ROA and EPS grew stronger after current CEO and founder Steve Jobs took upon the post of CEO in 1997. This could be due to a possible higher level of stockholder confidence in Steve Jobs as compared to the previous management.

CORRELATION (2001-2005) GRADIENT

%∆Price vs %∆ROE 2.560

%∆Price vs %∆ROA 2.597

%∆Price vs %∆EPS 2.303

After the introduction of iPod in 2001, Apple's share prices have increased dramatically with regards to ROE, ROA and EPS as compared to the previous time periods.

COMPANY'S BETA VALUE AND COMPARISION WITH RIVALS

SIC: 3571 (COMPUTER HARDWARE)

COMPANY TICKER BETA (S&P500)

Sun Microsystems SUNW 1.3634

Dell Inc. DELL 0.8557

Sony Inc. SNE 0.9563

Gateway Inc. GTW 1.8757

Apple Computer Inc. AAPL 1.7673

Industry - 1.64

SIC: