Financial Analysis Of Apple, Inc.

Company Background

Apple, Inc. (formerly known as Apple Computer, Inc.) was incorporated in the State of California in 1977. Apple currently designs, manufactures, and markets a variety of computer and personal electronic products, including Macintosh computers, and the iPod digital music player. AppleХs key markets are consumers, creative professionals, educational institutions, and business users.

For nearly twenty years, Apple computers have been the industry standard for creative industries such as publishing, advertising, digital music and video editing, and graphic design. Apple computer and peripheral products include Macbook and Macbook Pro laptops, iMac and Mac Pro desktops, as well a line of flat-panel displays and the Macintosh OS X operating system. Apple is currently the only company manufacturing computers that use the OS X operating system. Apple currently manufactures several high-priced software products aimed at the professional user, including the Logic line of digital audio production software, and Final Cut Pro video editing software.

Apple is the market leader in portable digital music players with their line of iPod products. Apple is also a leader in third-party digital content sales with the iTunes store, which seamlessly integrates with iTunes software and iPod hardware.

In June of 2007, Apple released its newest product, the iPhone. The iPhone combines a wireless phone with digital music and wireless Internet capabilities. The iPhone is probably the fastest selling new product in the history of Apple, with sales estimates of the $600 phone as high as 700,000 (Goldman Sachs) units during the first weekend after its launch. AT&T Wireless is the sole service provider for the iPhone, and Apple reportedly gets a share of iPhone service revenues.

Apple sells its products worldwide through a variety of channels. In addition to selling itХs products directly to consumers thru their website, Apple utilizes third-party wholesalers, resellers, and value-added resellers. Apple also runs a retail division, with 165 retails stores in operation at the end of FY2006.

Key Financial Ratios FY2006

Valuation Ratios

Company Industry Sector S&P 500

P/E Ratio 43.70 36.50 30.02 20.73

Beta 1.22 1.38 1.66 1.00

Financial Strength

Quick Ratio (MRQ) 2.88 2.29 2.68 1.29

Current Ratio (MRQ) 2.92 2.75 3.23 1.82

LT Debt to Equity 0.00 0.04 0.21 0.51

Total Debt to Equity (MRQ) 0.00 0.05 0.25 0.77

Interest Coverage (TTM) NM 4.74 14.09 13.53

Profitability Ratios

Gross Margin (TTM) 31.53 27.63 51.84 44.54

Net Profit Margin (TTM) 12.92 8.46 14.43 13.75

Management Effectiveness

Return On Assets (TTM) 17.09 12.40 11.10 8.28

Return On Investment (TTM) 24.58 25.43 15.54 12.25

Return On Equity (TTM) 26.63 36.92 20.34 20.63

Receivable Turnover (TTM) 24.13 14.20 8.17 10.40

Inventory Turnover (TTM) 71.75 58.61 12.85 12.08

Source: Reuters

TTM: Trailing Twelve Month

MRQ: Most Recent Quarter

Financial Ratio Analysis

Valuation and Financial Strength Ratios

Apple, Inc. currently has a Price-to-Earnings ratio of 43.70, compared to the industry standard of 36.50, and the S&P 500 average of 20.73. This indicates that Apple has a lower amount of risk than other firms in the computer manufacturing industry and other firms in the S&P 500. A high P/E ratio indicates low risk and high growth prospects, and Apple is outperforming the average firm in this aspect.

AppleХs current ratio for the most recent quarter is 2.92, which is higher than the industry standard, and over double the S&P 500 average. This means that Apple has enough assets that can be converted into cash in less than 12-months to cover nearly three times. Since a portion of the assets covered in this ratio is inventory, a better indicator of financial strength would be the quick ratio, as it excludes inventories. The quick ratio is 2.88, which is not much different than the current ratio. This would lead us to assume that the amount of inventory on hand is usually smaller than the industry average, or exclusion of inventory of assets would have a greater effect on this ratio.

By examining the long-term debt to equity ratio, as well as the remaining debt ratios, we can assume that Apple carries a relatively small amount of debt, as do most firms in the industry. This means that Apple has a proportionately large equity base, and a high amount of unused borrowing capacity.

Profitability Ratios

Apple has a gross profit margin ratio of 31.53, which is higher than the industry average of 27.63. This indicates that Apple is either more efficient at reducing production costs than the average firm in the industry, or has more efficient pricing policies and/or sale techniques than the average firm in the industry. The fact that Apple owns 165 retail stores may help increases this ratio by allowing more sales that arenХt discounted to wholesalers or distributors. This ratio is well below the S&P 500 average for both Apple and the entire industry.

AppleХs net profit margin is 12.92, compared to the industry average of 8.46. AppleХs computer products are priced higher than most in the industry, and a combination of these higher prices and efficient cost controls could be a factor.

Management Effectiveness

AppleХs inventory turnover ratio is 71.75, while the industry average is 58.61. AppleХs high inventory turn can be attributed to a period of high growth and increasing sales during FY2006,