Apple’s Financial Analysis Part 2

APPLES FINANCIAL ANALYSIS FOR THE YEAR ENDED September 27, 2008 Income Statement a) apple Inc commits multi-step income statement format. It organizes its operating section by using functional expense classification. b) in that location ar no unusual items presented in orchard apple trees income statement. Also the c tout ensembleer-up did not discontinue any of its operations, uncomplete had any changes in accounting principles. The net income for 2008, 2007, and 200 is $4,834, $3,496, and $1,989 respectively. The net income has increase continually in past three years. Net income increased 38. 3% in 2008. apples net income growth for 2007 was 75. 7%. The income statement doesnt need restating. I excessively believe that Apple is not managing their earnings. The companys revenue and earnings per sh ar are undervalued and Apples financials appear radically weaker than they actually are. It is because in April, 2007 they made a bad decision when announced that Apple depart be u sing what is commonly referred to as the subscription method of accounting for sales of the iPh unmatched where the sales revenue from the iPhone is deferred and recognized over a 24-month finale instead of at the point of sale.When disregarding the deferred revenue mechanism of subscription accounting, Apple actually earned $7. 48 in EPS on $38. 041 billion in revenue. That compares to the $5. 36 in EPS on $32. 479 billion in revenue that Apple reported on a GAAP-basis. During 2008, the Company adopted the Financial Accounting Standards Boards (FASB) Financial explanation No. (FIN) 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.FIN 48 changes the accounting for uncertainty in income taxes by creating a new framework for how companies should recognize, measure, present, and disclose uncertain tax positions in their financial statements. 09/27/08Restated 09/27/09 Net Sales32,47932,479 Cost Of Goods21,33421,334 rough Profit11,14511,145 Sel ling & Adminstrative & Depr. & Amort Expenses4,8704,870 Income afterward Depreciation & Amortization6,2756,275 Non-Operating Income620620 Pretax Income6,8956,895 Income Taxes2,0612,061 Investment Gains/Losses00 Other Income/Charges00 Income From Cont. Operations4,8344,834 Extras & Discontinued Operations00Net Income4,8344,834 2) Apple Inc recognizes revenue from sales when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is opinionated or determinable, and collection is probable. Revenue from service and support contracts is deferred and recognized ratably over the service coverage periods. Revenue is deferred for the fair value of the specified upgrade rights when offered. i. A/R turnover=Net Sales/Average A/R(net) A/R turnover2007=24,066/1637=14. 70 times A/R turnover2008=32,479/2422=13. 41 times ii. earnings % A/R=Allowance/ Gross A/R Allowance % A/R2007=47/24,066=0. 0195 Allowance % A/R2008=47/32,479=0. 001445 iii. Average collection period = 365/ A/R turnover (or 365*A/R/Net Sales) Average collection period2007=365/14. 70=24. 82 (every 25 days) Average collection period2008=365/13. 41=27. 22 (every 22 days) The total sales revenues increased consistently for the past years. Net sales increased 43. 86% in 2008 compared with 2007 ($24,006 and $ 32,479 respectively), A/R have increased too by 47. 95% in 2007 compared to 20056 ($1637and $2,422 respectively). The company does not have looser credit policy, since it does not have credit accounts whatsoever. Apple has an ncreasing accounts receivable turnover which is a positive sign showing the company is successfully executing its credit policies and quickly turning its accounts receivables into cash. The ratios calculated above cannot be taken into account because they do not represent the actual A/R for the company for entire year. 3)Inventory Costing a)The company uses FIFO in costing its broth. I believe that the company uses this method, because even though tax exp ense are higher, since the Cost of Goods Sold decrease by using the lower cost items, the net effect on the net income still result it net increase.The earnings per share also increase, as well as inventory in the balance sheet. If the cost of the inventories exceeds their food market value, provisions are made currently for the difference between the cost and the market value. The Companys inventories consist primarily of finished goods for all periods presented. If they use LIFO the net income would have been higher, it can benefit from tax savings and improve its cash flow. On other hand average cost achieves a net income somewhere in the middle. b)Looking at the vertical analysis of the Income Statement cost of goods sold has decreased to 0. 34% (from 66. 3 % in 2007to 65. 69% in 2008), and net sales increased by $8475. At the same time, looking at the horizontal analysis, while in 2008 COGS increased by nearly 39. 97% compared to 2007, sales increased only by 43. 86%, and in 2 007 while GOGS increased by 15. 56%, sales increased by 24. 29%. This, in my opinion indicates inventory have a bun in the oven (50 items), and fast moving inventory (7days). i. Inventory Turnover=(COGS)/(Ave. Inventory) Inventory Turnover2007= 15,852/(270+346)/2=51. 047? 51 items Inventory Turnover2008= 21,334/(509+346)/2=49. 904? 50 items ii. Gross Profit Percentage=Gross Profit/Net SalesGross Profit Percentage2007=8,154/24,006=0. 3397? 33. 97% Gross Profit Percentage2008=11,145/32,479=. 3431? 34. 31% iii. Average Days in Inventory=365/Inventory Turnover Average Days in Inventory2007=365/51=7. 16 days Average Days in Inventory2008=365/50=7. 3 days c) Apple is doing extremely well in terms of inventory turnover, which is one of the lowest in the industry only 7days . While a sizable inventory can be important to coping with sudden surges in demand, excessive inventory is wasteful and can exacerbate financial problems if a new ingathering is introduced before old inventory is clea red.Inventory is increased from 346 million in 2007 to 509 million in 2008. Because the sales are increased too, therefore it is an indication of intemperately business activities, rather than the problem with sale of existing products. Gross profit margin is flat for year 2007 and 2008 at 34%. 4)Property, plant and equipment a)Apple Inc uses the straight-line method of dispraise based upon the assets estimated useful life. b)Asset Turnover=Net Sales/Ave total assets Asset Turnover2007=24,006/(25,347+17,205)/2)=1. 1283 Asset Turnover2008=32,479/(39,572+25,347)/2=1. 0006 c)PPE has increased in the last year by $632 million.The company has purchased PPE in 2007 in the amount of $735 million and $1,091 million in 2008. In 2008 Apple declared a loss on disposition of property, plant, and equipment for $22 million, which has increased by $10 million since 2007(12million) 5) Liabilities a)Apples liabilities are composed by short-term debt, Accounts Payable, Accrued Expenses, Long-term d ebt, non-current liabilities. The major current and non-current liabilities accounts for the years of 2007 and 2008 are shown in the table below September 27, 2008 September 29, 2007_ Current liabilitiesAccounts payable $5,520 $4,970 Accrued expenses 8,572 4,310 Total current liabilities 14,092 9,280 Non-current liabilities 4,450 1,535 Total liabilities 18,542 10,815 b)Ratios i. Debt Ratio=Total Liabilities/Total Assets Debt Ratio2008=18,542/39,572=0. 468564 or 46. 86% ii. Debt to Equity=Total Liabilities/Stockholders Equity Debt to Equity2008=18,542/21,030=. 8817 iii. Times interest earned=Income before income taxes and interest expense/Interest Expense Times interest earned2008=6,275/ 0 c)Ratios for Microsofts for year ended 06/30/2008 i. Debt Ratio2008=36,507/72,793=0. 015 or 50. 15% ii. Debt to Equity2008=36,507/ 36,286=1. 0061 iii Times interest earned2006=22,492/0 These ratios are derived from Dillards financial statements that can be found on http//www. sec. gov/Archives/edga r/data/789019/000119312508162768/d10k. htm. Looking at Apples and Microsofts debt ratios, I can separate that Microsofts debt ratio is 3. 29% higher, or it has 3. 29% to a greater extent debt compared to its total assets. I think that 50. 15% indicates that Apples can be categorized a company of mollify risk level. Comparing Apples debt to equity ratio of . 8817% to Microsofts ratio of 1. 61%, I can tell that Apples are doing well, since it uses $. 88 derived from liability in addition to every $1 of equity in its business, taking advantage of the lower cost of debt for financing projects to relatively more expensive equity financing. Microsofts ration is only 0. 1793% lower, which indicates a normal debt ratio for Apple Inc. Comparing Apples ratio results to Microsofts, gives me the confidence to say that Apples liabilities fall into the industrys average. 6)Stock price a)Yahoo Finance chart PRICE DateOpenHighLowCloseAvg VolAdj Close* Sep-08172. 40173. 50120. 68128. 439,370,80012 8. 24 Aug-08159. 90180. 45152. 91169. 5323,273,800169. 53 Jul-08164. 23180. 91146. 53158. 9533,096,200158. 95 Jun-08188. 60189. 95164. 15167. 4434,281,100167. 44 whitethorn-08174. 96192. 24172. 00188. 7532,650,300188. 75 Apr-08146. 30180. 00143. 61173. 9538,841,700173. 95 Mar-08124. 44145. 74118. 00143. 5042,313,100143. 50 Feb-08136. 24136. 59115. 44125. 0246,645,400125. 02 Jan-08199. 27200. 26126. 14135. 3662,108,100135. 36 Dec-07181. 86202. 96176. 99198. 0831,771,400198. 08 Nov-07188. 60192. 68150. 63182. 2246,553,700182. 22 Oct-07154. 63190. 12152. 93189. 9537,438,400189. 95Sep-07153. 44154. 60152. 75153. 4743,935,800153. 47 b)In my opinion there is a strong positive correlation between the two charts. There are several noticeable changes of Apples stock price over the last year. In October,2007 Apples stocks increases to $189. 95 from $153. 47in Sept. The increase was referable people interest to get their hands on Mac OS X Leopard, the newest version of Apples operating system . After that since markets in general, and tech stocks in particular, were stimulate hard by poor earnings reports posted by Intel, Apples stock price dropped in first weeks of November.In the begging of January 2007 the stock dropped to $126. 14 after Jobs announced iphone sales to date of 4 million, and AT&T said that only 3. 9 million were activated, which means 100,000 iphones still in their Christmas wrapping or more likely unlocked. The companys stock decline in the first quarter was due to an antitrust suit which has been filed against Apple accusing the company of illegally maintaining a monopoly in the digital music market by failing to support Microsofts Windows Media Audio format. In May Stock reached $188. 55 because Apple reported its second quarter earnings, and its revenues of $7. 05 billion and a net profit of $1. 05 billion for the quarter. In second quarter Apple had slightly decreases and increases in stock value. On July 22, 2008 Apple reported its third quarter earnings results. The company earned $7. 46 billion during the quarter, a 37% increase from the same quarter 2007. Last month of the third quarter the company had a cut turn to $ 120. 68 per stock. 7) Final Review I believe that the company has strong results in the industry that it operates.Compared to its direct competition, Apple Inc is doing well. I also believe that Apple Inc is trying to grow, and became a leader in consumer electronics market. Based on my analysis, I agree with the companys strategy of increasing investment in Research and Development. Specifically, I suggest the sometime down the line after supplier contracts are over and equipment and technology costs have gone down Apple should enter the wireless cellular provider arena. This would allow Apple to recoup all profits instead of sharing/splitting profits with the providers.Customers buy the hardware/phone at cost rather than the current model of wireless provider subsidized phones at the expense of expensi ve plans. They should offer a quality engineered, eco-friendly, workplace data processor that is economically practical for corporations and large organizations. However due to Apples unique designing nitch and brand loyalty we feel they have the ability to amaze a portion of the bottom market that has always wished to own an Apple without diluting its luxury products image. Apple Inc would do a lot better if it was not in the declining economic environment as of now.Increasing questions about Jobs health and lack of transparency into a succession plan are decreasing the companys stability. Contrary of Wall Streets expectations Apple reports earnings of $1. 61 billion ($1. 78 per share), which was up 2 cents a share from the year earlier period. Revenue also increased from $9. 6 billion to $10. 17 billion. With stock price of $102 Apple Inc. shares have catapulted back atop the century mark today after brokerage house firm FTN Equity upgraded the stock from neutral to buy. We now believe investors are more prepared for the Chief Executive taking a smaller employment and we have not seen the multiple compression we expected, wrote analyst Bill Fearnley, Jr. I believe that by looking at the past performance of Apple, one can derive a future prognosis of Apples performance, bound to the industry development. I believe that an investor may want to buy Apples shares, since it looks like it is a strong company, and take advantage of the current low stock prices. I also would recommend to an investor not to invest all of his money in Apple, because of the uncertainty of the market.