Financial Statement Analysis

Apple Inc.
Instructor: Prof. Qin Xu

Group Members: Intan Purnama Sari Ricky Christian Chairunas Yenny Chitra Dewi Widjojo Neville Kok Wisnu Tejakusuma

MEW2011559011 MEW2011559035 MEW2011559041 MEW2011559057 MEW2012553005

University of International Business and Economics International Master Business Administration China Beijing

Executive Summary The objective of this paper is to provide information about financial position,

performance and changes in financial position of an enterprise and then to make an analysis based on that information. In this paper, the team chose Apple Inc. as the company for case study. Apple Inc. is an American multinational corporation that designs and sells consumer electronics, computer software, and personal computers. It is one of the most established and healthy IT brands in the world, and has a very loyal set of enthusiastic customers that advocate the brand. This company also has a very strong research and development department that always keep researching and doing innovation to invent new products. Besides those strengths, Apple also has weaknesses in terms of the products. Some of the products have some defects. For example, Apple iPod Nano have faulty screen, which later explained that a batch of its products has screens that break under impact, but the company replaced all those faulty items. Apple Inc. also has the ability to improve their products in terms of increasing the capabilities such as enabling flash player to be played in the iPad and so on. However, being successful can attract competition, and Apple works very hard on research and development and marketing in order to retain its competitive position. Apple Inc. has a lot of competitor in terms of products. Even though there are a lot of companies that has a business in this technology segment, the growth of this company is very high. As a result, Apple has no competitor and is considered as one of the most valuable companies in the world. Moreover, on January 18, 2011 Apple made announcement about its financial results. This company reported that it has revenue $26.74 billion and its quarterly profit of $6 billion, or $6.43 per diluted share. The balance sheet and income statement of Apple Inc. showed good results. It has high Retained Earnings and the Long-term Marketable Securities also increased. In addition, the cash flow statement of the company depicted that Apple Inc. was becoming better and better. However, it can be seen that the outflow of the company significantly increased in 2011 due to the fact that it has new products, advertising, and stores.

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Almost all of the short-term liquidity ratio, operating efficiency, capital structure and long-term solvency, profitability, and market measure of Apple displayed good results. Nevertheless, the total asset turnover and price to earnings of Apple are not that great compared to HP, one of Apples competitors. DuPont analysis is one of the most useful methods in analyzing the performance of the company. In this case, all the ratios in the DuPont analysis also presented great results. In summary, the team suggests that people should invest their money in Apple Inc. due to the fact that it has promising future in the technology market. Nonetheless, as a creditor, the team does not suggest for the creditors to loan their money to Apple Inc. This is due to the fact that Apples debt history was very good and there is small possibility that the creditors can get any profit from this.

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Table of Contents
1 2 Executive Summary ........................................................................................................... 1 Introduction......................................................................................................................... 5
2.1 2.2 Objective ................................................................................................................................... 5 Summary of the Findings ..................................................................................................... 5

3.1 Description of firm and its management .......................................................................... 6 3.2 SWOT Analysis ....................................................................................................................... 7 3.2.1 Strength ...............................................................................................................................................7 3.2.2 Weaknesses ........................................................................................................................................8 3.2.3 Opportunities .....................................................................................................................................8 3.2.4 Threats .................................................................................................................................................8 3.3 Discussion of Competitive Environment ........................................................................... 9 3.4 Economic Climate and Outlook ....................................................................................... 10 3.5 Other factors, e.g. labor relations, litigation ................................................................. 12 4.1 Common Size Financial Statement ................................................................................. 14 4.1.1 Balance Sheet Analysis ............................................................................................................... 14 4.1.2 Income Statement Analysis ........................................................................................................ 16 4.1.3 Cash Flow Statement ................................................................................................................... 18 4.2 Short-Term Liquidity ......................................................................................................... 21 4.2.1 Current ratio .................................................................................................................................... 21 4.2.2 Quick or Acid Test Ratio ............................................................................................................ 22 4.2.3 Cash Flow Liquidity ..................................................................................................................... 23 4.2.4 Average Collection Period ......................................................................................................... 23 4.2.5 Days Inventory Held .................................................................................................................... 24 4.2.6 Days Payable Outstanding.......................................................................................................... 24 4.2.7 Cash Conversion or Net Trade Cycle ..................................................................................... 25 4.3 Operating Efficiency ........................................................................................................... 26 4.3.1 Account Receivable Turnover................................................................................................... 26 4.3.2 Inventory Turnover ....................................................................................................................... 26 4.3.3 Payables Turnover ........................................................................................................................ 27 4.3.4 Fixed Asset Turnover ................................................................................................................... 27 4.3.5 Total Asset Turnover ................................................................................................................... 28 4.4 Capital Structure and Long-Term Solvency................................................................. 28 4.4.1 Debt Ratio........................................................................................................................................ 28 4.4.2 Long-term debt to total capitalization..................................................................................... 29 4.4.3 Debt to equity ................................................................................................................................. 29 4.4.4 Financial Leverage Index ........................................................................................................... 30 4.4.5 Times Interest Earned .................................................................................................................. 30 4.4.6 Cash Interest Coverage ................................................................................................................ 31 4.4.7 Fixed Charge Coverage ............................................................................................................... 31 4.4.8 Cash Flow Adequacy ................................................................................................................... 32 4.5 Profitability ........................................................................................................................... 32 4.5.1 Gross Profit Margin ...................................................................................................................... 32 4.5.2 Operating Profit Margin .............................................................................................................. 33 4.5.3 Effective Tax Rate ........................................................................................................................ 33

Firm, Industry, and Environment.................................................................................. 6

Financial Statement Analysis ....................................................................................... 14

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4.5.4 Net Profit Margin .......................................................................................................................... 34 4.5.5 Cash Flow Margin......................................................................................................................... 34 4.5.6 Return on Total Asset (ROA) .................................................................................................... 35 4.5.7 Return on Equity (ROE) ............................................................................................................. 35 4.5.8 Cash Return on Assets ................................................................................................................. 36 4.6 Market Measure .................................................................................................................. 37 4.6.1 Earnings per Common Share ..................................................................................................... 37 4.6.2 Price to Earnings............................................................................................................................ 37 4.6.3 Dividend Payout ............................................................................................................................ 38 4.6.4 Dividend Yield ............................................................................................................................... 38 4.7 DuPont Analysis................................................................................................................... 39 4.8 Projected Financial Statement ..................................................................................... 44

Outlook, Summary, and Conclusions ......................................................................... 44

5.1 5.2 5.3 Investment Potential ........................................................................................................... 44 Credit Assessment ............................................................................................................... 45 Summary and Conclusions................................................................................................ 45 Appendix A: Balance Statement ...................................................................................... 46 Appendix B: Income Statement ....................................................................................... 49 Appendix C: Statement of Cash Flow ............................................................................ 51

Appendix ........................................................................................................................... 46
6.1 6.2 6.3

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Appendix D: Projected Financial Statement ............................................................ 53 References ......................................................................................................................... 55

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2 2.1

Introduction Objective The objective of this paper is to provide information about financial position,

performance and changes in financial position of an enterprise, in this case Apple Inc. and then to make an analysis based on that information. Different users can use financial statements for different purposes:

Prospective investors, use of financial statements to determine the viability of investment in a line. Financial analyses can provide the investors with the ground for making finance decisions.

Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance the expansion of company and other significant expenditures.

Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.

Media and the general public are also interested in financial statements. In this research, the team will take the role as an investor and decide whether to

invest in this company or not.

2.2

Summary of the Findings In general, Apple has no problem with its liquidity. Apples performance,

especially with regard to current ratio, quick or acid-test ratio, and cash flow liquidity, is actually much better compared to Hawlett-Packard. In addition, the overall ROE index of the company is also higher than its competitor, HP. It proves that this company has promising future. While Apples performance was becoming better in 2011, HPs performance was decreasing compared to 2010. Based on the findings, Apple Ins. is one of the market leaders in technology industry and its products have strong brand image. Apple Inc. is definitely a good company to invest on according to this research.

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3 3.1

Firm, Industry, and Environment Description of firm and its management Apple Inc. (NASDAQ: AAPL; formerly Apple Computer, Inc.) is an American

multinational corporation that designs and sells consumer electronics, computer software, and personal computers. Some of the products that are best known from this company are Macintosh line of computers, iPod, iPhone and iPad. It also has some accessories that are already in the market. Its software includes the Mac OS X operating system; the iTunes media browser; the iLife suite of multimedia and creativity software; the iWork suite of productivity software; Aperture, a professional photography package; Final Cut Studio, a suite of professional audio and film-industry software products; Logic Studio, a suite of music production tools; the Safari web browser; and iOS, a mobile operating system. As of July 2011, Apple has 357 retail stores in ten countries, and an online store. It is the largest publicly traded company in the world by market capitalization, also the largest technology company in the world by revenue and profit, more than Google and Microsoft combined. As of September 24, 2011, the company had 60,400 permanent fulltime employees and 2,900 temporary full-time employees worldwide. Its worldwide annual revenue in 2010 totaled $65 billion, growing to $108 billion in 2011. This company was established on April 1, 1976 in Cupertino, California by Steve Jobs, Steve Wozniak and Ronald Wayne, and then incorporated January 3, 1977. The company was named Apple Computer, Inc. for its first 30 years. The word "Computer" was removed from its name on January 9, 2007, as its traditional focus on personal computers shifted towards consumer electronics. Below are the tables regarding the executive profiles and board directors of the company.

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Table 1 Name Tim Cook Eddy Cue Scott Forstall Jonathan Ive Bon Mansfield Peter Oppenheimer Philip W. Schiller Bruce Sewell Jeff Williams

Executive Profiles Position Held CEO Senior Vice President Internet Software and Services Senior Vice President iOS Software Senior Vice President Industrial Design Senior Vice President Hardware Engineering Senior Vice President and Chief Financial Officer Senior Vice President Worldwide Marketing Senior Vice President and General Counsel Senior Vice President Operations

Table 2 Name

Board of Directors Position Held Chairman of the Board, Apple Chairman and former CEO Genentech

Arthur D. Levinson, Ph. D.

Bill Campbell Tim Cook Millard Drexler Albert Gore Jr. Robert A. Iger Andrea Jung Ronald D. Sugar, Ph. D.

Chairman and former CEO Intuit Corp. CEO Apple Chairman and CEO J. Crew Former Vice President of the United States President and CEO the Walt Disney Company Chairman and CEO Avon Products Former Chairman and CEO Northrop Grunman

Source: http://www.apple.com/pr/bios/

3.2

SWOT Analysis

3.2.1 Strength Apple is very successful. When this company launched iPod in 2005, the sales of this player had increased its second quarter profits to $320. The favorable brand perception had also increased sales of Macintosh computers. IPod gives the company access to a whole new series of segments that buy into other parts of Apple brand. The Page 7

sales of its notebooks product are also very strong giving a huge contribution to income of apple. This company already built its brand. It is one of the most established and healthy IT brands in the world, and has a very loyal set of enthusiastic customers that advocate the brand. Such a powerful loyalty means that Apple not only recruits new customers but also retains old customer. This company also has a very strong research and development department that always keep researching and doing innovation to invent new products.

3.2.2 Weaknesses Some of the products have some defects. For example, Apple iPod Nano have faulty screen, which later explained that a batch of its products has screens that break under impact, but the company replaced all those faulty items. There is a pressure on Apple to increase the price of its music download file from the music industry in iTunes. The company is resolute, but if it gives in to the music producers, it may be perceived as a commercial weakness. Early in 2005 Apple announced that it was to end its long-standing relationship with IBM as a chip supplier, and that it was about to switch to Intel. Some industry specialists commented that the swap could confuse Apple's consumers

3.2.3 Opportunities The company can enable flash media player in tablet and cell phone, because some of people are not willing to buy apple product because it cannot play video that is using adobe flash. By enabling flash media player in tablet and cell phone, there will be more customer that are willing to buy Apples products. Apple also can add some feature to their product such as USB dock or memory card to iPad.

3.2.4 Threats The biggest threat to IT companies, such as Apple, is the high level of competition in the technology markets. Being successful can attract competition, and Apple works very hard on research and development and marketing in order to retain its

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competitive position. The popularity of iPod and Apple Mac are subject to demand, and will be affected if economies begin to falter and demand falls for their products. There is also a high product substitution effect in the innovative and fast moving IT consumables market. As a result, iPod and MP3 rule today, but only yesterday it was CD, DAT, and Vinyl. Tomorrow's technology might be completely different. Wireless technologies could replace the need for a physical music player. One of the threats for this company is war of lawsuit from other companies.

3.3

Discussion of Competitive Environment Apple Inc. has a lot of competitor in terms of products. There are a lot of

companies that has a business in this technology segment, but the growth of this company is very high thus, there is almost no competitor to this company. Apple has a lot of product line, for example computers, iPod, iPhone and iPad. For iPad and iPhone, Samsung is the biggest competitor for Apple, which has Galaxy Tab and Android. But iPhone is still leading the market. The biggest competitor for Macintosh is another computer company for example HP, Dell, Lenovo, Acer, Sony and others, but the main competitor is Microsoft as the operating system. In 2011, Apple closed out with a commanding 52.1% share of mobile devices tracked browsing the Web, while Googles Android had just 16.2%, For iPhone versus iPad, Apple's smartphone took 25.2% to lead all mobile devices. The iPad, though, was the second most popular device, with a 24.5% representation. According to the statistics, the Mac finished with 6.4% in December of 2011, well behind the 92.2% share Microsoft held with Windows. In terms of PC operating systems shows that Windows XP, although have been in technology for 10 years old, still leads the way with 46.5%. Windows 7 is in second with 37%, while Windows Vista holds 8.44%. (Apple Insider, 2012) Apple's Mac OS X 10.6 Snow Leopard remains its most popular at 3%. Lion closed out 2011 with 2% share in December.

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Figure 1

Sales of some mobile devices

Apple strategy to against its competitor

Apple has 3 factors that make Apple stands out from its competitors, its products are hot, it got $60 billion in cash, and it is a big company. These three factors allow it to get more of its fair share of components, and ultimately market share. Apple uses its size and vast array of resources to get deals from component makers. Apple's supply chain also leads this company to be more successful. There are lots of big companies out there. What separates Apple from the rest is its ability to sell a lot of products while selling remarkably few different kinds of products.

3.4

Economic Climate and Outlook

Apple Reports First Quarter Results

All-time record Mac, iPhone, iPad Sales Drive Highest Revenue and Earnings Ever Revenue Grows 71 Percent; Earnings Grow 78 Percent Apple is one of the most valuable companies in the world. On January 18, 2011 Apple made announcement about its financial results. This company reported that it has revenue $26.74 billion and its quarterly profit of $6 billion, or $6.43 per diluted share.

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International sales accounted for 62% of this quarter's revenue. Apple sold 4.13 million Macs during the quarter, a 23% unit increase over the year-ago quarter. The Company sold 16.24 million iPhones in the quarter, representing 86% unit growth over the year-ago quarter. Apple sold 19.45 million iPods during the quarter, representing a 7% unit decline from the year-ago quarter. The Company also sold 7.33 million iPads during the quarter. This company also generated $9.8 billion in cash flow operations during this quarter. Apple also expected revenue of $22 billion and diluted earnings per share of $4.90. Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork, and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple is reinventing the mobile phone with its revolutionary iPhone and App Store, and has recently introduced its magical iPad which is defining the future of mobile media and computing devices (Apple, 2011)

Market Performance

According to Gartner research firm, Apple leads the market share in PC market for the third quarter of 2011. This result gives a picture of Apple's market performance during this quarter. Because of this company's product such as MacBook Air, Apple experienced aggressive 21.5% year-over-year growth to take the third place in US market that grew by only 1.1% overall. (Macrumors, 2012) Apple also experienced the strongest growth among the top 5 vendors in the US PC Market. Apple's market share in the U.S. grew to 12.9% during the third quarter, up from 10.8% in the year-ago quarter and 10.7% last quarter. Below is the graph depicting Apples US Market share.

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Figure 2

Apple's U.S. Market Share Trend: 1Q06-3Q11 (Gartner)

Table 3

Gartner's Preliminary U.S. PC Vendor Unit Shipment Estimates for 3Q11 (Thousands of Units)

3.5

Other factors, e.g. labor relations, litigation

Apple is famous not only because of its products but criticism for the alleged use of sweatshop labor, environmental destruction, and unethical business practices. Additionally, it has been criticized for its litigious legal policy of suing before first gathering all the facts necessary to pursue a legitimate lawsuit

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Litigation

Apple faced a lot of antitrust action from another company. In 2004, Apple faced antitrust litigation due to other vendors music file incompatible and inoperable on the iPod. For example, Apple and AT&T Mobility antitrust class action, where the customers are locked with contract. Another example is Apple and other publishing companies also got sued by US Justice Department because of the price it sets in eBook. There are also some class action suits that were filed by customers. It is because of the iPod battery life. It did not have the battery life represented and/or that the battery's capacity to take and hold a charge substantially diminished over time Apple also got sued by other technology companies because of the patents problem. The companies that sued apple for example are Creative Technology because of the menu structure; Typhoon Touch technologies because of the touch screen; Nokia because of wireless technology; HTC because of iPhone's user interface, underlying architecture and hardware; Kodak because of digital imaging; Samsung related to android phones and tablets.

Labor Relations

According to Mail on Sunday 2006 alleged that sweatshop conditions existed in factories in China, where the contract manufacturers, Foxconn and Inventec, operate the factories that produce the iPod. It indicated that one iPod factory did not give proper treatment to the labors in the factory. After these allegations, Apple slowly audited the manufacturing conditions of its entire supplier then slowly raising standards of the working conditions. In 2009, there was also couple Chinese factory worker employed by Apples manufacturing partner Foxconn that committed suicide. This explained how labor relations in Apple are not satisfying.

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4 4.1

Financial Statement Analysis Common Size Financial Statement

4.1.1 Balance Sheet Analysis In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.

Analysis of The Balance Sheet

The complete Balance Sheet of Apple Inc. can be seen in Appendix A page 44.

Current Assets Current asset is the list of assets that have short-term liquidity rate. Current asset consist of cash and cash equivalents, short-term marketable securities, accounts receivable, inventories, deferred tax assets, vendor non-trade receivables, and some other current assets In Apples case, the total current assets in 2011 increased from the one in 2010. There are several factors that affect the change in total of the current assets. Cash and cash equivalents and inventories decreased significantly. However, other current assets are increasing, which yield to the increase of Apples current assents. It is possible that the company used its cash to get more long-term marketable securities. In addition, cash

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is also used to create more inventories (IPhone 4 and IPad 2 came out in 2011), which were sold out in an incredible rate increasing their income significantly.

Long-Term Marketable Securities Long-Term Marketable Securities represent the companys assets in securities such as governments bond, or corporate securities. Apple has a lot of assets in the form of securities which can be used in the future.

Goodwill Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Moreover, goodwill arising from businesses acquire unassigned to the reporting units that are expected to benefit from the synergies of the acquisition. In Apples case, goodwill is acquired by a lot of company that creates applications, or use Apples product in their company especially the music production house working together with Apple.

Liabilities Liability is an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Compared to 2010, Apples current liabilities, such as account payable and accrued expenses were higher in 2011. It is possible that the company needs more sources to launch their newest product at that time. Furthermore, Apple also launched some new products, opened new stores in the worldwide, and did some advertisement during the year. Long-term debt has also increased in 2011 compared with 2010 because the company had acquire some more debts to other source.

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Shareholders Equity Shareholders equity represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock. Shareholders equity increased a lot from 2010 to 2011 due to the retained earnings. Retained earnings of Apple significantly increased from 2010 to 2011 because of their sales and so does their stock value. It was surely a very good year for Apple as they become better player in its industry because of their run in 2011.

4.1.2 Income Statement Analysis

Financial accounting Income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.

Analysis of Income Statement

The complete Income Statement of Apple Inc. can be seen in Appendix B page 46.

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Revenues Revenue is an income that a company receives from its normal business activities, usually from the sale of goods and services to customers. The increase in revenues in 2011 compared with 2010 and 2009 primarily was due to an improvement in the development of software hardware in the company. Combination of price and product mix and favorable applications for the customers brings a lot of income to the company. Apples revenue comes mainly from the net sales itself. Even though in 2011, Apple has a significant increase on its cost of sales, the net sales increased even more, this created a very significant increase in its gross margin. This increase in gross margin makes a huge difference in its net income even though its operating expenses are higher than the year before.

Cost of Sales

Cost of sales is the cost that needing to be p1aid in order to get sales. It is the expense of the company for the whole period of which the income statement is made. The increase in cost of sales in 2011 compared with 2011 mainly was due to higher raw material and manufacturing costs. Total manufacturing expenses increased by 63% in 2011 compared with 2010 primarily due to an unfavorable currency impact, increased utilities, higher salaries and benefits. Similarly, Apples cost of sales also increased from 2009 to 2010 because of the same reason where material cost and manufacturing costs increased significantly which influence the cost of sales.

Gross Profit

Gross profit is the profit after cost of sales is taken away from the amount of net sales that was made in the whole period. Apples gross profit increased by more than $18 million in 2011 compared with 2010, as improvements in the combination of price and product mix and manufacturing costs and high volume. Gross profit percentage increased by more than 60% in 2010-2011 compared with 50% in 2009-2010 as the increase in

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revenues from pricing improvements to recover higher raw material and manufacturing costs was substantially greater than the increase in cost of sales.

Selling, General and Administrative Expenses

Selling and administrative expenses are some of the operating expenses in the company that are connected to selling processes, such as, advertisements and so on. In Apple, selling and administrative expenses has increased by around 50% in 2011 compared with 2010. The increase primarily reflects a growth in incentive compensation expense, partially offset by an unfavorable currency impact. Selling and administrative expenses also increased by around 30% in 2010 compared with 2009 primarily due to higher incentive compensation expense, deferred compensation expense.

Research and Development Expenses

Research and development expenses are some of the operating expense in the company that is connected to developing process of Apple, such as the development in its hardware and software. Apples research and development expense has increased by 20% in 2011 compared with 2010 primarily due to an increase in salaries and benefits and higher inside or outside testing expenses. Furthermore, research and development expenses increased by 20% in 2010 compared with 2009 primarily due to an increase in salaries and benefits and higher inside or outside testing expenses.

4.1.3 Cash Flow Statement

In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow, statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is

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concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. The cash flow statement is partitioned into three segments, namely: 1. Cash flow resulting from operating activities Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product. 2. Cash flow resulting from investing activities Examples of investing activities are: o Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.) o Loans made to suppliers or received from customers o Payments related to mergers and acquisitions 3. Cash flow resulting from financing activities Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

Analysis of Cash Flow

The complete cash flow of Apple Inc. can be seen in Appendix C page 47.

Operating Activities

According to the data obtained from the company, the cash of the operating activities of the company significantly increases from $18,595 to $37,529 in the year of

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2010 and 2011, respectively. This is due to the fact that the debt of the company decreases significantly from $6,307 to $2,515 and the increase in the account receivable from -$2,142 to $143. In addition, in the last few years Apple Inc. has develop remarkably. It gains more and more population compare to the other brands. As a result, the net income of the company also increased notably from $14,013 to $25,922. Even though the other current and non-current liabilities were increased from $778 to $4,495, the cash obtained from the operating activities still increased higher than those liabilities. As a result, the operating activities of the company were considered as great.

Investing Activities

The cash used in the investing activities of the company increased significantly from $13,854 to $40,419 in the year of 2010 and 2011, respectively. The purchases of marketable securities became much greater from $57,793 to $102,317 resulting in more bonds and stocks sold. The increasing number of the investing activities is due to the fact that the companys research and development spending is focused on investing in new hardware and software products, and in further developing its existing products, including iPhone, iPad, Mac, and iPod hardware; iOS and Mac OS X operating systems; and a variety of application software and online services.

Financing Activities

Cash generated by the financing activities for Apple Inc. primarily consisted of the proceeds from issuance of common stock and excess tax benefits from equity awards. The financing activities in the year of 2011 are greater than that in the year of 2010. The financing activities are $1,444 and $1,257 in the year of 2011 and 2010, respectively.

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Analysis of Inflow and Outflow

The complete common size inflow and outflow of Apple Inc. can be seen in Appendix C page table 48.

Inflow

The inflow of the company has increased remarkably from $66,976 to $109,346 in the year 2011. In the year of 2010, the inflow of the company mostly consisted of operating activities, proceeds from maturities of marketable securities, and proceeds from sales of marketable securities. However, in the year of 2011 the inflow is dominated by the operating activities and the proceeds from sales of marketable securities. In this time, we can see that the company is getting more popular and a lot of new customers have bought the products.

Outflow

As the inflow increased, the outflow of the company also increased. The outflow increased almost doubled the original value from $60,978 to $110,792. Most of the outflow was influenced by the purchases of marketable securities which went up by $44,452. In the year of 2011, Apple Inc. launched some new products requiring big advertisements and also opened a lot of stores in the worldwide. Apple Inc. opened more than 50 stores around the world including in the Philadelphia, Amsterdam, and Even Perth.

4.2

Short-Term Liquidity

4.2.1 Current ratio

Current ratio measures short-term liquidity, the ability of a firm to meet needs for cash as they arise. A current ratio of current assets to current liabilities of 2:1 is usually considered to be acceptable. The higher the current ratio, the better the liquidity will be.

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Current ratio = current assets current liabilities 2011 Apple HP 1.61 1.01 2010 2.01 1.10

In 2010, Apple showed a good result in current ratio of 2.01 because the companys current assets were twice its current liabilities. Nevertheless, the ratio went down to 1.61 in 2011 due to the fact that the cash and cash equivalent were decreasing while the current liabilities rose significantly than the current assets in 2011. Compared to HP, Apples current ratio showed a good result than HPs in both 2011 and 2010.

4.2.2 Quick or Acid Test Ratio

Quick or acid-test ratio measure short-term liquidity more rigorously than the current ratio by eliminating inventory, usually the least liquid current asset. In general, a quick ratio of 1 or more is accepted by most creditors. The higher the quick or acid-test ratio, the better the liquidity will be. Quick or acid-test ratio = (current assets inventories) current liabilities 2011 Apple HP 1.58 0.86 2010 1.96 0.97

Apple also showed good result in quick or acid - test ratio of 1.96 in 2010. However, it slightly decreased to 1.58 in 2011 because a bit drop in current assets, especially in cash and cash equivalent and significant increase in current liabilities. In addition, Apple still showed better result than HP in both years.

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4.2.3 Cash Flow Liquidity

Cash flow liquidity measure short-term liquidity by considering as cash resources (numerator) cash plus cash equivalents plus cash flow from operating activities. Cash flow liquidity equals to 1 means that for every dollar the company owes it has $ 1 cash to pay them. The higher the cash flow liquidity, the better the liquidity will be.

Cash flow liquidity = (cash + marketable securities + operating cash flow) current liabilities 2011 Apple HP 2.27 0.41 2010 2.13 0.46

In 2010, Apple displayed excellent result of cash flow liquidity in 2.13. Interestingly, it grew up until 2.27 in 2011. Apples total assets in 2011 rose significantly from the one in 2010 due to the increasing of marketable securities. Moreover, Apples cash flow liquidity showed much better result than HP in 2010 and 2011. HP was still lack behind in 2010 and 2011 with 0.46 and 0.41, respectively.

4.2.4 Average Collection Period

Average collection period indicates days required to convert receivables into cash. The lower the average collection period, the better its effects on the company since it means reducing the possibility of bad debt risk faced by the company.

Average collection period = net account receivable average daily sales 2011 Apple HP 18.10 52.28 2010 30.83 53.52

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Both of the companys average collection periods decreased in the year of 2011. While HPs average collection period slightly decreased, the Apples average collection periods decreased significantly. Due to the fact that the better it is if the company has the lower average collection period, Apple has better average collection period than HP.

4.2.5 Days Inventory Held

Days inventory held indicates days required to sell inventory. The lower the days inventory held, the better its effects on the company.

Days inventory held = inventory average daily cost of sales 2011 Apple HP 4.4 28.03 2010 9.7 24.60

Apples days inventory held was very awesome during both 2010 and 2011. Even though Apple had a low days inventory held during 2010, in 2011 the number still went down from 9.7 to 4.4. They showed that the daily cost of sales increased in 2011 indicating the more efficient management of Apple. In addition, the difference in the days inventory held between Apple and HP is quite large confirming that Apples daily sales are bigger than HPs.

4.2.6 Days Payable Outstanding

Days payable outstanding is the average number of days it takes to pay accounts payables in cash. Delaying payment of payables as long as possible, but still making payment by the due date, is desirable. Days payable outstanding = account payable average daily cost of sales 2011 Apple HP 82.89 55.20 2010 110.91 54.64

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Overall, days payable outstanding ratio of Apple showed good result in 2010 and 2011. The result in 2010 was good because if the company could delay the payment to supplier, company could save money for others investment. Moreover, in 2011, the ratio went down from 110.91 to 82.89. It was also good because the company would like to shorten the days of payment to suppliers, because company did not want to make the suppliers angry for late payments. Furthermore, compared to HP, Apple still showed better result because Apple could delay payment more than HP while still minimizing the late payments.

4.2.7 Cash Conversion or Net Trade Cycle

Cash conversion or net trade cycle indicates the days in the normal operating cycle or cash conversion cycle of a firm.

Cash conversion or net trade cycle = average collection period + days inventory held days payable outstanding 2011 Apple HP -78.01 25.10 2010 -113.19 23.48

Cash conversion or net trade cycle of Apple showed negative result in 2010 and 2011. They were good because Apples days payable outstanding were longer than days inventory held and average collection period. It is good because you can use other peoples money to generate more money for the company while paying the payments on time. In addition, HPs net trade cycles were significantly larger that Apples showing that HP needed more days than Apple before they can collect the money.

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4.3

Operating Efficiency

4.3.1 Account Receivable Turnover

Account receivable turnover shows how many times receivables are collected during a year, on average. It also measures the ability of company to collect cash from credit customers.

Account receivable turnover = net sales net account receivable 2011 Apple HP 20.16 6.98 2010 11.84 6.82

Apples account receivable turnover was getting higher in 2011. It means that the company was able to collect many account receivables during a year. It was good because it could increase the assets as well. On the other hand, HP generated lower account receivable turnover than Apple in both years.

4.3.2 Inventory Turnover

Inventory turnover measures efficiency of the firm in managing and selling inventory. High ratio indicates the ability of company to sell inventory quickly, but too high ratio may show inadequate inventory level. Thus, comparison to historical data and industry averages is very important.

Inventory turnover = cost of sales inventory 2011 Apple HP 83.03 13.02 2010 37.62 14.84

Inventory turnover ratio of Apple was good in 2010 and 2011. It went up from 37.62 to 83.03 in the year of 2011. Due to the fact that the inventory ratio in 2011 was

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decreasing, it means that the company could sell inventory fast. However, HP showed worse result than Apple because it could not sell many inventories like Apple did.

4.3.3 Payables Turnover

Payables turnover measures efficiency of the firm in paying suppliers. If turnover ratio is falling from one period to another, this is a sign that the company is taking longer to pay off its suppliers than it was before. On the other hand, if the turnover ratio is increasing, this means that the company is paying off its suppliers at a faster rate.

Payable turnover = cost of sales account payable 2011 Apple HP 4.40 6.61 2010 3.29 6.68

Apple showed good payables turnover increasing in 2011 from 3.29 to 4.40. It means that Apple was able to pay the supplier faster than last year. Compared to HP, Apple performance was still better due to the fact that Apples payables turnover increased while HPs slightly decreased.

4.3.4 Fixed Asset Turnover

Fixed asset turnover measures efficiency of the firm in managing fixed asset. It also assesses effectiveness in generating sales from investment in fixed assets. The higher the ratio, the smaller is the investment required to generate sales and thus, the more profitable is the firm.

Fixed asset turnover = net sales net property, plant, and equipment 2011 Apple HP 13.92 10.35 2010 13.68 10.71

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Apple generated higher ratio in 2011 than in 2010. Net sales of Apple increased significantly in 2011 generating higher profit as well. Moreover, Apple generated higher ratio than HP in both 2 years.

4.3.5 Total Asset Turnover

Total asset turnover measures efficiency of the firm in managing fixed assets. It also assesses effectiveness in generating sales from investment in total assets. The higher the ratio, the smaller is the investment required to generate sales and thus, the more profitable is the firm.

Total asset turnover = net sales total asset 2011 Apple HP 0.93 0.98 2010 0.87 1.01

Apples total asset turnover was getting higher in 2011. It showed that Apple could generate higher net sales in 2011 making higher profit to the company. There was no big difference between Apple and HP in total asset turnover. However, HPs total asset turnover slightly decreased in 2011.

4.4

Capital Structure and Long-Term Solvency

4.4.1 Debt Ratio

Debt ratio shows the proportion of all assets that are financed with debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. The lower the debt ratio, the better it is for the company.

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Debt ratio = total liabilities total assets 2011 Apple HP 0.34 1.00 2010 0.36 1.00

Apple debt ratio was less than 0.5 in both years. It means that the company generated low debt in both 2010 and 2011. However, HP showed bad results in those 2 years. The debt ratio of HP was 1.00, more than 0.5 generating higher debts that Apple in those 2 years.

4.4.2 Long-term debt to total capitalization

Long-term debt to total capitalization measures the extent to which long-term debt is used for permanent financing.

Long-term debt to total capitalization = L.T debt (L.T debt + shareholders equity) 2011 Apple HP 0.00 0.37 2010 0.00 0.27

Apple did not have long-term debt during the last five years. As a result, Apple does not need to have debt and has enough cash flow to run its business. In conclusion, Apple had much better result than HP.

4.4.3 Debt to equity

Debt equity indicates the relative proportion of shareholders' equity and debt used to finance a company's assets.

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Debt to equity = total liabilities shareholders equity 2011 Apple HP 0.52 0.79 2010 0.57 0.55

Apple had a good debt to equity ratio during 2010 and 2011. Having lower ratio in 2011, Apple generated lower debt. Although HP had almost similar result with Apple in 2010, HP failed to maintain their performance resulting in higher debt with ratio of 0.79.

4.4.4 Financial Leverage Index

Financial leverage index indicates if a firm is employing debt successfully.

Financial leverage index = ROE adjusted ROA 2011 Apple HP 1.52 3.32 2010 1.57 3.05

Apples financial leverage index showed good results in 2 years. Moreover, it even decreased in 2011 by 0.05 points resulting in lower risk generated. Nevertheless, HP showed higher result generating higher risk than Apple.

4.4.5 Times Interest Earned

Times interest earned measures how many times interest expense get covered by operating earnings. A lower times interest earned ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates.

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Times interest earned = operating profit interest expense 2011 Apple HP 13.92 2010 22.73

Apple has no interest expense because it could pay the bondholders on time. Hence, Apple did not need to pay the interest expense during these 2 years. In addition, Apples operating profit depicted outstanding result in both 2 years. On the other hands, HP result declined and was poor in 2011. HP probably had difficulties to pay the bondholders and did not have enough money to pay the interest expense.

4.4.6 Cash Interest Coverage

Cash interest coverage measures how many times interest payment are covered by cash flow from operating activities.

Cash interest coverage = (op. cash flow + interest paid + taxes paid) interest paid 2011 Apple HP 21.93 2010 28.99

Again, Apple had no interest paid. Apples operating cash flow generated higher amount of money. On the other hand, HPs result was bad compare to Apple during 2010 and 2011.

4.4.7 Fixed Charge Coverage

Fixed charge coverage measures coverage capability more broadly than times interest earned by including operating lease payments as fixed expenses. It also indicates the risk involved in ability to pay fixed costs when business activity falls.

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Fixed charge coverage = (op. profit + lease payment) (interest exp + lease payment) 2011 Apple HP 2.07 2010 2.44

Apple did not need to pay both interest expense and lease payment. Still, its operating profit had generated higher money.

4.4.8 Cash Flow Adequacy

Cash flow adequacy measures how many times capital expenditures, debt repayments, and cash dividend are covered by operating cash flow.

Cash flow adequacy = op. cash flow (capital expenditures + debt repayment + dividend paid) 2011 Apple HP 2.21 0.41 2010 0.89 0.53

Apples cash flow adequacy was quiet good in 2010. Moreover, it increased up to 2.21 in the year of 2011 indicating that company could cover capital expenditures, debt repayment, and dividend paid by operating cash flow. In addition, the operating cash flow of Apple increased significantly in 2011.

4.5

Profitability

4.5.1 Gross Profit Margin

Gross profit margin measures profit generated after consideration of cost of products sold.

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Gross profit margin = gross profit net sales 2011 Apple HP 0.40 0.23 2010 0.39 0.24

Apple generated quiet stable results during 2010 and 2011. Nevertheless, HP reflected poor results compare to Apple in both 2010 and 2011.

4.5.2 Operating Profit Margin

Operating profit margin measures profit generated after consideration of operating expenses. Operating profit margin = operating profit net sales 2011 Apple HP 0.31 0.08 2010 0.28 0.09

Apple had good stable results in operating profit margin during 2010 and 2011 with 0.28 and 0.31, respectively. Apple generated good result in this ratio because it could generate high operating profit in 2010 and 2011. On the other hand, HP still provided worst result than Apple.

4.5.3 Effective Tax Rate

Effective tax rate is the ratio of taxes paid to a given tax base. For corporate income taxes, it is the ratio of taxes to book profits. Effective tax rate can be used as an indication of how good the companys income is. The lower the effective tax rate, the better the companys income and vice versa.

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Effective tax rate = income taxes earnings before income taxes 2011 Apple HP 0.24 0.60 2010 0.24 0.53

Apple had lower effective tax rate than HP. It shows that Apple had better income than HP and vice versa.

4.5.4 Net Profit Margin

Net profit margin measures profit generated after consideration of all expenses and revenues. Net profit margin = net profit net sales 2011 Apple HP 0.24 0.06 2010 0.21 0.07

The results of Apples net profit margin were generally good compare to HP. Moreover, the net profit margin of Apple increased from 0.21 to 0.24 while HPs net profit margin slightly decreased.

4.5.5 Cash Flow Margin

Cash flow margin measures the ability of a firm to generate cash from sales. Since expenses and purchases of assets are paid from cash, this is an extremely useful and important profitability ratio. Knowing that a company is continually improving its cash flow margin is extremely valuable and is a key indicator of performance. Companies that end up generating a negative cash flow are losing money as they generate sales and any company cannot keep this up over an extended period of time. With a negative cash flow, the company will have to rely on cash reserves or take on more debt as they continue the business.

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Cash flow margin = operating cash flow net sales 2011 Apple HP 0.35 0.10 2010 0.29 0.09

Overall, the companys cash flow margins were good from 2010 to 2011. No negative cash flow generated. However, in this case Apple still had better cash flow margin than HP.

4.5.6 Return on Total Asset (ROA)

Return on total assets (ROA) measures overall efficiency of firm in managing assets and generating profit. It also tells an investor how much profit a company generated for each $1 in assets. Thus, it is the most stringent and excessive test of return to shareholders.

ROA = net earnings total assets 2011 Apple HP 0.22 0.05 2010 0.19 0.07

Apple generated good results of ROA during 2010 and 2011 with no negative ROA. Nonetheless, HP produced worse results of ROA than Apples ROA during those years.

4.5.7 Return on Equity (ROE)

Return on equity (ROE) measures rate of return on stockholders (owner) investment. A higher return on equity means that surplus funds can be invested to

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improve business operations without the owners of the business (stockholders) having to invest more capital. It also means that there is less need to borrow. ROE = net earnings shareholders equity 2011 Apple HP 0.34 0.18 2010 0.29 0.21

Apple also had brilliant result in ROE. There was no negative result in ROE because there was no loss in its operations. Again, HP still lacked behind compare to Apple.

4.5.8 Cash Return on Assets

Cash return on assets measures the return on assets on a cash basis. A higher cash return on assets ratio indicates a greater cash return.

Cash return on assets = operating cash flow total assets 2011 Apple HP 0.32 0.10 2010 0.25 0.10

Again, Apple still showed excellent result in cash return on assets. There was an increasing in 2011 at 0.32 point. It was good because Apple was able to generate cash from utilizing its assets. Operating cash flow also generated good result in effecting cash return on assets higher than last year.

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4.6

Market Measure

4.6.1 Earnings per Common Share

Earnings per common share shows return to common stock shareholder for each share owned.

Earnings per common share = net earnings average shares outstanding 2011 Apple HP 27.89 3.56 2010 15.28 3.90

Apples earning per common share was much higher than HP. In 2011 Apples result was really high compare to 2010. It was great because it could receive more net earnings in 2011. In this case, Apple was far better than HP.

4.6.2 Price to Earnings

Price to earnings ratio expresses a multiple that the stock market places on firm earnings. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. In general, a low P/E is considered a sign that a stock may be undervalued, or that investors expect poor future earnings. By contrast, a high P/E is thought to indicate an over-valued stock, or one that is expected to post significant earnings increases.

Price to earnings = market price of common stock EPS 2011 Apple HP 12.11 12.25 2010 14.89 13.45

Apples price to earnings was decreasing in 2011. The ratios of Apple were quite similar with HP. However, price to earnings is not too important for investor to analyze

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the company performance because each technology companies had different growth of prospects.

4.6.3 Dividend Payout

Dividend payout shows percentage of earning paid to shareholders. An excessively high payout ratio suggests that the company might be paying out more than it can comfortably afford. Not only does this leave just a small percentage of profits to plow back into the business, but it also leaves the firm highly susceptible to a decline in future dividend payments. In some cases, a company will even pay out more than it earns, thus yielding a dividend payout ratio in excess of 100%. Such extremely high payouts are rarely sustainable and should warn investors that a dividend cut may be on the horizon. Because the act of reducing dividends is usually interpreted as a sign of weakness, when a dividend cut announcement is made, it also usually triggers a decline in the share price.

Dividend payout = dividend per share EPS 2011 Apple HP 0.00 0.11 2010 0.00 0.08

The founder of Apple, Steve Jobs, never paid the dividends to the shareholders. After Steve Jobs passed away, many shareholders wanted to get the dividends. Thus, there is a probability that in 2012 there will be the data for dividend payment.

4.6.4 Dividend Yield

Dividend yield shows the rate earned by shareholders from dividends relative to current price of stock. High-growth companies usually have a low or no dividend yield, because most or all of their earnings are reinvested in their business. For a slow-growth firm with fewer prospects of substantial price appreciation, the higher dividend yield serves to make the stock more attractive and support the stock price.

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Dividend yield = dividend per share market price of common stock 2011 Apple HP 0.00 0.75 2010 0.00 0.64

Just like the dividend payment, there was no data for dividend per share in Apple due to the fact there was no dividend payment until 2011.

4.7

DuPont Analysis

DuPont analysis is a method of performance measurement that was started by the DuPont Corporation in 1920s, and has been used ever since. This method examines a companys Return on Equity (ROE) by breaking it into three main components, such as profit margin, asset turnover and leverage factor. By breaking the ROE into distinct parts, investors can examine how effective a company is using equity, since poorly performing components will drag down the overall figure. In details, DuPont analysis helps analyst to see how the firms decisions and activities over the course of an accounting period, which is what financial ratios are measuring-interact to produce overall firms shareholders, or the ROE.

The three components that are needed in doing DuPont analysis:

1. Net profit margin Earnings of a company often do not tell how good a company is. For example, increasing in earnings is good, but it does not mean that the profit margin of a company is improving. Other example, company has costs that have increased at a greater rate than sales. Thus, it leads to a lower profit margin. In order to solve the problem, net profit margin is a very useful, especially when comparing companies in similar industries. It is calculated as:

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This higher ratio of profitability ratio when comparing two or more company indicates more profitable company. It shows that the company has better control over its cost and covers who has a higher profit margin.

2. Total asset turnover ratio Asset turnover means that the amount of sales generated for every dollars worth of assets. It is calculated as:

It measures a firms efficiency using its assets in generating sales or revenue. The higher the number of asset turnover ratios is, the better it is. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.

3. Financial leverage or equity multiplier Equity multiplier is a measure of financial leverage. It is calculated as:

This ratio shows a companys total assets per dollar of stockholders equity. A higher equity multiplier indicates higher financial leverage, which means that the company is relying more on debt to finance its assets

DuPont analysis system:

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Hence,

Where, ROE ROA NPM TAT EM = Return on Equity = Return on Assets = Net Profit Margin = Total Assets Turnover Ratio = Equity Multiplier

After a short explanation about DuPont Analysis, there are Apple and HewlettPackard comparison results from 2010 to 2011 shown below.

Table 4 Comparison of Apple and HP Performance Apple Net Sales Net Income Total Assets Shareholder's Equity 2011 (in million) 108,249 25,922 116,371 76,615 2010 (in million) 65,225 14,013 75,183 47,791

Apple NPM TAT ROA (NPM*TAT) EM ROE

2011 24% 93% 22% 1.52 34%

2010 21% 87% 19% 1.57 29%

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Hewlett-Packard Net Sales Net Income Total Assets Shareholder's Equity

2011 (in million) 127,245 7,074 129,517 39,004

2010 (in million) 126,033 8,761 124,503 40,781

Hewlett-Packard NPM TAT ROA (NPM*TAT) EM ROE

2011 6% 98% 5% 3.32 18%

2010 7% 101% 7% 3.05 21%

Net Profit Margin In 2010, Apples net profit margin is 21%. Afterwards, it succeed making a slightly increase on its net profit margin to the number of 24% along the year of 2011. While Apple got an increase from 2010 to 2011, Hewlett-Packard was experiencing slightly decrease in its net profit margin from 7% to 6%. Apart from iPad 2 and iPhone 4 launching during 2010 and 2011, Apples increased on its net profit margin was also because of increasing in market share, which leaded to increasing sales.

Total Assets Turnover

Total assets turnover of Apple was increasing in about 3% from 2010 to 2011. However, Hewlett-Packards total assets turnover decreased from 101% to 98%, but still had higher total asset turnover compare to Apple in 2010 and 2011.

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In general, both of the company had a very good ratio in total assets turnover. It is very competitive between these two companies.

Return on Assets

In connection with net profit margin and total assets turnover, return on assets of Apple and Hewlett-Packard can be determined easily. Apples return on assets increased into 22%, while Hewlett-Packards dropped two percent into 5%. These numbers of return on assets mean Apple management were more efficient in generating earnings from its assets. It made large profits with little investment or in short, Apple is more profitable.

Equity Multiplier

As shown on the table, equity multiplier of Apple decreased from 2010 to 2011. It was from 1.57 to 1.52. In the contrary, Hewlett-Packard had increasing number from 3.05 into 3.32 in 2011. The equity multiplier shows how far the company relies on debt to finance its assets. In this case here, Apple did not rely much on its debt for financing its assets and it is better than Hewlett-Packard.

Return on Equity

In order to get the percentage of return on equity, the team needs to use the numbers from net profit margin, total assets turnover and equity multiplier. For Apple company, it made an increase on return on equity from 29% to 34% and as for the Hewlett-Packard, it decreased by three percent to 18%. Apple had the bigger number on return on equity compare to Hewlett-Packard both in the year of 2010 and 2011. It means that Apple was more preferable to be invested in.

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4.8 Projected Financial Statement

As it was reported in the report, Apples balance statement, income statement, and financial statement shows an incredible performance. This section will explain about the projected financial statement of Apple. It can be seen how this company will perform better in the future. However, as it was explained, Apple has undergone a change in managerial position, mainly the CEO. In the prediction, it is shown that the sales of Apple would increase far beyond the previous year, so does its net earnings. Even though the liabilities may also grow, but we expect their asset would grow even further. Especially if we look closely at the prediction of the cash-flow statement, net income and net cash flow will definitely increase if Apples condition stays the same through the year. The future may not be as the prediction has shown. However, as Apple keeps on innovating and creating new products, hardware and software, for example, IPad 3 and new IOS comes out in 2012, Apple would be able to stay strong.

5 5.1

Outlook, Summary, and Conclusions Investment Potential

As an investor, there are several aspects required to consider before doing the investment. One of the aspects need to be considered is the economic climate and global trend. Apple recently got ranked 20th in 2009, ranked 17th in 2010 and jumped into ranked 7th in 2011 as the best global brands (surveyed by Interbrand). It showed the consistency of Apple by growing rapidly from 2009 to 2011. It becomes market-leading company in its industry, which is consumer electronics industry, including smartphone, personal computers and music media player. The other important factor that also very important to be looked at is the financial statement. Annual reports of Apples in year 2010 and 2011 showed that Apple did very good performance during those prior years. Return on equity and earning per shares of Apple were increasing, while Hewlett-Packard was keeping decreased from year to year.

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Therefore, from those two aspects, we find that there is a big opportunity to invest in this company.

5.2

Credit Assessment

In term of credit assessment, the team should position ourselves as creditor. As a creditor who wants to lend money to company, we need to make sure that related company have enough money to repay the loan and the interest. In this case here, Apple has a very good records and performances to repay the loan. However, this is not that beneficial for the creditors to lend money to this kind of company. Its better to lend the money to Hewlett-Packard, which is a bit risky but can bring more income for the creditors.

5.3

Summary and Conclusions

Apple is now being the leading company in its business segment. It has good performance in its historical data and projected results. In the other hand, it showed outstanding achievement in international stages, such as best global brands and best global green brands. Furthermore, Apple maintains its old consumers by keep inventing new products and also updates its old products. However those notable success need to be observed further, because chief executive officer of Apple Inc. was just replaced by Tim Cook recently. But after all, with all analysis and the facts that the team have gathered and exposed, the team recommends investors to invest in Apple Inc.

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6 6.1

Appendix Appendix A: Balance Statement

Consolidated Statements of Balance Statement (In millions, except number of shares which are reflected in thousands) Assets: Current assets: Cash and cash equivalents Short-term marketable securities Accounts receivable, less allowances of 53 and 55, respectively Inventories Deferred tax assets Vendor non-trade receivables Other current assets Total current assets Long-term marketable securities Property, plant and equipment, net Goodwill Acquired intangible assets, net Other assets Total assets Liabilities and Shareholders Equity Current liabilities: Accounts payable Accrued expenses Deferred revenue Total current liabilities Deferred revenue non-current Other non-current liabilities Total liabilities 2011 $ 14,632 $ 9,247 $ 4,091 $ 27,970 $ 1,686 $ 10,100 $ 39,756 2010 $ 12,015 $ 5,723 $ 2,984 $ 20,722 $ 1,139 $ 5,531 $ 27,392 2011 $ 9,815 $ 16,137 $ 5,369 $ 776 $ 2,014 $ 6,348 $ 4,529 $ 44,988 $ 55,618 $ 7,777 $ 896 $ 3,536 $ 3,556 $ 116,371 2010 $ 11,261 $ 14,359 $ 5,510 $ 1,051 $ 1,636 $ 4,414 $ 3,447 $ 41,678 $ 25,391 $ 4,768 $ 741 $ 342 $ 2,263 $ 75,183

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Commitments and contingencies Shareholders equity: Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares issued and outstanding, respectively Retained earnings Accumulated other comprehensive income/(loss) 443 (46 ) Total shareholders equity Total liabilities and shareholders equity $ 76,615 $ 116,371 $47,791 $ 75,183 $ 62,841 $ 37,169 2011 $ 13,331 2010 $ 10,668

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Common Size Balance Sheet: Assets: Cash and cash equivalents Short-term marketable securities Accounts receivable, less allowances of 53 and 55, respectively 2011 8.43% 13.87% 4.61% 2010 14.98% 19.10% 7.33%

Inventories Deferred tax assets Vendor non-trade receivables Other current assets Total current assets Long-term marketable securities Property, plant and equipment, net Goodwill Acquired intangible assets, net Other assets Total assets Liabilities and Shareholders Equity Accounts payable Accrued expenses Deferred revenue Total current liabilities Deferred revenue non-current Other non-current liabilities Total liabilities Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares issued and outstanding, respectively Retained earnings Accumulated other comprehensive income/(loss) 443 (46 ) Total shareholders equity Total liabilities and shareholders equity

0.67% 1.73% 5.45% 3.89% 38.66% 47.79% 6.68% 0.77% 3.04% 3.06% 100.00%

1.40% 2.18% 5.87% 4.58% 55.44% 33.77% 6.34% 0.99% 0.45% 3.01% 100.00%

12.57% 7.95% 3.52% 24.04% 1.45% 8.68% 34.16% 11.46%

15.98% 7.61% 3.97% 27.56% 1.51% 7.36% 36.43% 14.19%

54.00% 65.84% 100.00%

49.44% 63.57% 100.00%

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6.2

Appendix B: Income Statement

Consolidated Statements of Income Statement (In millions, except number of shares which are reflected in thousands and per share amounts) Three years ended September 24, 2011 Net sales Cost of sales Gross margin Operating expenses: Research and development Selling, general and administrative Total operating expenses Operating income Other income and expense Income before provision for income taxes Provision for income taxes Net income Earnings per common share: Basic Diluted Shares used in computing earnings per share: Basic Diluted $ 924,258 $ 936,645 $ 909,461 $ 924,712 $ 893,016 $ 907,005 $ 28.05 $ 27.68 $ 15.41 $ 15.15 $ 9.22 $ 9.08 $ 2,429 $ 7,599 $ 10,028 $ 33,790 $ 415 $ 34,205 $ 8,283 $ 25,922 $ 1,782 $ 5,517 $ 7,299 $ 18,385 $ 155 $ 18,540 $ 4,527 $ 14,013 $ 1,333 $ 4,149 $ 5,482 $ 11,740 $ 326 $ 12,066 $ 3,831 $ 8,235 2011 $ 108,249 $ 64,431 $ 43,818 2010 $ 65,225 $ 39,541 $ 25,684 2009 $ 42,905 $ 25,683 $ 17,222

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Consolidated Statements of Cash Flows Net sales Cost of sales Gross margin Operating expenses: Research and development Selling, general and administrative Total operating expenses Operating income Other income and expense Income before provision for income taxes Provision for income taxes Net income

2011 100.00% 59.52% 40.48% 2.24% 7.02% 9.26% 31.22% 0.38% 31.60% 7.65% 23.95%

2010 100.00% 60.62% 39.38% 1.65% 5.10% 6.74% 16.98% 0.14% 17.13% 4.18% 12.95%

2009 100.00% 59.86% 40.14% 1.23% 3.83% 5.06% 10.85% 0.30% 11.15% 3.54% 7.61%

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6.3

Appendix C: Statement of Cash Flow

Consolidated Statements of Cash Flows (In millions) Three years ended September 24, 2011 Cash and cash equivalents, beginning of the year Operating activities: Net income $25,922 $14,013 2011 $11,261 2010 $5,263

Adjustments to reconcile net income to cash generated by operating activities Depreciation, amortization and accretion Share-based compensation expense Deferred income tax expense Changes in operating assets and liabilities: Accounts receivable, net Inventories Vendor non-trade receivables Other current and non-current assets Accounts payable Deferred revenue Other current and non-current liabilities Cash generated by operating activities Investing activities: Purchases of marketable securities Proceeds from maturities of marketable securities Proceeds from sales of marketable securities Payments made in connection with business acquisition, net of cash acquired Payments for acquisition of property, plant, and equipment Payments for acquisition of intangible assets Other Cash used in investing activities -$4,260 -$3,192 -$259 -$40,419 -$2,005 -$116 -$20 -$13,854 -$102,317 $20,437 $49,416 -$244 -$57,793 $24,930 $21,788 -$638 $143 $275 -$1,934 -$1,391 $2,515 $1,654 $4,495 $37,529 -$2,142 -$596 -$2,718 -$1,610 $6,307 $1,217 $778 $18,595 $1,814 $1,168 $2,868 $1,027 $879 $1,440

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Financing activities: Proceeds from issuance of common stock Excess tax benefits from equity awards Taxes paid related to net share settlement of equity awards Cash generated by financing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents, end of the year Supplemental cash flow disclosure: Cash paid for income taxes, net $3,338 $2,697 $831 $1,133 -$520 $1,444 -$1,446 $9,815 $912 $751 -$406 $1,257 $5,998 $11,261

Common Size of Cash Flow 2011 % Inflow (In Millions) Operating activities Proceeds from maturities of marketable securities Proceeds from sales of marketable securities Proceeds from issuance of common stock Excess tax benefits from equity awards Total Outflow (In Millions) Purchases of marketable securities Payments made in connection with business acquisition, net of cash acquired Payments for acquisition of property, plant, and equipment Payments for acquisition of intangible assets Other Taxes paid related to net share settlement of equity awards Total Change in cash and marketable securities 3.85% 2.88% 0.23% 0.47% 100.00% 3.29% 0.19% 0.03% 0.67% 100.00% 92.35% 0.22% 94.78% 1.05% 34.32% 18.69% 45.19% 0.76% 1.04% 100.00% 27.76% 37.22% 32.53% 1.36% 1.12% 100.00% 2010%

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Appendix D: Projected Financial Statement 2012 166627 8911 1288 4529 16130 12776 6950 5826 3556 24109 24284 0 15347 13840 53470 2868 0 56338 13331 17018 104050 134399 190736 2011 9815 5369 776 4529 44988 7777 3991 3786 3556 52330 14632 0 9247 8283 32162 2868 0 35030 13331 17018 62841 93190 128220 2010 11261 5510 1051 3447 41678 4768 2466 2302 2263 46243 12015 0 5723 4527 22265 1440 0 23705 10668 20956 37169 68793 92498

Projected Balance Sheet in millions Cash Receivables Inventories Other current assets Total current assets PPE Accumulated depreciation Net PPE Other assets Total assets Accounts payable Current portion of long term debt Accrued expenses Income taxes & other Total current liabilities Deferred income taxes and other liabilities Long term debt Total liabilities Common stock Additional paid in capital Retained earnings Shareholders' equity Total liabilities and net worth Growth Ratio Sales growth Gross profit margin S G & A/sales Depreciation expense/gross prior year ppe Interest expense/prior year long term debt Income tax expense/pretax income

65.962% 40.479% 7.020% 38.045% 0.000% 24.216%

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Projected Income Statement in millions Sales COGS Gross profit SG & A D&A Interest expense Income before tax Income tax expense Income from extraordinary items and discontinued operations Net income Outstanding shares Growth Ratio Accounts receivable turnover rate Inventory turnover rate Accounts payable turnover rate Accrued expenses turnover rate Tax payable/tax expense Dividend per share Capital expenditures--in millions Capital expenditures/sales Projected Cash-Flow Statement in millions Net income D&A Receivables Inventories Accounts payable Accrued expenses Income taxes and other Net cash flow from operations Capital expenditures Net cash flow from investing activities Long term debt Dividends Net cash flow from financing activities Net change in cash Beginning cash Ending cash

2012 179653 106931 72721 12611 2959 0 57151 13840 0 43312 6783.775594

2011 108249 64431 43818 7599 1814 0 34205 8283 0 25922 6783.775594

2010 65225 39541 25684 5517 1027 0 18540 4527 0 14013 5428.649

20.162 83.030 4.403 11.706 100.000% 0.31 3012 2.782% 2012 43312 2959 -3542 -512 9652 6100 5557 63525 -4999 -4999 0 -2103 -2103 56423 9815 66238

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References

Apple Inc. (2012). Apple Press Info. Retrieved from: http://www.apple.com/pr/bios/

Apple Inc. (2012). Apple Reports First Quarter Results. Retrieved from: http://www.apple.com/pr/library/2011/01/18Apple-Reports-First-QuarterResults.html

Goldman, David. (2011). How Apple Block its Competition. CNN. Retrieved from: http://money.cnn.com/2011/04/22/technology/apple_supply_chain/index.htm

Hodson, Steve. (2011). Is Apple Competition with Anyone. Retrieved from: http://www.inquisitr.com/84506/is-apple-in-competition-with-anyone/

Marketing Teacher. n.d. SWOT Analysis of Apple. Retrieved from: http://www.marketingteacher.com/swot/apple-swot.html

Oliver, Sam. (2012). Apple's iOS finishes 2011 with 52% share of mobile Web browsing. Apple Insider. Retrieved from: http://www.appleinsider.com/articles/12/01/02/apples_ios_finishes_2011_with_5 2_share_of_mobile_web_browsing/

Slivka, Eric. (2011). Apple's Share of U.S. PC Market Leaps to 12.9% in 3Q 2011. Retrieved from: http://www.macrumors.com/2011/10/12/apples-share-of-u-s-pcmarket-leaps-to-12-9-in-3q-2011/

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