Background and Industry
Apple (AAPL) was incorporated in January 1977 as designs and manufactures company for mobile communication devices that are the iPhone series and music players such the iPods. Apple additionally sells a wide range of electronic accessories, software services, applications, and digital content. Apple has changed the tech industry, and it is not until 1979 when Steve Jobs, the founder of Apple, designed the Apple II which completely changed the world’s perspective on technology. The company’s more significant market share includes countries such as America, Europe and developing markets such as China and the rest of Asia. Consequently, Apple Inc. has managed to assert a strong presence in the African markets although it faces steep competition from brands such as Samsung, Huawei, and Lenovo which have undoubtedly a larger market share due to their fair prices (Zhang, 2018).
Some of the company’s products include the iPhone, professional software product, Apple TV, Mac laptops, iPods, and the Apple smartwatch. Additionally, Apple has been promoting and selling digital contents such as music and applications using its iTunes stores, iBook stores, and the television APP store. The methods applied by Apple to sell its products include selling through the company’s retail stores, network service providers, and online stores. The company’s iPhone series includes smartphones with the latest software technology called Siri, which is voice activate assistant with the intelligence to guide the user and make the phone conveniently easy to navigate.
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Additionally, the phone has Apple Pay which is an app that makes transactions easier to conduct through its digital payment system (SwingTradeBot, 2018). Apple has significantly impacted the tech industry becoming one of the key players. Over the last three decades since its establishment, Apple has revolutionized how the world views technology and more so the mobile phone devices. The general understanding and the way in which people interact with technology has completely changed over the course of years as individuals are opened to new possibilities by the release of every new device and software by Apple.
Common Size Analysis
Below is a consolidated Income Statement revealing the common analysis of the company in five fiscal years beginning September 2014 as provided by Stock Analysis on Net (2018).
| 12 months ended | Sept 29, 2018 | Sept 30, 2017 | Sept 24, 2016 | Sept 24, 2015 | Sept 27, 2014 |
|
Net sales Cost of Sales Gross Margin Research and Development Selling, general, and administrative Operating Expenses Operating Income Interest and dividend income Interest Expense Other expense, net Other Income (expense) net Income before provision for income taxes Provision for income taxes Net Income |
100.00 -61.66 38.34% -5.36 -6.29 -11.65% 26.69 2.14 -1.22 -0.17 0.75% 27.45% -5.03 22.41% |
100.00 -61.53 38.47% -5.05 -6.66 -11.71% 26.76% 2.27 -1.01 -0.06 1.20% 27.96% -6.87 21.09% |
100.00 -60.92 39.08% -4.66 -6.58 -11.24% 27.84% 1.85 -0.68 -0.55 0.63% 28.46% -7.27 21.19% |
100.00 -59.94 40.06% -3.45 -6.13 -9.58% 30.48% 1.25 -0.31 -0.39 0.55% 31.03% -8.18 22.85% |
100.00 -61.41 38.59% -3.30 -6.56 -9.87% 28.72% 0.98 -0.2 -0.24 0.54% 29.26% -7.68 21.67% |
Key:
Operating income is derived from deducting the operating expenses from the company’s operating revenues.
Income before provision for income taxes is the amount of loss or income derived from continuing operations which includes the profit or loss from the equity method investments that is before income tax expense which is a benefit and income attributable to noncontrolling interests regarded as a loss are deducted.
Net income is the proportion of loss or profit for the period in which net income taxes are attributed to the company.
As observed from the income statement, the operating income expressed as a percentage of net sales decreased gradually from 2016 to 2018. The results may be attributed to the increase in operating expenses in the years 2017 and 2018 which may have been caused by the various changes in the economy (MarketWatch, 2018). Different economic variables such as inflation are a significant cause of the increase in the cost of operations within the parent company. The income before provision for income taxes presented as a percentage of net sales also significantly declined from the year 2016 to 2017. Consequently, the profit before provision for income taxes also decreased from 2017 to 2018.
The reason for the significant decline is the increase in interest expense, net expenses, and other general expenses incurred by APPL in the five consecutive financial periods (Nasdaq, 2018). Thus, the net income expressed as a percentage of sales for the company as per the income statement provided decreased from 2016 to 2017 due to the low provision for income taxes realized in the financial year and increased by a more significant margin in the year 2018. The increase was attributed to the rise in the requirements for income taxes as observed in the table above.
The current liabilities of the company as a percentage of total liabilities and shareholder’s equity have been observed to increase from 2016 to 2017 and from 2017 to 2018 respectively. Apple has also realized a consequent increase in the non-current liabilities from the year 2016 to 2017 and from 2017 to 2018. The company’s general increase in assets presents a probable future for investment as the value of market shares have in recent years continually increased raising the net amount of APPL further. However, the company’s liabilities have also increased significantly from the year 2016 to 2017 and from 2017 to 2018 causing a decrease in the net profit attained in the three fiscal years (MarketWatch, 2018). As a result, shareholder equity has also decreased from the year 2016 to 2018. From the income statement, one can surmise that the company was performing relatively well in the financial years 2014, 2015, and 2016.
Nonetheless, the performance of the company made a drastic turn from the year 2016 due to various internal and external factors that contributed to the decline in productivity of the organization. In 2015, Apple banked $34.7 billion in profit which followed by the increase in corporate taxes to even out the unequal distribution of income (Nasdaq, 2018). Thus, presently Apple relies on lower manufacturing and production costs in China to ease the burden of production. However, the recent political unrest in the country has disrupted the tranquility of the industry leading to an increase in manufacturing costs.
Trend Analysis
| Strong | Down | Down | Down | |
| 2018-11-16 | Strong | Flat | Down | Down |
| 2018-11-15 | Strong | Down | Down | Down |
| 2018-11-14 | Strong | Down | Down | Down |
| 2018-11-13 | Strong | Down | Down | Down |
| 2018-11-12 | Strong | Flat | Down | Down |
| 2018-11-09 | Strong | Up | Down | Down |
| 2018-11-08 | Strong | Up | Down | Down |
| 2018-11-07 | Strong | Up | Down | Down |
| 2018-11-06 | Strong | Up | Down | Down |
| 2018-11-05 | Weak or Absent | Up | Down | Down |
| 2018-11-02 | Weak or Absent | Up | Down | Down |
| 2018-11-01 | Weak or Absent | Up | Flat | Up |
| 2018-10-31 | Weak or Absent | Up | Down | Up |
| 2018-10-30 | Weak or Absent | Up | Down | Down |
| 2018-10-29 | Weak or Absent | Up | Down | Down |
| 2018-10-26 | Weak or Absent | Up | Down | Down |
| 2018-10-25 | Weak or Absent | Up | Down | Flat |
| 2018-10-24 | Weak or Absent | Up | Down | Down |
| 2018-10-23 | Weak or Absent | Up | Up | Up |
| 2018-10-22 | Weak or Absent | Up | Flat | Flat |
| 2018-10-19 | Weak or Absent | Up | Flat | Flat |
| 2018-10-18 | Weak or Absent | Up | Down | Down |
| 2018-10-17 | Weak or Absent | Up | Up | Flat |
On conducting a smart scan chart analysis on the performance of Apple Inc, it is determined that there is a rather downtrend as the market remains pessimistic about the company. Apple Inc. has managed to maintain an attractive façade to the consumers. Despite having a good reputation in the Consumer Goods Sector, Apple Inc. has been observed to be struggling with a paradoxical position. The shares of the company have moved by -9.54% from the previous market value of $194.17 (Jinjin, 2013). The 20-days simple moving average (SMA) had enabled short-term traders to evaluate and assess the stocks more efficiently than their counterparts, the long-term traders. As a result, the small-scale traders will consume much time which who would have initially been used in the process. A simple moving average is a useful tool in determining any significant shift in the trends of the organization and may also be used effectively in stabilizing the unpredictable stock market. AAPL has recently portrayed an apparent variation in the volume trend of the stock market.
The company stock has given a return of -3.68% in the last five consecutive financial periods. The PerfMonth which is usually used to analyze the weekly performance of investors, stakeholders, and companies depicted a shift of -12.58%. The PerfMonth indicator determines the actual value of shares in the market. Following the development of the tech industry and the growth of technology, Apple has become more concerned with producing products that not only satisfy the consumer but also make life generally more comfortable. With the breakthrough in the field of mobile technology, Apple has set an uptrend as it releases its iPhone series which keep going beyond the set boundaries to provide efficient services to their consumers ((Smithson, 2018). The company has in return increased the employment opportunities as it has employed over 100,000 individuals globally.
Apple Inc. has in recent years become more diversified and normalized as the company has been observed to hire qualified personnel from various cultural, ethnic, religious, and moral backgrounds. Although normalization and diversification often tend to differ, Apple Inc. has managed to integrate the two critical business aspects into its operations successfully. As the company continues to face new challenges from the steep competitive industry, Apple Inc. has managed to use diversity as an impactful tool in its operations (Lee, 2015). Apple Inc. is one of the few organizations that have truly embraced innovation and, as a result, led to an increase in its market value to over 10 billion dollars. The company understands the need for a low carbon economy and thus dedicates its effort and resources in producing goods and services that encourage conservancy of the environment. This is because the company considers itself to be entrepreneurship and therefore sustainability is inseparable from its operations.
Financial Ratio Analysis
Annual Income Statement (values in 000')
| Period Ending: | Trend | 9/29/2018 | 9/30/2017 | 9/24/2016 | 9/26/2015 | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Liquidity Ratios | ||||||||||||||||||||||||||||||||
| Current Ratio |
|
112% | 128% | 135% | 111% | |||||||||||||||||||||||||||
| Quick Ratio |
|
109% | 123% | 133% | 108% | |||||||||||||||||||||||||||
| Cash Ratio |
|
57% | 74% | 85% | 52% | |||||||||||||||||||||||||||
| Profitability Ratios | ||||||||||||||||||||||||||||||||
| Gross Margin |
|
38% | 38% | 39% | 40% | |||||||||||||||||||||||||||
| Operating Margin |
|
27% | 27% | 28% | 30% | |||||||||||||||||||||||||||
| Pre-Tax Margin |
|
27% | 28% | 28% | 31% | |||||||||||||||||||||||||||
| Profit Margin |
|
22% | 21% | 21% | 23% | |||||||||||||||||||||||||||
| Pre-Tax ROE |
|
68% | 48% | 48% | 61% | |||||||||||||||||||||||||||
| After Tax ROE |
|
56% | 36% | 36% | 45% | |||||||||||||||||||||||||||
The table above was obtained from NASDAQ (2018) and elaborates the various financial ratios of AAPL in the last four consecutive fiscal years. The rates included are the liquidity ratios and profitability ratios which are crucial in determining the continuity and liquidity of the company (SwingTradeBot, 2018). The current price which is obtained by dividing the current assets by the current liabilities has been observed to increase from 2015 to 2017 by a considerable margin and then decline from 2016 to 2017 and 2018. Thus, the current assets of the company against the current liabilities have significantly decreased from 135% in 2016 to 112% in 2018. The ability of the firm to cater to its current obligations has since declined (Zhang, 2018).Consequently, the same trend is observed with the quick ratio too. The rapid proportion increased from 2015 to 2016 but then decline in the two consecutive years that is in 2017 and 2018. The decrease in quick ratio also implies that the company is unable to meet its current liabilities as well as it did in 2016. A similar observation and conclusion are made for the cash ratio.
The profitability ratios include gross margin, profit margin, operating margin, pre-tax margin, and the Return on Investment. These types of proportions are pivotal in determining the bottom line of the organization and the returns made to the investors. Profitability ratios generally show a company’s efficiency and its performance against its competitors. From the table, the gross profit margin is observed to be declining gradually from 2015 to 2018. The gross profit margin is the cost of goods sold against the sales of the company (Lee, 2015). Thus, a decline implies that Apple Inc. is unable to efficiently control the cost of its inventory resulting in the production of expensive products. The operating margin of the firm is also expressing a similar trend to the gross profit margin. The low operating margin indicates that the company’s earnings before tax are also relatively lower.
Return on Equity
The return on equity (ROE) ratio is significant in measuring the returns awarded to the investors of the company. From the table above, the return on equity has been observed to have decreased from 2015 to 2017 but then took a turn for the better in 2018. Apple Inc. has recorded its highest rate on equity in 2018 meaning that the investors were apportioned more substantial returns compared to the other three years (MarketWatch, 2018). The management of the company is generating sufficient income to sustain its operations. However, if the current trend in the decrease in liquidity ratios persists, the company will be unable to take care of its current liabilities which will eventually lead to bankruptcy and a pull out of investors. The management is thus encouraged to increase its current assets by collecting the account receivable and growing its sales.
Recommendation
Apple Inc. is one of the most worthy organizations in the world. The company has an enormous market value of $751.28 billion and is considered a potentially growing investment. The ratio analysis and financial income statements provided in the report reveal a need for the company to increase its profitability. Due to the changes in the economy and the fluctuation in consumer taste and preferences, it is advisable for the company to focus on producing products that satisfy the needs of the consumer. The tech industry has become highly competitive in recent decades, and thus Apple Inc. is required to delve in sustainable production to make it more competitive. The company could use biodegradable materials in producing its devices. This will make it more appealing to both the investors and consumers who have become increasingly aware of the ethical responsibilities of organizations. Apple Inc. has managed to outperform the industry but still faces threats from formidable competitive companies such as Samsung and Techno which brag of cheaper manufacturing costs. AAPL should, therefore, find alternative methods of production that are cheaper to increase its profitability index.
Reflection
From the report, I have learned about the volatility of the tech industry as portrayed by Apple Inc. Before this project, I was Unable to comprehend the various factors that crucially impact the productivity and continuity of an organization. There are important factors that contribute to the increase in the competitive advantage of a company operating in the tech industry such as sustainability, diversity, and entrepreneurship. I have learned that is important for the organization to maintain an ethical production process.
References
Jinjin, T. (2013). A strategic analysis of Apple Computer Inc. & recommendations for the future direction. Management Science and Engineering , 7 (2), 94-103.
Lee, J. B. (2015, July 28). Before / Apple / After: How Apple has led the tech industry every step of the way | Cult of Mac. Retrieved from https://www.cultofmac.com/113454/before-apple-after-how-apple-has-led-the-tech-industry-every-step-of-the-way-gallery/
MarketWatch. (2018, November 19). Apple Inc. Retrieved from https://www.marketwatch.com/investing/stock/aapl
Nasdaq. (2018). AAPL key financial ratios. Retrieved from https://www.nasdaq.com/symbol/aapl/financials?query=ratios
Smithson, N. (2018, August 31). Apple Inc. SWOT analysis & recommendations. Panmore Institute. Retrieved from http://panmore.com/apple-inc-swot-analysis-recommendations
SwingTradeBot. (2018). Recent trend analysis of $AAPL | Apple Inc. Retrieved from https://swingtradebot.com/equities/AAPL/trend-table
Zhang, Q. (2018). Research on Apple Inc’s current developing cconditions. Open Journal of Business and Management , 06 (01), 39-46. doi:10.4236/ojbm.2018.61003
