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XXX University

Apple Financial Ratio Analysis

Student Name 1

Analysis of Financial Statements: FIN-4500

March 29, 2021

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Table of Contents

1.Introduction 1

2. Ratio Analysis 2
2.1. Liquidity Ratios 2
2.2. Asset Management Ratios 3
2.3. Leverage Ratios 3
2.4. Profitability Ratios 4
2.5 DuPont Decomposition 4

3. Conclusion 4

References 5

Appendix A: Tables 6
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1. Introduction

Apple is one of the most successful technological companies in the world. It is

headquartered in Cupertino, California where they design electronic consumer products and
online services. Majority of Apple’s manufacturing is sourced from China and other
Northeastern Asain countries like Japan, Taiwan and South Korea. Over the past two 4Qs, over
60% of Apple’s revenue was from their phones. They have gained market share from the
industry leader, Samsung and now are in a tie for the most global sales with 18% of the global
market as of 2019 4Q. The next biggest company is Huawei with 14% of the global phone
market. This report will explain how Apple is able to continue to maintain and expand upon its
efficiency through in depth analysis of its financial statements.

2. Ratio Analysis:

A financial ratio analysis gives insight at the company’s financial well-being and their
strengths and weaknesses. It also serves as trend analysis and to compare the company’s
performance to their peers and industry average. We will examine Apple’s liquidity, asset
management, long-term solvency, and profitability.

2.1. Liquidity

The Current Ratio shows to what extent the company can pay short-term debts and
usually, a higher Current Ratio is better. A lower Current Ratio can indicate that the company
has a higher risk of financial distress. On the other hand, if a Current Ratio is very high, much
higher than the industry average for example, it could mean that the company is not using their
assets efficiently. Apple's Current Ratio was at 1.12 in 2018 before it rose to 1.54 in 2019 and
then dropped again slightly to 1.36 in 2020. Compared to the competitor Dell, with a Current
Ratio of 0.70 in 2020, Apple is more liquid. In Apple’s MD&A they detail the specific changes
to current assets and liabilities that contributed to the decrease in Current and Quick Ratios. Due
to the large stockpile of cash and other short-term liquidity arrangements, the company believes
it has sufficient funds to satisfy its working capital needs, capital asset purchases, dividend
payments, share repurchases, debt repayments and other liquidity requirements associated with
its existing operations over the next 12 months (Apple Inc. 2020 Form 10-K, Pg. 20).
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In 2019, the Quick Ratio (like the Current Ratio), was at its highest at 1.50 compared to
1.09 in 2018 and 1.33 in 2020. This can be compared to Dell, which in 2020 had a Quick Ratio
of 0.64. Apple is outperforming the competitor by being able to pay off current liabilities without
relying on inventory assets.

2.2. Asset Management

Apple’s asset management can be analyzed by looking at three different ratios, the Asset
Turnover ratio, the Average Collection Period, and the Inventory Turnover. All three of these
ratios indicate a better performance in 2020, than in either 2019 or 2018. Additionally, all three
of these metrics outperform Dell in 2020.
The Asset Turnover ratio has improved in 2020 because the sales has increased while the
average total assets have decreased. Apple notes that the sales have increased largely due to
higher net sales of Services and Wearables, Home and Accessories (Apple Inc. 2020 Form 10-K,
Pg. 20).
The Average Collection Period for Apple in 2020 decreased from around 28 and 32 days in 2018
and 2019 respectively, to 26 days in 2020. They also outperformed Dell which turned over its
inventory every 49 days in 2020. The major driver for this change was the decrease in accounts
receivable from 2019 to 2020. 51% of Apple’s accounts receivable comes from its cellular
network carriers, so it is likely that they changed their accounts receivable policy with those
carriers to decrease the outstanding accounts receivable in 2020. (Apple Inc. 2020 Form 10-K,
Pg. 45).
Finally, the Inventory Turnover ratio of 41.7 for 2020, shows an improvement over 2019 and
2018 which had a ratios of 40.2 and 37.2 respectively. Apple outperformed Dell in 2020 which
had an Inventory Turnover ratio of 18.1. In 2019, the Cost of Goods Sold (COGS) was lower
than in both 2018 or 2020. One of the possible influences on the change in COGS was that much
of Apple’s COGS is subject to currency risk (Apple Inc. 2020 Form 10-K, Pg. 15), and in 2020
the dollar weakened against the Chinese Yuan effectively raising the COGS for 2020 while
inventories remain relatively stable, and therefore raising the Inventory Turnover ratio. For
Apple, this ratio is growing year over year and is much higher than Dell’s, which in 2020 was
only 18.2.
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2.3. Long-term solvency

The Debt Ratio shows how much of the firm’s total assets are financed by debt. As we
have seen, Apple’s Debt Ratio increases from 31.3% in 2018 to 37.8% in 2020. This compares
favorably against Dell, which finances nearly half (49.3%) of its total assets with debt. As for
long-term debt, the company details its issuance of $16.1 billion and repayment and/or
redemption of $12.6 billion in notes. The drastic increase of long-term debt is reflected in the
increase of the company’s debt ratio from 31.9% to 37.8%.
The Times Interest Earned (TIE) ratio indicates how many times over the interest expense can be
paid by its pre-tax, pre-interest, earnings. Generally, the higher the number the better. In 2020,
Apple had a higher TIE Ratio than in 2019 and 2018, due to the decrease in the firm’s interest
expense. This is likely due to the decrease in interest rates in 2020 driven by the COVID-19
pandemic response. (Apple Inc. 2020 Form 10-K, Pg. 24).

2.4. Profitability
There are three ratios that can be helpful when assessing a firm’s profitability, Return on
Sales (ROS), Return on Assets (ROA), and Return on Equity (ROE). Apple’s ROS is relatively
high when compared to the competition. Apple in 2020 had a ROS of 20.9%, while Dell had
only 5.0%. This is good news for Apple, as it shows that they are generating a lot more return on
sales when compared to Dell. When looking at the trend, however, there is some concern. From
2018 to 2020 there has been a steady decline amounting to a 1.5% decrease in ROS. This fact is
reflected in the Operating Profit Margin decrease of 3.2% over the 3 years, which is explained in
part by the growth in operating expenses discussed in the MD&A (Apple Inc. 2020 From 10-K,
pg. 23)

2.5. DuPont Decomposition:

Return on Equity (ROE) is a fundamental analysis tool that both managers and investors
use to evaluate the financial performance of a company on multiple levels. Apple’s ROE has
been steadily rising since 2018, while making a more significant jump from 2019 into 2020. The
main drivers for the significant jump are higher leverage and the improved efficiency in asset
management. The total asset turnover increased from 0.738 in 2019 to 0.828 in 2020 and Equity
multiplier increases from 3.56 in 2019 to 4.25 in 2020.
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3. Conclusion
Apple’s financials are very strong especially when comparing to the competition.
Although Apple has seen a slight decline in profit margin over the last three years which will
need further analysis and attention, the overall financial health of the company remains strong.
Apple Inc. seems to be trending towards higher returns on assets and equity, partly due to
improvements in efficiency and changes to capital structure. Apple has been able to weather the
COVID-19 pandemic well, pivoting towards e-commerce, while taking advantage of low interest
rate debt, despite some negative effects from currency risk. Overall Apple is in a very strong
position financially, with no major areas of concern to indicate financial distress or weakness.
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References

Apple Inc 2020 Form 10-K. (n.d.). (2020), from

https://www.sec.gov/ix?doc=/Archives/edgar/data/320193/000032019320000096/aapl-
20200926.htm

Easton, McAnlly, & Sommers. (2021). Financial Statement Analysis and Security Valuation,
(6th ed., pp. 3-4, 3-5, 3-6) (1272347328 939609723 Zhang, Ed.). Cambridge.

Alpert, G. (2021, March 05). Top 10 S&P 500 stocks by Index Weight. Retrieved March 21,
2021, from https://www.investopedia.com/top-10-s-and-p-500-stocks-by-index-weight-4843111

Apple Inc 's Roa per quarter. (n.d.). Retrieved March 22, 2021, from
https://csimarket.com/stocks/AAPL-Return-on-Assets-ROA.html
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Appendix

Table 1: Financial Ratios

Apple Dell
2020 2019 2018 2020
Current Ratio 1.364 1.540 1.124 0.703
Quick Ratio 1.325 1.501 1.090 0.640

Asset Turnover 0.828 0.738 0.717 0.797

Average Collection Period (Days) 26.0 32.4 28.2 49.343
Inventory Turnover 41.650 40.213 37.150 18.153

Debt Ratio 37.75% 31.92% 31.30% 45.30%

Financial Leverage 22.767 17.665 21.926 1.333

Return on Sales 20.94% 21.26% 22.40% 5.02%

Return on Assets 17.33% 15.69% 16.07% 4.00%
Return on Equity 73.68% 55.92% 49.36% 228.63%

Table 2: DuPont Decomposition Analysis

DuPont Decomposition Analysis

Operations Asset Leverage
ROE Management Management Management ROA
NI/Avg. Sales/Avg. Avg. NI/Avg.
Year Equity NI/Sales Assets Assets/Avg. Assets
2018 49.36% 22.40% 0.717 3.072 16.07%
2019 55.92% 21.26% 0.738 3.563 15.69%
2020 73.68% 20.94% 0.828 4.251 17.33%