As of January 2012, Apple became the world’s largest company and America’s leading ‘Fortune 500’ firm. Although Apple’s financial statements alone look encouraging, they are empty numbers without understanding how a technology company could achieve such consistent growth. A benchmarking analysis is also required to understand the consistency behind the company. Only by understanding both of these analytical processes in association with each other can one see how the company has been able to strategically achieve its number one status and still maintain room for additional growth. To put Apple’s past successes and their opportunity for future growth into perspective it is important to provide a sense of context by analyzing them next to their long time competitors; Microsoft and Google. Microsoft competes with Apple as an open platform for personal computing through its ‘Windows’ operating system and software. Google is a relatively new competitor with its ‘Android’ mobile operating system, competing with Apple’s iPhone, and iPad. To begin such a wide reaching analysis, let’s start by looking at Apple’s financial statements
To best establish a pattern in the strategic financial planning of all three companies it was determined that a 5 year financial review was in order. Appendix ‘A’, is a summary of all three companies annual reports covering the past 5 years. Each company has demonstrated a somewhat similar growth in equity but there is one key difference which has resulted in Apple’s consistently improving bottom line and its dramatic success in 2011. That difference is Apple’s aggressive cash re-investment in itself relative to its net income. To visually demonstrate Apple’s aggressive strategy, three graphs have been produced which embody a single key component from each of the three major financial statements; the income statement, the balance sheet, and the cash flow analysis.
Figure 1 – Independently produced graphs based on a summary of each corporation’s financials found in Appendix A.
In the final graph, the cash flow analysis, you can clearly see Apples strong cash re-investments over its rivals. Unlike Microsoft which has committed itself to large shareholder dividends, Apple has elected not to distribute dividends and has been able to maintain a consistent cash position while reinvest all its earnings into additional infrastructure in preparation for even greater growth. Part of this strategy is a result of Apple’s senior management being highly successful at creating accurate budgets. This superior accuracy in budgeting is in part associated with Apple’s success in benchmarking, which will be discussed in greater detail later in this paper. Simply put, “Apple is self-aware enough to stay within its bounds. Money isn’t spent on hair-brain ideas”, (Steve Cheney, Business Insider, May 24th, 2010) and as a result it can achieve highly efficient organic growth. On top of Apple’s focus, they have limited their R&D spending to about one-tenth the spending of Microsoft and close to one-third the R&D spending of Google. This is an amazing feat for a company that leads the industry in innovation.
Apples Spending. Large capital investments reflect the importance Apple sees in such things as ‘iCloud’, or cloud computing, which drive synchronization services such as iTunes Match. Apple has also “spent ‘Billions’ on its supply chain, acquisitions,” (Erica Ogg, Gigaom, February 14th,2012) along with 40 new retail stores, mostly outside the United States, product tooling and manufacturing equipment, as well as corporate facilities and infrastructure (citing Brian Caulfield, Forbes, November 2nd, 2011). This retail commitment and upgrading of their production ability represent Apple’s commitment to globalization in production as well as in sales.
Ratio Analysis. The first analysis selected is Apple’s Debt to owners’ equity ratio. This ratio places Apple squarely in the middle of the pack with just a touch over .5. Microsoft’s ratio is .9 while Google is .25. Achieving a .5 represents a very attractive debt ratio and as such there is no concern here. Another ratio of interest is Apples Current Ratio (1.6). We might be a little more concerned here because when you compare it to Microsoft’s 2.6 ratio and Google’s 4.2 it would appear that Apple is a riskier investment. Apple has a much higher ratio of accounts payable then its rivals. There is no written explanation for Apple’s higher payables but as they have maintained a very consistent cash position and considering the amount of growth they are experiencing, this might not be an issue of concern. Something to consider is that both Google and Microsoft are primarily software companies where as Apple maintains both a software and a hardware component, which will inevitably make their payables a much bigger factor. To establish the validity of such a theory out of sheer curiosity I looked up Dell’s current ratio and found that it is 1.3. Dell is recognized as one of the most efficiently run computer companies in the industry, but with a lower current ratio than Apple, it must mean that the 1.61 current ratio should not be considered a point of concern.
Having reviewed the detailed financial statements of all three companies and having conducted several ratio examinations, it is evident that Apple runs a tight corporation, committed to organic growth, and establishing itself for future growth in such areas as cloud computing. Together this spells out quality financial health for the company. With 30 out of its 40 new retails stores opening up outside of the US, they are most definitely a company with a global strategy. Finally, any concerns such as a larger than average accounts payable were quickly put to rest by expanding the competitive analysis beyond Apple’s two primary competitors. As apple moves forward, it is hard to say what more they should do. Having surpassed all others, corporations management may wish to adjust their financial position to further reduce risk and establish additional green practices and continue to push for fair wages so that they may be seen through the eyes of history as one of the great corporations excelling both financially and ethically.