Apple, Inc. (NASDAQ: AAPL) reported net income of $53.4 billion of net income on $115.5 billion of average shareholders' equity for the 12 months ended September 2015, a 46.25% return on equity (ROE). Apple's ROE has risen in recent years due to higher financial leverage, offset partially by declining asset turnover. Apple leads its large peers and competitors due to its substantially wider net profit margin. Analysts are forecasting 12% annual earnings growth over the next five years, which would likely lead to a higher ROE, assuming there are no major changes in capital structure or dividend policy.
Historical and Peer Comparisons
Apple's 46.25% ROE is the highest value achieved for any full year of the past decade by the company. Net income has increased steadily throughout most of Apple's recent history, with 8.6% three-year average growth and a 44.6% 10-year average growth. Book value has trended upward throughout the past decade as well, though the growth rate of shareholders' equity has slowed over the preceding three years. The introduction of a regular dividend and share repurchase activity have contributed to this trend and helped propel ROE along its trajectory. Apple's ROE is also the highest among its largest peers in the electronic equipment and personal electronic device industries. The average ROE among Apple's peers is 8.9%.
DuPont analysis can determine the factors that are driving ROE. Apple reported a net margin of 22.9% for the year ending in September 2009, an improvement of 130 basis points (bps) over the two previous years. The highest margin attained by the company in recent years was 26.7% in fiscal year 2012, creating an upper bound for the distribution materially higher than the latest value. Apple's net margin is the highest among its peers by a significant amount. Samsung is one of the industry leaders at 8.9%, with increasing competition weighing on pricing power and squeezing margins for many electronics companies. Though net profit margin can explain Apple's ROE growth relative to the years before 2009, net margin has not been a significant factor driving ROE higher over the past five years. However, Apple holds a major advantage over its competition in net profit margins, which is the main contributor to its industry-best ROE.
Apple's asset turnover ratio was 0.89 for the 12 months ending in September 2015, which is one of the lowest values achieved over the past decade, and it is very comparable to its 2013 and 2014 ratios. Apple's asset turnover has slid despite steady, rapid revenue expansion due to the rising book values of its assets. Cash and equivalents, long-term marketable securities and property, plant and equipment (PP&E) have been the primary sources of asset value growth. Falling asset turnover suggests that Apple is using its asset base less efficiently to drive revenues, but the current value is still comparable to those of its peers. The peer group's asset turnover ratios range from Sony's 0.51 to LG Display's 1.26, with an average value of 0.86. Asset turnover has created a small drag on Apple's ROE over time, and it cannot explain the company's ROE relative to its peers.
Apple's equity multiplier has risen steadily since fiscal 2012 to 2.43 in 2015, representing the highest value of the past decade. The equity multiplier was only 2.08 in fiscal 2014. The company's book value growth rate has not matched that of its asset base, with long-term debt rising to $53.5 billion in 2015. A higher equity multiplier indicates more financial leverage, with less of the business being financed by equity. Apple's equity multiplier falls near the middle of the peer group range. Other large electronics makers' financial leverage ratios range from 1.4 to 6.4, with an average of 2.6. Financial leverage is the primary factor driving Apple's ROE over the past five years, but it does not differentiate Apple relative to its peers when it comes to ROE.