They’re the two most iconic companies in the 21st century’s dominant industry, with similarities outnumbering their differences. Both are headquartered on the Pacific Coast. One was founded in April of 1975, the other less than a year later. Their legendary founders were not only cultural icons, but rivals, associates, and on rare occasions, symbiotic partners. One company used to be the largest in existence and today is not far behind. The other emerged from midlife doldrums to grow to a size now double that of the former. Of course, the companies in question are Microsoft Corporation (MSFT) and Apple, Inc. (AAPL)—each with a record of success that far outshines even the monolithic Standard Oils and East India Companies of years ago. But four decades in, what exactly quantifies Microsoft and Apple as so successful? Do both amass assets and build shareholder equity the same way? Let’s find out.
Cash on Hand, and All the Way Up the Arm
Purely as an accounting entity, Apple is most famous (or notorious, depending on your viewpoint) for sitting on copious amounts of cash. The company’s pile maxed out in 2014 at $178 billion, which is a figure larger than the market capitalization of any but 12 or so companies on Earth. That will happen when a company dominates the market in several fields, inspires fierce brand loyalty, and goes from 1995 to 2012 without paying out a dividend.
Meanwhile, it’s not as if Microsoft is at the mercy of banks itself. At year-end Microsoft had $8.7 billion in cash, which is not only enough to take care of its short-term obligations for the next four-plus years, it represents a 128% increase over the previous year.
It’s hard to imagine where Microsoft’s or Apple’s balance sheets could be improved. Their current ratios do vary, with Microsoft having a distinct edge—1.1 for Apple, and 2.5 for Microsoft. Apple is under the low end of the historically approved 1.5 – 3 range, but that’s emblematic of a current trend where companies are quicker to utilize working capital than to have it sit unused. Furthermore, when companies get as large as Apple and Microsoft, different and more liberal rules apply. Rather than look at the ratio, examine the difference between current assets and current liabilities—working capital. Apple’s working capital is $5 billion, Microsoft’s $68 billion. Apple’s cash gets the headlines, but Microsoft wins the liquidity war.
That isn’t the entire story, however. Another major difference between Microsoft and Apple—aside from one actively shaking off a reputation of stodginess and the other having a customer base with varying degrees of fanatical devotion—is Apple’s reliance on long-term marketable securities, which currently add up to $130 billion, a decent-sized multiple of Microsoft’s total. That isn’t cash, but it’s close enough. Should Apple ever need more cash than the billions it already has on hand, those Treasurys and commercial paper can easily be converted to cash. Conventional wisdom states that having long-term marketable securities on the balance sheet, let alone a 12-digit total of such, is an inefficient way for any company (other than a bank or an insurer) to exploit its financial assets. It’s not as if Apple is deriving a lot of income from all those instruments.
Citizen of the World
Then again, Apple’s home country levies the highest corporate taxes in the world. What’s the connection? Almost all of that cash is in the form of retained earnings held overseas. Should the cash ever get repatriated to the United States, Apple would have to pay taxes on it. And it’s safe to say that whatever the highest available tax bracket is, Apple is in it. To his credit, CEO Tim Cook testified before Congress and said Apple would be happy to let American politicians get their mitts on his company’s billions…if only Congress would do the honorable thing and simplify the tax code. Knowing the complexity and internal contradiction of the Internal Revenue Code, the Senate panel backed off and never addressed the issue again.
A look at both Apple’s and Microsoft’s accounts receivable shows another large disparity, particularly when quoted as day sales outstanding. Apple’s are 17, Microsoft’s 52. So all things being equal, Apple gets paid more quickly. Contrast the accounts receivable with another important asset category, inventories, and the two companies are almost identical. For each, accounts receivable are about 7.4 times the size of inventories.
Property, plant, and equipment numbers are comparable for the two behemoths. Goodwill, on the other hand, varies widely between them. Apple has less than $1.6 billion in goodwill on its books, Microsoft more than $20 billion. Why is the former’s so low?
Make Room For Mobile
The relevant question is, why is the latter’s so high? You can attribute it to one transaction – Microsoft’s 2012 purchase of Nokia Corporation’s (NOK) phone division. Nokia used to be the largest phone company in the world. Microsoft overpaid in an effort to popularize the Nokia-made Windows Phone, otherwise known as the RC Cola to the iPhone’s Coke and Android’s Pepsi. Microsoft loses money on every Lumia it sells, and, can’t make it up in volume. Windows Phones comprise less than 1/40 of the mobile market in the United States. There are still millions of Americans who have never seen a Windows Phone in the wild, or anywhere outside of the display case at a phone store.
Microsoft essentially overpaid for Nokia to the tune of $7.2 billion. Which wouldn’t explain a $20 billion goodwill figure, unless the phone division carries negative value. Did Microsoft indeed pay billions for something less than worthless? Not exactly, even though there might be symbolism in Microsoft recently shutting down Nokia’s flagship retail store in downtown Helsinki. After all, Nokia is as large a point of Finnish pride as Sibelius or reindeer. For Microsoft’s part, even after years of attempts at mobile— Windows CE, the short-lived Kin, etc.—the company still remains a bit player in smartphones.
However, Microsoft’s phone software is inexpensive, and runs on inexpensive hardware. That makes it not only the opposite of Apple’s iOS, but could enable Windows Phones to pull greater market share in poorer parts of the world. The Nokia purchase was a long-term investment, rather than an immediately beneficial one.
Dabbling in Debt
In the second half of the balance sheet, both companies ought to have almost negligible current liabilities, right? Not even. Apple has about $6.4 billion in short-term debt, and Microsoft $2 billion. Why would any corporation so awash in cash borrow money, let alone two of them? Well, why not? They can enjoy favorable interest rates, which give Microsoft and Apple cheap lines of credit to facilitate further expansion. Microsoft has about $21 billion in long-term debt, Apple just under $17 billion. That’s a long-term-debt to total assets ratio of 8% for Apple, 12% for Microsoft. It should be noted that Apple incurred all that long-term debt in the most recent year. When Apple started issuing bonds in 2013, investors couldn’t lend it money fast enough—much in the same way that Apple makes money faster than it can spend it.
The Bottom Line
When companies enjoy as much success as Microsoft and Apple have, their financial statements start to differ not merely in degree but in form from those of merely healthy companies. Neither company will stay on top forever, but with so much cash on hand, so much equity ($90 billion for Microsoft, $112 billion for Apple), and so many other positive indicators, both the Rock of Redmond and the Cupertino Colossus will be able to foresee problems years before they become insurmountable.