For investors in Apple, Inc. (AAPL), the investment has certainly been fruitful. For those who are late to the party and are considering investing in the Cupertino-based consumer products giant, a good place to start gauging the company is its balance sheet. A company’s balance sheet presents a picture of its financial situation at a certain point in time. For an investor who wants to understand a company and its potential, the balance sheet is a good guide.
Apple’s balance sheet is available in the "Investor News Section" of the company’s corporate website as its 10-K filing with the Securities and Exchange Commission. Investors can also access Apple’s unaudited balance sheet, which it releases with its quarterly earnings.
Balance Sheet Components
The balance sheet of a company breaks down into its assets (or what it owns), liabilities (or what it owes), and its shareholders’ equity (or the money that belongs to shareholders after paying off all liabilities). The total of its assets is equal to the sum of its shareholders’ equity plus its liabilities. In the case of Apple, as of September 27, 2014, this consisted of $231.839 billion on the assets side, total liabilities of $120.292, and total shareholders’ equity of $111.547 billion.
Cash Is King
For Apple, its strong cash position is a major strength. The company holds cash and cash equivalents of $13.8 billion and also holds $11.23 billion in marketable securities that can easily be converted into cash. Thus, it has an ample cash chest. A lot of this is held overseas and the company would have to pay US taxes on the money to bring it into the country. That is why the company prefers to borrow money to engage in its share buyback program.
Accounts receivable make up $17.4 billion. This represents the amounts owed by the companies it does business with, such as cellular network carriers, retailers and wholesalers, and government and education customers. Extending credit in business transactions is a risk, and Apple has credit insurance to limit its risk to this exposure. Two big customers account for 10 percent of the company’s receivables.
Another major asset is Apple’s $130.16 billion in long-term marketable securities. This includes about $79 billion in corporate securities and about $22 billion in US Treasurys. These investments are subject to interest rate risk if interest rates start moving up. The company also reports about $20 billion in the property, plant, and equipment category. This represents the value of what it owns in property and equipment after accounting for the wear and tear associated with use.
Apple also reports $4.6 billion of goodwill, an intangible asset that represents the company’s estimate of the positive consumer association with its brand name. For the September 2014 period, the company tacked on $2.2 billion in goodwill connected to its acquisition of Beats Music in July 2014 for $2.6 billion. The acquisition was mostly financed with Apple’s readily available cash holding – useful for such acquisitions.
Apple’s current liabilities are about $63 billion, which includes its $30 billion accounts payable, or the amount it owes companies it does business with, as well as more than $6 billion in the commercial paper it issued. The company issued commercial paper debt to finance activities such as share buybacks it has committed to, as well as to pay out dividends.
The company has a total long-term debt of more than $28 billion, which includes both fixed-rate debt, on which the interest rate is fixed, and floating-rate debt, on which the interest rate could move up. In order to manage the risk that interest rates could move against the company, Apple has also entered into interest rate swaps. The company’s other non-current liabilities, or those that are not due for a while, amount to about $25 billion.
In addition, Apple’s shareholder equity position includes about $23 billion, representing its equity base, and more than $87 billion in the earnings it has generated for its shareholders over time. The company had a stock split in June 2014, giving out seven shares for every share held by an investor.
Analyzing the Balance Sheet
Another way to understand Apple’s financial position is to look at certain ratios that give an idea of how the company manages its business. One major ratio for this purpose is the liquidity ratio, which provides a measure of how easily the company can pay off its creditors if it had to. This is obtained by taking stock of Apple’s current assets versus its current liabilities. In Apple’s case, this is a healthy 1.08, indicating the company has enough current assets on hand to cover its current liabilities.
Looking at how much Apple is leveraged, or how much debt it has in relation to its equity position, also provides investors with an idea about how prudently its debt is managed. Too much debt relative to equity indicates that a company is over-leveraged. This could be a red flag since it will have less breathing room if it runs into trouble. Apple’s debt-to-equity ratio of about .32 is certainly a conservative ratio and gives it lots of breathing room.
As for the company’s profitability, it has obtained a healthy return on the equity it has on its balance sheet, generating a net profit of more than $39 billion on its sales and making for a return on equity of about 35 percent.
The Bottom Line
A reading of Apple’s balance sheet certainly suggests that it is a well-managed company. It presents its information in a reader-friendly format and does not have any significant exposure to off-the-balance-sheet items that might obfuscate its true situation. However, investors should note that a company’s balance sheet could deteriorate as its earnings situation and industry position change. Thus, it is important to look at its most recent balance sheet before investing.