FINC 330

Research Project Part 2: Apple Inc. Business Finance Group 1

Research Project Part 2

Apple Inc.

Business Finance Group 1

Colin Brogan

Edelmira Hernandez

Elizabeth Fisher

Jessica Butler

Khalia Alexander-Cobbs

Francesca Bodunrin

University of Maryland Global Campus

FINC 330 6982: Business Finance

Professor Bryan Smith

August 3, 2021

Research Project Part 2 - Apple Inc.

Introduction

Apple Inc. is a tech company established in 1977 known for its design, development, and retailing of high-end electronic products. The products include iPhones, tablets, personal computers, smartwatches, among others. The company also offers services such as advertisements either through its internal platforms or third-party licensing. The company's success makes it a very strong asset also traded in the stock market. This paper seeks to evaluate the company’s bond performance within the last couple of years and see if it is potentially a good investment.

Financial Leverage Ratios

Figure 1

Debt-to-assets Ratio

Note: Data obtained for manual calculations from Apple Inc. NASDAQ: AAPL Debt-to-Assets.

Figure 2

Debt to Equity Ratio

Note: Data obtained for manual calculations from Apple Inc. NASDAQ: AAPL Debt-to-Assets and Financial Statement Liabilities and Shareholders’ Equity.

Figure 3

Interest Coverage Ratio (Times Interest Earned)

Note: Data obtained for manual calculations from Apple Inc. NASDAQ: AAPL Financial Statement Income Statement.

The debt-to-assets ratio is calculated by adding the company’s long-term and short-term debt and then dividing by the total assets. Debt-to-assets ratio is also referred to as the leverage ratio. Creditors, analysts, and investors commonly use the debt-to-assets ratio to determine the financial risk of the company (Corporate finance institute, 2020, para. 1). The result of the debt-to-assets ratio calculation shows the creditors, analysts, and investors the percentage of assets that are being financed through debt. According to the Corporate Finance Institute, a debt-to-asset ratio equal to one means that the company owns the same amount of liabilities as its assets, indicating the company is highly leveraged. A debt-to-asset ratio greater than one reveals the company owns more liabilities than it does assets, indicating the company is extremely leveraged and is a very risky decision to invest in or lend to. A debt-to-asset ratio of less than one implies the company owns more assets than liabilities. If necessary, the company can sell its assets to meet its obligations. The lower the leverage ratio, the smaller amount of risk it is to invest with or lend to the company (2020, para. 7).

Figure 1 above shows a table of Apple Inc.’s calculated debt-to-assets ratio for a five-year span from 2016 through 2020. Apple Inc.’s debt-to-asset ratio ranges from 27.05 percent in 2016 to 34.71 percent in 2020. The calculations show a slight increase each year in the debt-to-assets ratio. This is not something that should be of concern for Apple Inc.’s investors or creditors. Apple Inc.’s leverage proves they own more assets than debt and the company’s risk is low.

Another ratio commonly used by creditors, investors, and analysts is the debt-to-equity ratio. The debt-to-to equity ratio is calculated by dividing the total debt by the total shareholder’s equity. This leverage ratio indicates how the company’s capital is inclined towards, either equity financing or debt. Understanding the debt-to-equity ratio helps creditors, investors, and analysts determine the percentage of contribution to the assets of the business. A company with a ratio equal to one means that there is an equal contribution of shareholder’s equity and creditors. A ratio of less than one implies that the potion of assets provided by shareholders is greater than that of the creditors. It is opposite for a ratio less than one. The preference of the ratio depends upon your investment in the company. Creditors prefer a low ratio whereas shareholders benefit from a higher debt-to-equity ratio (Carlson, 2020, para. 12).

Figure 2 above shows a table of Apple Inc.’s calculated debt-to-equity ratio for a five-year span from 2016 through 2020. Apple Inc.’s debt-to-asset ratio ranges from 0.68 in 2016 to 1.72 in 2020. The calculations show an increase each year in the debt-to-equity ratio. In 2016 and 2017 Apple Inc.’s shareholder’s equity was more than their debt. In 2018 the ratio was 1.06 which is because the amount of debt and shareholder’s equity was almost equal. In the years 2019 and 2020 the debt-to-equity was 1.19 and 1.72 respectively. This resulted from a decrease in shareholder’s equity. This can be viewed negatively from a creditor’s standpoint, but from the standpoint of a shareholder, it can be a positive change.

The third financial leverage ratio presented for calculation and analyzation is the interest coverage ratio, which is also referred to as the times interest earned. To calculate the interest coverage ratio, you must divide the company’s earnings before interest and taxes (EBIT) by the interest expense for a given period. The purpose of the interest coverage ratio is to inform investors and creditors the ability a company can pay interest on its outstanding debt. The ratio provides insight on the margin of safety a company has for paying interest on its debt. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. According to Hayes, “an interest coverage ratio of 1.5 is generally considered a minimum acceptable ratio for a company and the tipping point below which lenders will likely refuse to lend the company more money, as the company’s risk for default may be perceived as too high” (2021, para. 15). On the other hand, if a company’s interest coverage ratio is below one, this indicates they are not producing adequate proceeds to satisfy its interest expense.

Figure 3 above shows a table of Apple Inc.’s calculated interest coverage ratio for a five-year span from 2016 through 2020. Apple Inc.’s average interest coverage ratio for the five years presented in the table is 26.09. This may seem like a high ratio, but normally larger companies have a higher interest coverage ratio. This indicates that they have the ability to pay substantial interest payments on a regular basis.

Apple Inc. is known for its competitive advantage with its most popular products. Apple Inc. generates revenues from the sales of their products and services. Over the years, Apple Inc. has proven the ability to continue to produce new products and services which keeps their debt-to-asset ratio at a level which is not a concern for the company. This can be viewed in Figure 1 above. Apple Inc.’s financial structure has had the ability to sustain over the years. According to the financial leverage ratios, they are not considered to be an at-risk company. Apple Inc.’s debt-to-asset ratio, over the five-year span from 2016 to 2020, averaged 0.31 or 31%. Since this ratio is below one, according to lenders, creditors, and analysts they are considered to be low risk.

Collection and Evaluation of the Data About Bond Performance of Apple Inc.

APPLE INC. Stock, AAPL (Finra, 2021)

145.27 -0.25 (-0.17%)

145.52 -0.34 (-0.23%)

1. The last price of bonds is 103.663. Assuming that par value of the bond is $1,000, the investor will pay $103,633 for the bond if he/she purchased the bond at the Price listed in the Last Sale column. [103.663*1000=103663]

2. Assuming that par value of the bond is $1,000, the annual coupon interest payments would be 24 . [1000*2.4%=24]

3. Assuming that par value of the bond is $1,000, the current yield of the bonds is 81.08% . [1000*2.4%=24/0.296= 81.08%]

4. The YTM listed in quotations of the bonds is 0.296 .

As an investor interested in purchasing a bond issued by Apple, Inc, I would choose the Current Yield of the bond, as this measure would examine the current price of the bond, as opposed to looking at its face value (Chen, 2020). Apple, Inc’s current yield of 81.08% represents the return investors expect to earn if the owner purchased the bond and held it for a year. However, current yield is not the actual return an investor receives, if they hold the bond until maturity, likely due to economic fluctuations. Whereas, with a Coupon Rate, an investor may yield less than the going market rate as the bond will not pay more since its value was determined at issuance, thus may have an upside-down investment when the market ticks up and is more favorable (Chen, 2020).

The Current Yield of Apple, Inc’s bonds are callable, as they can be redeemed prior to the bonds' maturity date, likely when current interest rates drop below the interest rate on the bond. This enables the company to pay its investor the the face value of the bonds, in addition to any accrued interest to date (Investor.gov, n.d.).

Apple, Inc’s third quarter reports for its June operating performance included new revenue records in every geographic segment, double-digit growth in every product category, and an all-time high for their installed base of active devices, generating $21 billion of operating cash flow and. This enabled a return of nearly $29 billion to the company's shareholders during the quarter, with continued significant investments to support long-term growth plans (Apple.com, 2021). Thus, if I were an investor looking for a bond to invest in, I would absolutely purchase Apple, Inc’s current yield bond as its records show that Apple has an immense cash reserve with low debt for its size, despite the roughly $108 million in current debt (Kenny, 2021). It has plenty of cash flow to cover its interest payments which ensure the investors creditworthiness in the company and earn more income due to market price fluctuations with an innovative company who is already generating over $20 billion in operating cash flow.

Collection and Evaluation of the Data About Stock Performance of Apple Inc. for the Last One Year

In the past three years, the Price-to-Earnings ratio has been relatively high for Apple Inc. However, the ratio started out at 24.7 in 2019 and then increased to 40.45 in 2020, which is an extremely high P/E ratio, but in the past year it dropped to its current ratio of 28.49. Overall, these are great numbers for their Price/Earnings (P/E) ratio, but it is not good news for the company that their Price to earnings ratio decreased in the past year. The industry average ranges from 13 to 15 which is significantly lower than Apple’s P/E ratio. This high P/E ratio can sometimes mean that investors are expecting high growth in the future and are willing to pay a higher share price. However, based on the industry averages it is more likely that Apple is in fact performing well but is also overvalued.

Apple’s Price/Book (P/B) ratio has been extremely high over the past few years. In 2019 it was 14.23, followed by 34.16, and is currently 37.51. This implies that Apple is considered to be overvalued. Typically, any P/B ratio above 3 means that it is overvalued, which can lead to investors of the company losing money. The current industry average for this ratio is 11.2 which is still significantly less than Apple’s P/B ratio.

Over the past 3 years, Apple’s diluted earnings per share has been positive and increasing year to year, which is great news for the company. The current industry average is about 4.85 which is slightly lower that Apple’s current EPS, backing up the fact that Apple is performing well. However, there is still a ton of room for improvement since the EPS can go all the way up to 99.

Apple’s dividends per share has also been positive and increasing over the past three years, however their dividends per share never goes above 1 which is lower than the industry average of 1.5. This implies that the stock market's price is higher than the dividend payments that shareholders get from owning the Apple stock. Therefore, Apple’s low dividends per share indicate that the company is overvalued.

Although Apple, Inc. is mostly performing above industry averages it is still safe to say the company is overvalued. As shown in the statistics above, the Price/Book ratio is considered overvalued when it's above 3 and Apple’s current P/B ratio is 37.51. Another indicator that Apple’s stock is overvalued is the fact that Apple’s dividends per share are lower than the industry average. Given this information above, it is reasonable to believe that common stockholders are not receiving an adequate return on their investment and instead should invest in a company with a lower Price/Book ratio and a higher dividends per share ratio. Furthermore, it is also not a good idea to buy this stock due to the overvaluation of the company.

Stock Performance

Apple, Inc.	2019	2020	Current
Price/Earnings Ratio	24.7	40.45	28.49
Price/Book Ratio	14.23	34.16	37.51
Earnings Per Share	2.97	3.28	5.12
Dividends Per Share	.76	.81	.88

Specific Recommendation, with Supporting Rationale for Apple Inc.’s Management

After studying the financial trends and figures posted by Apple Inc., it is clear that the company is moving on an upward trend in terms of profit being realized and success in the long run. For instance, in the last five years, i.e., from 2016, the Company has generally been in steady growth from about 6% to 15%. However, in the year 2019, where the management realized a drop of approximately 2%. Also, the data that summarizes Apple Inc.'s performance compared to Refinitiv estimated projections show a positive result in the fundamental elements analyzed by the team in the financial department. For example, the figure posted by the department in earnings per share (EPS) indicates an improvement in the earnings per share, which is a profit to the Company, i.e., the projection was $0.99, and the actual value realized by the company was $1.40. Additionally, the other figures for revenues, iPhone revenues, services revenue, other products revenue, Mac revenue, iPad revenue, and gross margin are all positive figures from the estimated values, which indicates the growth of the Apple Inc. company.

Furthermore, the financial trends are showing growth to the Company, and in the coming years, the organization is set to demonstrate a similar trend with more improvements in the long run. However, some enhancements are necessary to ensure the proper growth of Apple Inc. First, the management should adopt various ways of doing business that minimize costs as profit is maximized. One of the means of achieving this is by investing heavily in technology and ensuring more work is done by machines instead of human beings, thus reducing the wage bill in the company. Another strategy is by carrying out more research on new trends and models of devices such as computers and mobile phones, which are on-demand in the market to boost sales and growth of the company.

Reflections

What I learned about this project is how to understand and calculate bond rations to better understand investments. An important ration to know is the price to earnings ratio. This ration helps you evaluate if the bond is overpriced or underpriced. Knowing this information will help you make better investment decisions. - Edelmira Hernandez

While evaluating the data about the stock performance of Apple, Inc. I learned how to calculate many different ratios in order to learn more about Apple, Inc. This assignment showed me the significance of each ratio (P/E ratio, P/B ratio, EPS, and DPS) and how it can determine if the company's stock is valued correctly, undervalued, or overvalued. I will be able to apply this information in the future in order to determine which stocks clients should buy and this will also help me determine which stocks I should invest in. - Colin Brogan

Over the course of this project, I spent many hours learning how to utilize the weekly learning material in a real-life scenario. Using Apple Inc and its abundance of resources assisted with my understanding of bonds, stocks, and much more. I feel confident in my knowledge in the investment/business finance world to understand a business’ worth in the stock market. This project along with this course was very well rounded and knowledgeable in the investment world.

· Jessica Butler

In my research on bond performance, I learned of the differences between the current yield and coupon rate of a bond, gaining an understanding of how the market impacts a shareholder’s investment and what that means for a callable bond. I learned that while callable bonds are perceived as riskier for the investor, because an investor whose bond has been called is often encountered with reinvesting at a much lower rate, however, with the steady incline of cash reserve compared to its debt, Apple will always be a safe bet for its investors. In all, I learned to put the book to the test, calculating bonds based on real time market rates and analyzing its effects from the perspective of an investor. - Khalia Alexander-Cobbs

This project has been very insightful not only with learning various financial ratios, bond, and stock analysis, but also what all this means for our chosen company, Apple Inc. It is very important to know how to calculate the financial leverage ratios, but it is more important to know what these ratios tell you about the company. This project has taught me everything I need to research a company prior to possibly investing in the company. Investing in stocks and bonds can be profitable. With the knowledge I have gained from this project will allow me to make a financially sound decision prior to investing in a company. The knowledge I have gained will also help in the workplace when making decisions on possible investments for my employer. I will be able to present a well calculated analysis of the possible investors and present my findings to upper management. - Elizabeth Fisher

Apple Inc.'s financial ratios and values have been evaluated during the course of this investigation. On the same note, the group learned various technical skills and mathematical principles for calculating numbers, which are important in the job market, particularly in financial analysis. According to what I've learnt, earnings per share is calculated by subtracting the return of the company and dividing it by the unassigned shares of its common stock to arrive at an estimate of its profits. As EPS increases, the company under review makes more money. The workings of the company reveal its profitability. Another way to arrive at the gross margin is by subtracting the selling price of a product from its cost of production. Last but not least, it reveals how much a company has made in terms of sales.  - Francesca Bodunrin

References

Apple Inc (AAPL) financials - XNAS | Morningstar. (n.d.). Morningstar | Empowering Investor Success. https://www.morningstar.com/stocks/xnas/aapl/financials

Apple Inc. (NASDAQ:AAPL). (n.d.). Stock Analysis on Net. https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Ratios/Long-term-Debt-and-Solvency#Debt-to-Assets

Apple Inc. (NASDAQ:AAPL). (n.d.). Stock Analysis on Net. https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Financial-Statement/Income-Statement

Apple Inc. (NASDAQ:AAPL). (n.d.). Stock Analysis on Net. https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Financial-Statement/Liabilities-and-Stockholders-Equity

Carlson, R. (2020, January 26). The debt-to-Equity ratio: Measuring financial risk. The Balance Small Business. https://www.thebalancesmb.com/what-is-the-debt-to-equity-ratio-393194

Corporate Finance Institute. (2020, March 31). Debt to asset ratio - How to calculate this important leverage ratio. https://corporatefinanceinstitute.com/resources/knowledge/finance/debt-to-asset-ratio/

Finra. Bonds detail. (2021, August 3). Market Data Home. https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C592367&symbol=AAPL4001809

Hayes, A. (2021, April 7). Why the interest coverage ratio matters. Investopedia. https://www.investopedia.com/terms/i/interestcoverageratio.asp

Investor relations. (2021). https://investor.apple.com/investor-relations/default.aspx#tabs_content--2021

Murphy, C.B. (2021, May 31). Assessing a stock's future with the price-to-Earnings ratio and PEG. Investopedia. https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/

Technology sector. (n.d.). CSIMarket - Company, Sector, Industry and Market Analysis. https://csimarket.com/Industry/industry_valuation_ttm.php?pb&s=1000