To Genius Professor only.

Apollo 1

Running head: Apollo Group Inc. Financial Analysis

Financial Analysis of Apollo Group Inc.

Angel Francisco Carrete Rodriguez

University of West Florida

FIN 6406

Financial Management

December 2, 2011

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Running head: Apollo Group Inc. Financial Analysis

Table of Contents

I. Executive Summary 3

II. Introduction 3

III. Industry and Competition 5 A. Industry Leaders 6 B. Industry Performance 7

IV. Financial Analysis 9 A. Balance Sheet 9 B. Income Statement 11 C. Statement of Cash Flows 12 D. Financial Ratios 13

a. Liquidity Measures 15 b. Debt Management 15 c. Asset Management 16 d. Profitability Ratios 16 e. Market Value Ratios 17

E. Five Year DuPont Analysis 18

V. Weighted Average Cost of Capital 19

VI. Overall Evaluation 21

VII. References 22

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Running head: Apollo Group Inc. Financial Analysis

Executive Summary

Apollo Group Inc. is the leader in the for-profit public education industry. Apollo has

been expanding at an amazing rate, doubling its assets in just five years. It has ventured with

success to overseas markets and created the powerhouse of the University of Phoenix.

Nonetheless, this growth has come with its problems. The Profit Margin has decreased over the

years, assets utilization has become more inefficient, and equity has risen too much in the

company. Furthermore, Apollo has proven it is not the best performer in the industry and

investors are noticing it. Perhaps it is time for Apollo to change its strategy, slow its growth, and

focus on improving its current operations.

Introduction

Apollo Group Inc. is the largest company in the for-profit college industry in the United

States. It owns 11.5% of the market share and has an annual revenue of $5 billion (Culbert,

2011a). Apollo group is made by four different universities: the University of Phoenix, the

Institute of Professional Development, the College for Financial Planning Institutes Corporation,

and Meritus University Inc. The University of Phoenix (UP) is by far the largest asset in the

group, generating 90% of the group’s revenue. It has around 200 campuses in 39 states, one

campus in Puerto Rico, and holds other joint ventures in other parts of the world, including South

America, Canada, England, and the Netherlands (Culbert, 2011a; Allen, 2008).

Apollo Group is relatively new in the industry; it was founded by Dr. John Sperling in

1973. During its birth, Apollo was conceived as a learning institution especially designed for the

working adults needs (Apollo Group Inc., 2011a) and quickly expanded into the behemoth it is

today. Apollo Group offers degrees at an undergraduate, master’s, and doctorate level. Apollo

group has been constantly growing over the years. In the past four years, revenue growth has

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Running head: Apollo Group Inc. Financial Analysis

been steadily rising, 9.9% (2007), 12.1% (2008), 26.2% (2009), and 24.6% (2010) (Culbert,

2011a).

The group is also actively searching to expand overseas with their Apollo Global Inc.

joint venture. As of August 31, 2011, Apollo Global Inc had received investments of $604.2

million (Apollo Group Inc., 20011b). Apollo Global owns BPP Holdings PLC (United

Kingdom), Western International University Inc. (U.S.), Universidad de Artes, Ciencias y

Comunicación (Chile), and Universidad Latinoamericana (Mexico).

Apollo Group currently trades at the NASDAQ stock market under the APOL ticker

symbol. Due to its size, Apollo is also part of the NASDAQ-100 and the Standard & Poor’s

(S&P) 500 index (NASDAQ, n.a.a; Stock Markets Review, n.a.). Its initial public offering (IPO)

was carried out on December 1994 with 3.5 million shares at $11.00 per share. A secondary

offering happened two years later, with 2.75 million shares at $31.25 per share. Currently, there

are 137,756,000 shares in common stock of which 475,000 are voting shares. All voting shares

are currently owned by management, along with 16.5% of all the Class A shares (Dalavagas,

2011). The current market value is $6,467,307,910 (NASDAQ, 2011). According to the North

American Industry Classification System (NAICS), Apollo is classified under the Colleges,

Universities, and Professional Schools category with the 61131 code. The Standard Industry

Classification (SIC) code is 8221.

The student composition at UP is about 60% undergrad and graduate students and 40%

students seeking associate degrees. Furthermore, UP shows that it has stayed true to its founding

principles since about 50% of its students receive some level of employee assistance for their

tuition, and the average age of its students is 33 for undergraduate programs and 36 for graduate

(Culbert, 2011a; Urban, 2007).

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Running head: Apollo Group Inc. Financial Analysis

Apollo Group actively wants to expand, especially through its flagship and its Global

joint venture. In its 2011Anual Report, the group mentions that it wants to increase its net

revenue and cash flow by updating its learning and data platforms, forming better links with

employers, acquiring and partnering with new institutions to develop better postgraduate

programs, reorganizing and streamlining their operations, and an aggressive international

expansion (Apollo Group Inc., 2011b).

Industry and Competition

The for-profit universities industry includes all colleges and institutions that offer either

undergraduate or graduate degrees in any area in a for-profit basis (Culbert, 2011a). The degrees

offered are at all levels: trade, associate, undergraduate, Master’s, or doctorate; full-time or part-

time; on site or online. For-profit colleges have a long history, but their biggest expansion began

in the 1970’s. At that time, most of these colleges were trade schools, with cosmetology

accounting for 40% of all courses and 14% of all students (as cited in Bailey, Badway, &

Gumport, 2001). The majority of their programs lasted less than one year with some of them

lasting less than a semester.

Since for-profits were mostly trade schools, they mostly grew in low-income urban areas

and became known effectively as trade schools in the 1990’s. Since then, for-profit colleges have

been plagued by the same scandals and accusations we hear today: deceptive recruitment, high

rate of student loan defaults, low graduate placement, and high dropout rates (Bailey, Badway, &

Gumport, 2001).

These accusations compelled the government to create new regulations that created

tougher accreditation standards, decreased the reliance of for-profits on government loans,

increased program length, and cleaned the admission procedures. These new regulations gave

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Running head: Apollo Group Inc. Financial Analysis

birth to the Accredited Career Colleges (Bailey, Badway, & Gumport, 2001). This accreditation

gives colleges the capacity to award undergraduate and graduate degrees.

Industry Leaders

The for-profit college industry is comprised of 159 businesses with 563 four-year

universities. The industry has an annual revenue of $26.4 billion, which is only 7% of the whole

education industry’s revenue of $380.6 billion (Culbert, 2011a; Culbert, 2011b). The industry is

fairly concentrated with the four largest companies capturing 23.6% of the market. Most of the

growth in the industry is done by acquisitions, and it is estimated that the number of colleges will

keep growing 2.7% per year in the next five years (Culbert, 2011a).

The largest company in the market is Apollo Group with 11.5% of the market share. It

almost doubles the market share of the next competitor in size and more than triples its revenue.

The next biggest company in the industry is DeVry Inc with 6.4% of the market. DeVry has 95

campuses in the States in addition to several campuses overseas, and its revenue amounts to

$1.46 billion. DeVry’s flagships are Carrington College, DeVry University, Ross University, and

the Keller Graduate School of Management (Culbert, 2011a).

The third largest company, Career Education Corporation is the newest of the biggest

companies in the industry. Started in 1994, it has 3% of the market share, and is made up of more

than 90 campuses worldwide. Career Education Corporation has a revenue of $2.2 billion and its

largest schools are the American InterContinental University, Colorado Technical University,

and Briarcliff College (Culbert, 2011a).

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Running head: Apollo Group Inc. Financial Analysis

Figure 1. Market Share in the For-Profit Education Industry. Adapted from “For-Profit

Universities in the U.S. Report 61131b” by K. Culbert, 2011, IBISWorld Industry Report, p. 27.

Copyright 2011 by IBISWorld Inc. Adapted for educational use.

Industry Performance

The for-profit industry has grown 14.1% in the last five previous years (Culbert, 2011a).

This growth is mainly due to the high number of high school graduates and the high

unemployment that is prevalent in the country i.e., 9.0% as of October 2011 (BLS, 2011).

According to Culbert (2011), 79% of all high school graduates are pursuing undergraduate

degrees, hence the strong correlation of number of graduates with enrollment; while the high

unemployment deters students who want to drop school or go into the job market instead of

college (Culbert, 2011a).

One other factor that might explain the constant growth of the industry, is the rapid

growth of online-courses in for-profit colleges. An online course makes it easy for students from

different states and countries to enroll, with no extra cost for the school. This strategy has

worked remarkably well for some schools. One clear example of this tactic is Bridgepoint

Education Inc’s: the fourth largest school with 2.7% of the market share. Bridgepoint has only

two campuses, because 99% of its students are enrolled for online only classes. Career Education

Corporation trails behind with 40% of its courses offered online only (Culbert, 2011a).

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Running head: Apollo Group Inc. Financial Analysis

To offer this type of courses, minimal infrastructure is needed and students only need a

computer and internet connection. And whenever schools want to expand the number of students

enrolled in their online courses, investments are not generally big (Culbert, 2011a). This

tendency is further fueled by the proliferation of web-technologies which make access to the

internet easier, faster and cheaper. The internet has now over one billion users which makes the

(Graham-Hackett, 2003).

Yet, one might question if for-profits will be able to maintain their growth. The industry

has lately been the target of the media and the U.S. government for their quality, marketing

tactics, and loan defaults. 12% of all undergraduate and graduate students enroll in for-profit

colleges, but these same colleges get 25% of all federal student aid. More alarmingly their

students represent 50% of all student debt defaults (Koppel, 2011).

The U.S. Department of Education just recently passed the “Gainful Employment” rule

released this past June to combat this problem. The regulation forces all school programs to pass

one of three tests: at least 35% of former students are paying their debts by at least $1; a loan

payment must not exceed 30% of a graduate’s discretionary income; and a graduate’s loan

payment must not exceed 12% of his total income (Korn, 2011). This can greatly affect the for-

profit industry since Title IV federal funds represent 90% of the industry’s revenue (Federal

Student Aid, 2010).

Competition in the industry is high, especially since their substitute, non-for-profit

schools, are regarded as having more quality. To fight this, for-profit schools attract new

students by having an aggressive recruiting and marketing campaign, being an accredited

institution, being able to respond to working student needs, being accessible to online users, and

being flexible in schedule and location (Culbert, 2011a; Bialy et al. 2001).

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Running head: Apollo Group Inc. Financial Analysis

Financial Analysis

In this section, the principal financial statements of Apollo Group Inc. are analyzed. The

analysis will consist of a five year historic study and the major financial ratios are also discussed.

To be able to make a comparison, the for-profit industry, its sector, and the Standard & Poor’s

500 (S&P 500) are also presented.

Financial Statements

The balance sheet for Apollo Group showing the information for 5 years is shown in

Table 1. From looking at the balance sheet, it is seen that Apollo Group has a healthy

composition of its assets-liabilities. Current assets have always been above the current liabilities

by about 30%. Fixed assets and long term debt have remained somewhat constant through the

years. It does seem curious that current assets have more than doubled. Cash and short term

investments have grown by five times. Debt seems to not have kept the pace with this growth,

which explains why retained earnings have kept on growing considerably over the years.

Another situation that is worth noting is that the goodwill entry has remained positive

during the five years. In addition, property/plant/and equipment has also been steadily growing.

These two entries combined might confirm the expansion through acquisition strategy that

Apollo Group has expressed.

In general, the balance sheet shows a healthy and growing company that favors short

term over long term debt. It can be speculated that Apollo is acting cautiously by increasing the

amount of retained earnings or that all funding is done through internal equity, since there has

been no paid dividends. But other financial statements must be analyzed to see how this growth

is been achieved.

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Running head: Apollo Group Inc. Financial Analysis

Table 1. Balance Sheets in a Five Year Period Comparison (data shown in thousands)

31-Aug-11 31-Aug-10 31-Aug-09 31-Aug-08 31-Aug-07

Cash and Short Term Investments $ 1,571,664 $ 1,284,769 $ 968,246 $ 486,255 $ 370,597

Total Receivables, Net $ 215,567 $ 264,377 $ 298,270 $ 221,919 $ 190,912

Other Current Assets, Total $ 547,926 $ 664,657 $ 555,843 $ 461,369 $ 363,869

Total Current Assets $ 2,370,786 $ 2,253,212 $ 1,880,017 $ 1,169,543 $ 925,378

Property/Plant/Equipment, Gross $ 1,104,840 $ 1,094,317 $ 965,310 $ 873,940 $ 766,169

Accumulated Depreciation $ (551,813) $ (474,780) $ (407,803) $ (434,805) $ (401,962)

Property/Plant/Equipment, Net $ 553,027 $ 619,537 $ 557,507 $ 439,135 $ 364,207

Goodwill, Net $ 133,297 $ 322,159 $ 522,358 $ 85,968 $ 29,633

Intangibles, Net $ 121,117 $ 150,593 $ 203,671 $ 23,096 $ 2,214

Total Long Term Investments $ 5,946 $ 15,174 $ 19,579 $ 25,204 $ 22,084

Notes Receivable - Long Term $ - $ 126,615 $ - $ - $ -

Other Long Term Assets, Total $ 85,533 $ 114,161 $ 80,245 $ 117,466 $ 106,347

Total Fixed Assets $ 898,920 $ 1,348,239 $ 1,383,360 $ 690,869 $ 524,485

Total Assets $ 3,269,706 $ 3,601,451 $ 3,263,377 $ 1,860,412 $ 1,449,863

Accounts Payable $ 69,551 $ 90,830 $ 66,928 $ 46,589 $ 80,729

Accrued Expenses $ 398,806 $ 375,461 $ 268,418 $ 121,200 $ 103,651

Current Long Term Debt $ 419,318 $ 416,361 $ 461,365 $ 15,488 $ -

Other Current Liabilities, Total $ 767,612 $ 910,859 $ 958,567 $ 682,332 $ 559,455

Total Current Liabilities $ 1,655,287 $ 1,793,511 $ 1,755,278 $ 865,609 $ 743,835

Total Long Term Debt $ 179,691 $ 168,039 $ 127,701 $ 15,428 $ -

Total Deferred Income Tax $ 26,400 $ 38,875 $ 55,636 $ 2,743 $ -

Minority Interest $ 3,625 $ 32,690 $ 64,690 $ 11,956 $ -

Other Liabilities, Total $ 164,339 $ 212,286 $ 100,149 $ 130,467 $ 72,188

Total Long Term Liabilities $ 374,055 $ 451,890 $ 348,176 $ 160,594 $ 72,188

Total Liabilities $ 2,029,342 $ 2,245,401 $ 2,103,454 $ 1,026,203 $ 816,023

Total Common Stock $ 104 $ 104 $ 104 $ 104 $ 104

Additional Paid-In Capital $ 68,724 $ 46,865 $ 1,139 $ - $ -

Retained Earnings $ 4,320,472 $ 3,748,045 $ 3,195,043 $ 2,595,340 $ 2,096,385

Treasury Stock - Common $ (3,125,175) $ (2,407,788) $ (2,022,623) $ (1,757,277) $ (1,461,368)

Unrealized Gain (Loss) $ (531) $ (994) $ - $ - $ -

Other Equity, Total $ (23,230) $ (30,182) $ (13,740) $ (3,958) $ (1,281)

Total Stockholders' Equity $ 1,240,364 $ 1,356,050 $ 1,159,923 $ 834,209 $ 633,840

Total Liabilities and

Shareholders’ Equity $ 3,269,706 $ 3,601,451 $ 3,263,377 $ 1,860,412 $ 1,449,863

Adapted from Apollo Group Balance Sheet Report, 2011, Factiva, 2011. Adapted for

educational use.

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Running head: Apollo Group Inc. Financial Analysis

Income Statement

To continue with the financial analysis, the income statement for the previous five years

is shown in Table 2. The income statement shows how sales have increased over the years with

interesting jumps. From 2007 to 2008, net sales increased 15%, 26% the following period, 25%

from 2009 to 2010, and in the last year there was a decline of 4%. That is a $2 billion increase in

sales in just five years. Despite this increase, Apollo has remained operational efficient since the

proportion of sales to cost of revenue and other expenses has remained the same throughout the

years. Further ratio analysis is needed to confirm this assumption.

Net income has also grown steadily with a sharp spike from 2008 to 2009 while

maintaining a similar profit margin. Again, in the opinion of the author, the income statement

shows a strong company.

Table 2. Income statements in a Five Year Period (data shown in thousands)

31-Aug-11 31-Aug-10 31-Aug-09 31-Aug-08 31-Aug-07

Net Sales $ 4,733,022 $ 4,925,819 $ 3,953,566 $ 3,133,436 $ 2,721,812

Cost of Revenue $ 1,774,087 $ 1,733,134 $ 1,333,919 $ 1,177,991 $ 1,045,713

Gross Profit $ 2,958,935 $ 3,192,685 $ 2,619,647 $ 1,955,445 $ 1,676,099

Selling, General and Administrative

Expense $ 1,607,796 $ 1,673,845 $ 1,364,384 $ 1,099,720 $ 963,165

Depreciation $ 159,006 $ 145,564 $ 108,828 $ 88,349 $ 80,926

Other $ 230,889 $ 362,552 $ 80,500 $ - $ -

Total Operating Expense $ 3,771,778 $ 3,915,095 $ 2,887,631 $ 2,366,060 $ 2,089,804

Operating Income $ 961,244 $ 1,010,724 $ 1,065,935 $ 767,376 $ 632,008

Non-Operating Interest Expense, Net $ (8,931) $ (11,891) $ (4,448) $ (3,450) $ (232)

Non-Operating Interest Income $ 3,222 $ 2,920 $ 12,591 $ 30,078 $ 31,172

Other Non-Operating Income, Net $ (1,588) $ (685) $ (7,151) $ 6,772 $ 665

Income Before Tax $ 953,947 $ 1,001,068 $ 1,066,927 $ 800,776 $ 663,613

Total Income Tax $ 420,638 $ 464,063 $ 456,720 $ 314,025 $ 250,961

Income After Tax $ 533,309 $ 537,005 $ 610,207 $ 486,751 $ 412,652

Minority Interest $ 36,631 $ 31,421 $ 4,489 $ 598 $ -

Net Income Before Extraordinary

Items $ 569,940 $ 568,426 $ 614,696 $ 487,349 $ 412,652

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Running head: Apollo Group Inc. Financial Analysis

Total Extraordinary Items $ 2,487 $ (15,424) $ (16,377) $ (10,824) $ (3,842)

Net Income $ 572,427 $ 553,002 $ 598,319 $ 476,525 $ 408,810

Dividends Paid $ 0 $ 0 $ 0 $ 0 $ 0

Adapted from Apollo Group Income Statement Report, 2011, Factiva, 2011. Adapted for

educational use.

Statement of Cash flows

This statement shows that Apollo has been actively purchasing back its stock and has also

been actively purchasing new fixed assets. Despite doing so, it has been able to maintain a

positive cash flow every year which can explain the big increase in current assets shown in the

balance sheet. Table 3shows the statement of cash flows.

By looking at the different financial statements it is easy to conclude that Apollo is a

healthy company with a strong growth over the years. It keeps generating more current assets

than current liabilities, sales grow each year, the cost of operating the company remains stable,

and cash reserves keep growing. But to really gage how strong the company is, it must be

compared to others in its industry, with the market in general, and to itself in previous years.

Table 3. Statement of Cash flows in a Five Year Period (data shown in thousands)

31-Aug-11 31-Aug-10 31-Aug-09 31-Aug-08 31-Aug-07

Net Income $ 535,796 $ 521,581 $ 593,830 $ 475,927 $ 408,810

Depreciation $ 159,006 $ 147,035 $ 113,350 $ 92,496 $ 71,383

Deferred Taxes $ 55,823 $ (125,399) $ (13,799) $ (6,624) $ (46,040)

Discontinued Operations $ - $ 9,400 $ - $ - $ -

Unusual Items $ 230,889 $ 362,552 $ 89,916 $ - $ -

Other Non-Cash Items $ 227,942 $ 325,865 $ 187,401 $ 127,482 $ 168,856

Cash Taxes Paid $ 464,701 $ 514,532 $ 472,241 $ 289,630 $ 293,089

Cash Interest Paid $ 10,972 $ 7,837 $ 3,683 $ 2,874 $ 231

Accounts Receivable $ (121,120) $ (265,996) $ (192,289) $ (105,726) $ (150,943)

Other Assets $ 54,825 $ (9,645) $ (38,204) $ (7,285) $ (1,912)

Payable/Accrued $ 4,851 $ (44,653) $ 45,406 $ (14,155) $ 31,174

Taxes Payable $ (25,241) $ 10,421 $ (30,848) $ 21,667 $ (2,440)

Other Liabilities $ (225,649) $ 102,081 $ 157,315 $ 142,224 $ 109,734

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Running head: Apollo Group Inc. Financial Analysis

Changes in Working Capital $ (312,334) $ (207,792) $ (58,620) $ 36,725 $ (14,387)

Cash from Operating Activities $ 897,122 $ 1,033,242 $ 912,078 $ 726,006 $ 588,622

Purchase of Fixed Assets $ (162,573) $ (168,177) $ (127,356) $ (104,879) $ (104,551)

Other Investing Cash Flow Items,

Total $ 326,884 $ (127,112) $ (515,760) $ (155,939) $ (27,384)

Cash from Investing Activities $ 164,311 $ (295,289) $ (643,116) $ (260,818) $ (131,935)

Financing Cash Flow Items $ 10,889 $ 9,108 $ 77,523 $ 30,797 $ 4,022

Issuance (Retirement) of Stock, Net $ (758,265) $ (426,727) $ (335,411) $ (351,393) $ (429,997)

Short Term Debt, Net $ 410,051 $ 475,454 $ 513,170 $ 250,991 $ -

Long Term Debt, Net $ (437,925) $ (477,568) $ (37,341) $ (251,435) $ -

Issuance (Retirement) of Debt, Net $ (27,874) $ (2,114) $ 475,829 $ (444) $ -

Cash from Financing Activities $ (775,250) $ (419,733) $ 217,941 $ (321,040) $ (425,975)

Foreign Exchange Effects $ 712 $ (1,697) $ (1,852) $ (272) $ (451)

Net Change in Cash $ 286,895 $ 316,523 $ 485,051 $ 143,876 $ 30,261

Adapted from Apollo Group Income Statement Report, 2011, Factiva, 2011. Adapted for

educational use.

Financial Ratios

The financial ratios shown in Table 4 paint an interesting story for the for-profit higher

education industry and for Apollo Group. The industry as a whole practically doubles the Profit

Margin of the service sector. The Return on Assets (ROA) is 17 times greater and Return on

Equity (ROE) is multiplied by seven. Furthermore, Return on Investment is tripled and Earnings

per Share are doubled (Apollo Group, 2011a).

Paired against the S&P 500, the for-profit industry also excels. All three, ROA, ROI, and

ROE are higher and the industry has grown substantially more in the last five years than the S&P

500. The Price/Earnings and the Price per Share ratios are also much higher: perhaps showing

that investors still think the industry will keep growing strong. These findings are also confirmed

by the slightly lower Price to Sale ratio. The only ratio in which the S&P has any advantage over

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Running head: Apollo Group Inc. Financial Analysis

the industry is the Profit Margin, meaning the average S&P 500 company gets to keep more

pennies for each dollar sold.

In general, the for-profit industry is a good investment option. Companies in the industry

are several times more efficient using their equity, and thus provide investors with more earnings

for every dollar they invest. Hence, investors are willing to pay a premium for each of their

stocks.

Table 4. Key financial ratios of Apollo Group in Comparison

Apollo DeVry Industry

(Schools)

Sector

(Services) S&P 500

P/E ratio, 5-Yr High 24.91 36.17 41.81 30.89 32.87

Price to Sales TTM 1.44 2 1.62 3 2.52

Price to Book MRQ 5.06 3.2 6.03 4.51 3.82

EPS, 5-Yr Growth 10.08 75.98 22.05 9.66 9.97

Revenue, 5-Yr Growth 16.95 19.66 25.17 27.34 9.34

Current Ratio 1.43 -- 1.35 1.19 1.49

Long Term Debt to

Equity MRQ 0.12 0 0.32 1.36 0.58

Total Debt to Equity

MRQ 0.14 0 0.49 1.6 0.69

Operating Margin TTM 17.92 22.65 18.85 11.25 21.06

Net Profit Margin TTM 7.54 15.27 10.48 5.43 14.03

Return on Average

Assets TTM 11.62 16.56 15.47 0.87 8.89

Return on Investment

TTM 20.52 24.3 16.27 4.03 8.85

Return on Average

Equity TTM 30.96 26.5 33.43 4.04 30.02

Receivables Turnover

TTM 23.05 11.28 33.61 16.49 12.61

Asset Turnover TTM 1.54 1.08 1.43 1.05 0.94

Note. Ratio comparison data. Adapted from Apollo Group Ratio Comparison Report, 2011;

DeVry Inc. Comparison Report, Factiva, 2011; and Career Education Corp. Ratio Comparison

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Running head: Apollo Group Inc. Financial Analysis

Report, Factiva, 2011. MRQ represents the most recent quarter at the time of the report. TTM

represents the past 12 months at the time of the report. Adapted for educational use.

Apollo Group Liquidity

Apollo’s Current Ratio is above the industry and sector, but it is slightly below the

average S&P 500 industry. It shows that the company can meet its obligations in the short run

without problems. If the Long Term Debt to Equity, Total Debt to Equity, and Interest Coverage

ratios also taken into consideration, Apollo Group can also probably fulfill its longer term

obligations without worrying. This conclusion is further confirmed by looking at the Cash Flow

statement results.

Apollo Group Debt Management

It is noted from the ratios that Apollo Group practically does not use leverage to finance

itself. This finding had already been noted in the financial statements. But this is not something

particular to Apollo, the whole industry works that way. The debt to equity ratio for the industry

is only 0.32, Apollo’s is a mere 0.12. This is particularly interesting, since this is not the normal

behavior for capital intensive industries. As it has been mentioned before, most of the companies

that expand in the industry purchase public schools to expand or form joint ventures. Such low

ratios are normally found in non-capital intensive industries. For example, Microsoft’s debt to

equity ratio for 2011 is 0.21, while the software industry’s is 0.24 (Microsoft Corporation, 2011).

The very low debt to equity ratio could explain Apollo’s above-industry return on investment,

since profits are not diluted paying interest.

Nonetheless, one has to wonder if Apollo would benefit by taking more debt to expand

their growth. Apollo Group, despite having the largest market share, is not well thought of by

investors. Apollo’s P/E ratio is 40% below the industry average and the price to book ratio is

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Running head: Apollo Group Inc. Financial Analysis

16% lower. In addition, Apollo’s EPS ratio is half of the industry’s average, indicating that

investors might not expect Apollo to keep growing at the same rate. More debt would most likely

increase its EPS ratio and make the company more attractive to investors. Since Apollo expects

to keep growing in the coming years and interest rates are at an historic low, it seems like now is

a good time to inquire in some debt. Furthermore, Since Apollo is the largest company in the

industry, even if regulations were to change negatively, Apollo would be the most likely to better

adapt to its new environment.

Apollo Group Asset Management

Apollo shows better Asset Turnover and Receivable Turnover ratios than the industry,

sector, and S&P 500. In general these ratios mean a better asset management, but it must be

noted that the industry capital intensiveness can vary considerably from company to company.

Apollo is a very capital intensive company as its PPE/Total Asset ratio of 17.2% shows. To

compare, DeVry’s ratio is 23.8%, Bridgepoint’s is 14.1%, the industry’s is 17.1%, and the S&P

500 is 25.1%.

Apollo Group Profitability Ratios

The profitability ratios show mixed results. Net Profit Margin is substantially lower for

Apollo group compared to competitors, industry and the S&P 500. The Return on Assets is lower

than the competitor and industry, but much higher than the S&P 500. A similar story is shown

with the Return on Investment and the Return on Equity is comparable on Apollo, industry and

S&P 500.

This puts Apollo in an awkward position in its industry, but not compared to other

companies its size in the S&P 500. It is true that the Net Profit Margin is near half of the S&P

500 average, but Apollo is in the author’s opinion a low risk company. It has almost no debt, has

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Running head: Apollo Group Inc. Financial Analysis

growth expectations, and has a healthy cash flow. This makes it compete in the profitability

index with the rest companies in the market.

Apollo Group Market Value Ratios

These ratios do not favor Apollo Group. They show that investor do not value Apollo’s

stock as much as they do the S&P 500 or the industry average. Even though the market value of

the company in respect to its books is higher than the S&P 500 and it has slightly higher EPS,

investors are not willing to pay as much per Apollo dollar of income as they would for other

companies. Perhaps investors are punishing Apollo for when it mislead investors regarding a

Department of Education Report in 2008. Even though Apollo had to pay $280 million in

damages, investors have not forgotten the incident (Culbert, 2011a). Or maybe there is a historic

trend that investors see that makes them act cautiously. A DuPont Analysis of the Return on

Equity (ROE) ratio might discover this. Nonetheless, the value of Apollo’s share has remained

above the S&P 500 average as shown in Figure 2.

Figure 2. Apollo Group’s Stock Price vs. S&P 500’s. Adapted from “Apolo Group Inc.

(APOL.OQ)” by Thompson Reuters, 2011, Thompson Reuters. Copyright 2011 Adapted for

educational use.

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Running head: Apollo Group Inc. Financial Analysis

Five Year DuPont Analysis

Apollo Group has been compared to its industry and market. Now it is compared to itself

in a five year period using the DuPont equation. Table 5 shows the equation for the 5 years

analyzed.

Table 5. Five Year DuPont Analysis

Year Profit Margin T.A. Turnover E. Multiplier ROE

2011 12% x 2.00 x 1.91 = 46%

2010 11% x 2.19 x 1.66 = 41%

2009 15% x 2.10 x 1.62 = 52%

2008 15% x 2.68 x 1.40 = 57%

2007 15% x 2.94 x 1.46 = 64%

Adapted from Apollo Group Income Statement Report, 2011, Factiva, 2011.

With the breakdown of showing how the group’s ROE has changed over the years, it is

easy to see why Apollo has been losing financial steam. The firm has been generating less

income for each dollar sold, become severely less efficient, while becoming more leveraged. The

results do not come as a surprise since it was already shown that Apollo doubled its sales in five

years while in the same period assets grew by 250%. Growing in such a scale does not come

without drawbacks; leading a company that size is a lot more complicated, not to mention that

managing the different mergers and diseconomies of scale come into effect.

The author believes that Apollo should slow down and tune its operations before

continuing its expansion. And the expansion should be done, if possible, with external debt and

not with so much internal equity. To calculate how much the cost capital would be for Apollo, a

weighted average cost of capital analysis is done next.

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Running head: Apollo Group Inc. Financial Analysis

Weighted Average Cost of Capital

Several calculations and assumptions were made in order to obtain the weighted average

cost of capital (WACC) for Apollo. The suppositions were based on Apollo Group being part of

the NASDAQ-100 index and the S&P 500. This means that the group is a strong and stable

company. Thus, one would expect that Apollo would be able to have access to cheaper capital.

This assumption is confirmed by looking at the betas calculated from Value Line (0.60) and from

Factiva (0.38) (Dalavagas, 2011; Apolo Group Inc., 2011c). These companies believe that

Apollo has less risk than the market beta of 1.

For the first component of the WACC, the cost of retained earnings, the Capital Asset

Pricing Model was used. The risk free rate of return was taken from the rate of the three month

U.S. Treasury Bonds while the risk premium on the market was taken from the quarter to date

yield on the S&P 500. The beta was taken from an average of Value Line’s and Factiva’s betas.

To calculate the before-tax cost of debt, the debt cost was taken from Moody's seasoned

Aaa corporate bond yields graph. The latest yield was used. The company’s tax rate was

calculated from Apollo’s income statement using the income before tax and the total income tax.

The cost of preferred stock was not calculated, since there is none at Apollo. No

dividends have ever been distributed. The weights of debt and common equity were obtained

from the balance sheet. All these calculations are shown in Table 6.

Table 6. Weighted Average Cost Of Capital

Weight % Debt Cost Cost of

Retained

Earnings

Preferred $ - 0% Tax Rate 44.09% Krf 2.00%

Debt $ 374,055 23.17% Debt Rate 3.90% Km 10.48%

Equity $ 1,240,364 76.83% 1-Tax Rate 55.91% b 0.49

Total $ 1,614,419 1 Ks 6.16%

Weighted Average Cost of Capital

Apollo 20

Running head: Apollo Group Inc. Financial Analysis

WACC =

WdKd(1-t) +

WpKp +

WsKs

6.66% 0.51% 0% 6.16%

Adapted from Apollo Group Income Statement Report, 2011, Factiva, 2011; Apollo Group Inc.,

Value Line, 2011; Daily Treasury Yield Curve Rates, 2011, U.S. Department Of Treasury, 2011;

Moody's Seasoned Aaa Corporate Bond Yields, Federal Reserve Bank of St. Louis, 2011;

Performance Data, S&P 500, 2011.

The WACC for Apollo is 4.66% higher than the risk free market of 2%. This is a

significant higher cost of debt than the risk free market rate. Another situation to note is that the

cost of retained earnings is also much higher than that of debt. Apollo should utilize more debt

now that rates are record low. Yet the author believes that this analysis has many short comings

since the economy is not stable at this moment. The yields from the S&P 500 average market

return have varied wildly this year, e.g., the month to date rate is -.21%, quarter to date is

10.48%, and the year to date is 0.87% (Standard &Poor’s 500, 2011). All else constant, varying

this variable would change the WACC result from 1.4% to the current 6.7%. The same situation

arises with the three month T-bonds; the rate has varied from 0.16 to 0.01 this year alone (U.S.

Department of the Treasury, 2011).

Overall Evaluation

The future looks promising for Apollo Group Inc. The company is profiting from the ever

growing high school retention rate and the nation’s current unemployment rate. Furthermore, it

does not have to compete for government funds in this age of cutbacks, like its non-for-profit

competitors. Also, for-profits are becoming more and more recognized as quality institutions,

like Apollo’s own University College of Professional Studies in England, which just recently

received recognition as a university college (Culbert, 2011a). As for-profits start being

Apollo 21

Running head: Apollo Group Inc. Financial Analysis

recognized as quality institutions, their demand will multiply. As demand grows, graduates

become more common; causing the job market to accept these degrees more readily.

Also, the new spur of government scrutiny, might become a blessing for a giant like

Apollo. Under the new Gainful Employment Act, about 5% of for-profits will lose their

accreditation, which could booster Apollo’s market share (Korn, 2011). Yet Apollo must review

their growth strategy as it is affecting its performance. It is become less profitable, less efficient,

and equity is growing too much.

Investors see this, and if Apollo is not careful, they will make sure to reprimand the

group. To avoid this pitfall, Apollo must focus its resources to improve the image of its

University of Phoenix. It must raise the quality of the university and its profitability, because in

this industry with many brands to choose from, name recognition is very important. This is

especially important now that for-profits are in the public eye.

Slowing its growth and freeing resources to improve the University of Phoenix’s quality

is one way to achieve this goal. This is very important because non-for-profits are now starting to

compete more and more in the online segment, previously a segment dominated by for-profits.

All in all, the financial analysis in this paper shows that Apollo is a promising company. And if

Apollo can manage its growth strategy, it can become the absolute for-profit school in the U.S.

market.

Apollo 22

Running head: Apollo Group Inc. Financial Analysis

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