accounting postar accountceli
Post on 27-Jan-2016
224 Views
Preview:
DESCRIPTION
TRANSCRIPT
IMB 2015/2016
Accounting for Managers
Financial analysis of Apple and Microsoft
Course Coordinators: Prof. Dr. Samo Javornik Students: Blaž Babnik
Prof. Dr. Metka Tekavčič Milica Bogavac
Sanja Končan
Ljubljana, December 2015
Contents
1. Introduction.................................................................................................................................3
2. Description of companies and their business model..................................................................3
2.1 Apple...........................................................................................................................................3
2.2 Microsoft....................................................................................................................................4
2.3 Differences in business models............................................................................................5
3. Analysis and description of the industry....................................................................................6
4. Financial statement analysis.......................................................................................................7
4.1 Trends and structure in Apple Balance Sheet.........................................................................8
4.2 Trends and structure in Microsoft Balance Sheet...................................................................9
4.3 Ratio analysis...........................................................................................................................10
4.3.1 Profitability.......................................................................................................................10
4.3.2 Liquidity............................................................................................................................10
4.3.3 Solvency.............................................................................................................................11
4.3.4 Activity...............................................................................................................................11
5. Scorecard table..........................................................................................................................12
6. Conclusion..................................................................................................................................13
7. References and sources:............................................................................................................14
8. Appendix:...................................................................................................................................15
2
1. Introduction
2. Description of companies and their business model
2.1 Apple
Apple is the world's largest information technology company by revenue,[7] the world's
largest technology company by total assets, and the world's third-largest mobile phone
manufacturer. On November 25, 2014, in addition to being the largest publicly traded
corporation in the world by market capitalization, Apple became the first U.S. company to be
valued at over US$700 billion. The company employs 115,000 permanent full-time
employees as of July 2015 and maintains 453 retail stores in sixteen countries as of March
2015; it operates the online Apple Store and iTunes Store, the latter of which is the world's
largest music retailer.
Apple has always been and continues to be a manufacturer of computers and electronics with
a focus on complete hardware and software integration. Prior to 1996, the company focused
almost exclusively on personal computers in the Macintosh line, with the occasional foray
into innovative products like the Newton. When Steve Jobs rejoined the company in 1996,
3
that mission evolved beyond personal computing into products like the iPod, iPhone, and
iPad.
Apple's longest running line of business is that of computer hardware and software. The
company has always believed that hardware is only as useful as its software, and the
importance of full software and hardware integration cannot be underestimated. This
dedication to owning the full integrated product has allowed Apple to focus on quality and
usability, at the cost of market share with its Mac line of products.
There are two basic business models in the world. The first is cheap, low-quality, high-
volume products. You don't make much profit per unit, but you sell of a ton of them. The
second is expensive, high-quality (luxury), low-volume products. You don't sell many units,
but you make a lot of profit per unit. It's really hard to split the difference, selling high-
volume, high-quality products. If you spend 1% more on quality, your customers can't tell the
difference (without more research on their part), so you'll lose 10% of your customers who
won't accept the higher price. Or, you are selling to the luxury market, lowering price to sell
more units means lowering quality standards, destroying your brand. Apple is another
company that succeeds at this, selling higher quality products at enormous volumes, at
mainstream prices.
As quoted in Apple's Form 10K, "The Company’s fiscal year is the 52 or 53-week period that
ends on the last Saturday of September". This is mainly because the company wants to end its
year on a Saturday because of higher sales on the weekend.
Apple is positioned well for the future, and it's not a company that's willing to settle for
current success. Unafraid of cannibalization, the company continues to churn out iPhones that
make the iPod look like a hobby, as well as the iPad Mini that unashamedly steals market
share from its big brother. Notoriously secret, the company reveals little about the product
pipeline, but its believed that Steve Jobs left a product roadmap for more than a decade.
2.2 Microsoft
Microsoft Corporation (commonly referred to as Microsoft) is an American multinational
technology company headquartered in Redmond, Washington, that develops, manufactures,
licenses, supports and sells computer software, consumer electronics and personal
computers and services. Its best known software products are the Microsoft Windows line
of operating systems, Microsoft Office office suite, and Internet Explorerand Edge web
browsers. Its flagship hardware products are the Xbox game consoles and the Microsoft
4
Surface tablet lineup. It is the world's largest software maker by revenue, and one of
the world's most valuable companies.
Microsoft was founded by Paul Allen and Bill Gates on April 4, 1975, to develop and
sell BASIC interpreters forAltair 8800. It rose to dominate the personal computer operating
system market with MS-DOS in the mid-1980s, followed by Microsoft Windows. For years,
Microsoft dominated the computer industry with its Windows software; Apple was an
afterthought for more than a generation of operating products. Before Google Web browsing
began to dominate the market, Microsoft gave away Internet Explorer for free and drove
Netscape out of business.
The Microsoft revenue model historically relied on just a few key strengths. The first, and
most important, is the licensing fees charged for use of the Windows operating system and
the Microsoft Office suite. After a few years of increasing irrelevance in the race against
Google and Apple, Microsoft unveiled a new vision in April 2014, instantly shifting focus to
make Windows software more compatible with competitor products, such as the iPad.
Microsoft also has a few successful products, highlighted by the Microsoft Surface and
Surface Pro, that battle Apple devices.
Moving forward, however, Microsoft realizes it cannot simply stick with the same old
method and continue to compete with Apple and Google. Paid software is a more difficult
sell in an age of low-cost alternatives. Additionally, tablets and phones are replacing PCs. A
newer Microsoft business model has been telegraphed by CEO Satya Nadella, one that
emphasizes product integration and a "freemium" software package.
2.3 Differences in business models
5
3. Analysis and description of the industry
Information technology is broader industry in which both companies, Apple and Microsoft
are operating. More specifically, Apple belongs to Computer Manufacturing industry whereas
Microsoft is classified as Computer Software & Services Industry.
Computer Software & Services Industry includes companies which offer a wide range of
products and services, personal computer operating systems, network security applications to
payroll processing services and information technology consulting and outsourcing services.
Companies operating in Computer manufactoring industry manufacture and assemble
personal computers (PCs), laptops and servers.
Competition is a common theme in information technology, also with rivalries between
Apple and Microsoft. Entry into this industry is common, however it is harder to survive
within. Competitive nature of this industry requires the newcomer to be able to sustain a
technological and product marketing edge over its larger rivals. And if suceeded, at the end
these compenies most likely become acquisition targets to Microsoft, Apple and other high
powers as they cannot compete against them.
Large part of this industry's cost structure represent sales and marketing expenses.
Expenditures on research and development vary across the industry, although they reach
enormously levels especially in a software developer's cost structure. Apple and Microsoft
have global operations, that they expose to inconsistencies of foreign exchange. Nevertheless,
the group's margins are wide; and good returns on invested capital suggest effective use of
funds.
Foundation that was formed with increased data processing, has brought greater efficiency
and productivity to nearly every kind of business. Information technology, of which software
and services is an integral part, and computers and servers as external part, have become
inseparable from a business's daily operations. It plays exceptionally important role for the
customer.
6
One would think that information technology will never become fully mature because of its
high tech industry. However, the results show the opposite, while there seems to have been a
shift in the balance of market power from the industry to its end markets. This end markets
are experiencing increasing competition and pressure on profitability. Many systems are not
used to their fullest, therefore this industry’s customers are looking for ways for more
efficient usage of these already developed systems. One of the industry’s responses for
maneuvering has been a concept of virtual servers or virtual computing, which provides more
effective way in using system capacities by allocating computing sources. Another larger
opportunity is to move to cloud computing wherein computing resources are not directly
owned and software and services are purchased-by contract or metered usage-and made
available via Internet technology. (Industry Overview: Computer Software and Services)
Computer manufacturing industry is reporting a decline as there is presented market
saturation with the products. Consumer markets in United States, Japan and Western Europe
are approaching to lower demand.
Recent trend has showing how domestic manufacturing activity of Apple has weakened in
US and Europe, as a result of offshoring. Industry operators have continued to relocate
production activity overseas and take advantage of lower labor and production costs in order
to compete with foreign manufacturers. However, while general demand for computers has
grown in between, intense competition due to product homogeneity has led to falling prices
and smaller profit margins.
In recent years has aggressive competition transformed computer manufacturing into an
increasingly standardized industry with limiting revenue potential. (Computer
Manufacturing: Market Research Report)
4. Financial statement analysis
7
We will describe trallalala
4.1 Trends and structure in Apple Balance Sheet
For the last decade investing in Apple appeared to be a good business decision. On 27 th of
Sept, 2014 Balance Sheet of Apple company revealed for 231 billion and 839 million US
worth assets, total liabilities of 120.292 billion and the level of total shareholders was
111.547 billion US$. The main strength of Apple is its liquidity. They dispose with 13.8
billion US cash and cash equivalents and also with 11.23 billion US$ in marketable securities
that can be easily converted into cash. Thus, the company dispose with significant amount of
cash. Most of this money is kept outside the US. The Apple Company would have to pay
additional US taxes if it decides to enter the country. This is the reason why the company
decided rather to borrow money to implement its share buyback1 program.
Accounts receivable reached a value of 17.4 billion US $. This is the amount that other
businesses that cooperate with Apple owe the company: such as mobile phone operators,
retailers, and state and educational institutions, which are also its major customers. The high
level of accounts receivable may pose risk in business as it slows down cash flow cycle.
However, within Apple this should not be the case because the whole amount of accounts
receivable is evenly distributed, meaning, the two biggest debtors account for not more than
10% of total accounts receivable.
Another important element of Apple's assets is the 130.16 billion US$ in the long-term
marketable securities. This amount includes approximately 79 billion US$ in corporate
securities and about $ 22 billion in US treasuries. These investments pose risk of rising
interest rates. However, these investments are taken at fixed interest rates. Company also has
20 billion US$ in properties, plants, and equipment category. This represents the value of
property and equipment that Apple uses for a purpose of their depreciation. Apple’s goodwill
was estimated for 4.6 billion US$, which represents the highest goodwill of any company in
the world.
1 Share Buyback is a program of repurchasing of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market
8
Apple’s current liabilities amount for 63 billion US$ and include for 30 billion US$ of
accounts payable (the amount the company owes to its suppliers). Also, it issues more than 6
billion US$ of commercial paper. Commercial paper was used in order to finance activities
such as share buy-backs that are committed, and to pay dividends.
The company has long-term debt that exceeds 28 billion US$. Long –term debt is divided by
fixed-rate debt (debt issued by fixed interest rate) and floating-rate debt (where interest rates
may rise, less secure). Other non-current liabilities of the company, KOJE NECE DOSPETI
JOS NEKO VREME NA NAPLATU, have a value of about 25 billion US$.
Apples shareholder equity position has a value of about 23 billion US$ and represents the
equity base. However, there has been generated 87 billion US$ dollars in earnings. In June
2014, the company conducted the stock split2 in a manner that for each share received seven
new shares, ratio 1-7.
4.2 Trends and structure in Microsoft Balance Sheet
At the end of 2014 Microsoft had 8.7 billion US$ in cash, and this amount isn’t just enough
to cover short-term liabilities during the 4 years, it represents also increasing of 128%
comparing to previous year.
Accounts receivable of Microsoft are 52 days and Apple only 17 days. Both of the companies
has the value of accounts receivable and inventory around 7.5. One more significant element
of Microsoft Balance Sheet is its goodwill (20 billions).
Microsoft has short-term debt around 2 billion US dollar, and Apple 6.4. This debt does not
represent needs for these companies, it is actually consequence because of the fact that they
have opportunity to get loans under really good conditions (low interest rates), and that will
lead to cheap capital and expansion of business. Microsoft has around 21 billion US dollars in
long-term debt, and Apple has a little bit less than 17 billion. This will give long-term-debt to
total assets ratio 12% for Microsoft and 8 % for Apple.
Microsoft is extremely stable company which has high amount of equity (90 billions) and it
represents save long-term investment.
2 A corporate action in which a company divides its existing shares into multiple shares
9
Ovdje jos nesto dodati
4.3 Ratio analysis
Napisati nesto o ratio analysis I koje smo koristili ,
4.3.1 Profitability
The value of gross profit margin (38.59%) of Apple is lower comparing to leading
competitors in the industry (55-65%), while values for operating profit and net margin profit
are at the top of the industry. Value of return on equity and return on assets is significantly
higher than in competitor’s case. The value of return on equity of Microsoft is higher
comparing to the most important competitors but still lower comparing to Apple. The value
of gross profit margin is on the top of the industry (64.7%), what tells us about high
profitability of this company.
Gross profitmargin=Revenue−Cost of Goods SoldRevenue
Returnon Equity= Net Income
Shareholde r ' s Equity
4.3.2 Liquidity
Liquidity ratio provides us information of how easily a company can pay off to all creditors if
needed. This ratio is calculated by dividing current assets and current liabilities. In the case of
Apple, this ratio has a value of healthy 1.08, which shows that the company has enough
current assets available to them to cover all current liabilities. For Apple relatively low value
10
of current ratio is not the consequence of bad financial situation, it is actually result of
specific way of managing with its equity or capital. The same case is with the value of cash
ratio (0.4) so we for sure can say that the Apple is one of the companies with the biggest
capital reserve.
T
If we look at the current ratio Microsoft has advantage comparing to Apple, because it’s
average value is 2,5, while in the case of Apple is 1,1. At big and powerful companies like
this two, the best indicator is net working capital which amounts 5 billion in Apple, and 68
billion US dollar in Microsoft. The value of current ratio (2.5) is on the same level of the
leaders in this industry and it shows the fact that Microsoft is in really good position because
of liquidity. Cash ratio is also really high which confirmation of this extremely liquid
company is (1.88).
Current Ratio= Current AssetsCurrent Liabilities
Cash Ratio=Cash Equivalents+CashCurrent Liabilities
4.3.3 Solvency
The value of debt to equity ratio is on the lower level comparing to competitions for
Microsoft is 0.25 and for Apple 0.32. Because of that it allows them more space for
borrowing if trallala
Interest coverage is on really good level so we can conclude that companies are not
opterecenja costs of paying interest rate.
Debt ¿ Equity Ratio= Total Liabilities
Shareholde r ' s Equity
11
Interest Coverage Ratio= EBITInterest Expense
4.3.4 Activity
The value of inventory turnover (57.94) is convincingly really high, which indicates that
Apple manages their inventories really good comparing to Microsoft which inventory
turnover amounts 11.72.
Asset turnover is 0.83 comparing to Microsoft 0.55.
Inventory Turnover= SalesAverage Inventory
Asset Turnover= SalesTotal Assets
5. Scorecard table
Grade from 1 (bad) to 5 (good)
Apple MicrosoftIncome Statement 5 5Balance Sheet 5 5Cash Flow Statement 5 4Total 15 14 ProfitabilityGross profit margin 4 5Return on equity 5 4Total 9 9
LiquidityCurrent ratio 3 4Cash ratio 3 4Total 6 8 SolvencyDebt to equity 4 5Interest coverage 5 3
12
Total 9 8 ActivityInventory turnover 5 3Asset turnover 5 4 Total 49 46Maximum 55 55Average 4,45 4,18
6. Conclusion
There are few reasons for buying Apple stocks like Recent Revenue Growth (14,3% on
average annual during previous 3 years), Recent Net Margins ( the average value during pass
3 years -21,8%), long term stability and profitability, attractive ROIC, ROE (Apple has
Return on Invested Capital of 31, 8% and ROE of 43, 8%). On the other hand there are
reasons for not buying: risky PS, relatively low Dividend Yield of 1,7 % ( Apple didn’t give
dividends from 1995until 2012).
During the analyzing Apple we can conclude that beside the fact that is one of the biggest
innovators on the market, it is extremely good for buying tech stocks, like one of the biggest
companies because of market capitalization.
Reasons for buying Microsoft are recent Operating Margin ( really stable, on the level of 28-
28,5 %), strong Operating Cash Flows ( 8,6 billion US dollars, which is 1,9 times higher than
Net Income), attractive ROIC, ROE and FCF ( ROIC=33,9%, ROE=14,3% , FCF( Free Cash
Flow Margin)=35,5%. Reasons for not buying are: recent Revenue Growth (7,8 % on average
annual during pass 3 year, but it was decreased for 12,2 % in last quartile this year), risky
PE,PS, purchasing of Nokia.
Based on presented data and research we can conclude that both of the companies are in
extremely good financial condition and in the future we cannot expect some events which
will have such a bad influence. Still we give a slightly advantage to Apple, first of all because
13
of the way they manage money and assets and because financial position of Microsoft is
shaken because of purchase of Nokia.
7. References and sources:
http://www.investopedia.com/articles/markets/111015/apple-vs-microsoft-vs-google-how-
their-business-models-compare.asp
http://www.digitalbusinessmodelguru.com/2013/02/analysis-of-apple-inc-business-
model.html
https://en.wikipedia.org/wiki/Microsoft
https://en.wikipedia.org/wiki/Apple
http://www.ibisworld.com/industry/default.aspx?indid=740
https://www.microsoft.com/investor/reports/ar13/financial-review/discussion-analysis/
index.html
http://marketrealist.com/2014/07/must-know-enterprise-resource-planning/
http://www.valueline.com/Stocks/Industries/
Industry_Overview__Computer_Software_and_Services.aspx#.VmNxtdLqiko
14
8. Appendix:
8.1 Apple financial statement
8.2 Microsoft financial statement
15
top related