First we will take a close look at Apple’s current assets and current liabilities, and see how they have changed throughout the 2011-2012 year period. Then the impact on company’s profitability of a 10% estimation error in one of the current assets and current liabilities category will be analysed. Risks attached to current assets and current liabilities categories will be identified. Then company’s current ratio will be analysed. Finally company’s plans that may affect current assets and liabilities will be identified.
Apple’s Current Assets and Current Liabilities
In the year 2011, most proportion of Apple’s total current assets was in cash and cash equivalents and short-term marketable securities, 21.82% and 35.87% respectively (see Appendix B). In 2012, same current assets had the major share of the total current assets as well as accounts receivables: 18.64%, 31.89% and 18.98% respectively. Cash and short-term marketable securities can be easily and quickly turned to cash, thus in both years more than half of Company’s current assets consisted of the most liquid assets. Most of the short-term marketable securities value is attributed to corporate securities, US Treasury securities and US Agency securities (see Appendix C). Apple Inc. has a total of 3 current liabilities: accounts payable, accrued expenses and deferred revenue. In 2011 total current liabilities were proportioned: 52.31%, 33.06%, 14.63% respectively; while in 2012: 54.94%, 29.61%, 15.45% respectively. To see the breakdown of the accrued expenses please refer to Appendix D. In both years more than half of current liabilities consisted of accounts payable. Company’s inventories are recorded at the lower cost, calculated using the firs-in, first-out (FIFO) method or market value (Apple, 2012). Inventories consist mostly of components and finished goods. In both years inventories took up less than 2% of the total current assets. According to Victor (2012) the low inventory value has a valid reason: Tim Cook the inventory manager led the distribution with an “inventory is evil” view. Apple’s inventory depreciates very quickly, Cook estimates around 1-2% loss in inventory value each week assuming normal conditions (Victor, 2012). “As of September 29, 2012, the company had a total of $4.2 billion of inventory component prepayments outstanding, of which $1.2 billion are classified as other current assets and $3.0 billion are classified as other assets in the Consolidated Balance Sheets. The Company had a total of $2.3 billion of inventory component prepayments outstanding as of September 24, 2011” (Apple, 2012, p.69).
Over the 2011financial year total current assets increased by 28.15% while total current liabilities increased by 37.80% (see Appendix B). A higher growth rate of current liabilities compared to current assets is not good, if it continues at the same rate, current liabilities will exceed current assets and the firm might face liquidity problems. The highest increase over the year was in accounts receivables which had more than doubled.
The Effect on Profit of a 10% Error in Estimation of any one of the Major Current Asset and Current Liabilities Categories
In 2012 Apple had a 40.55% return on capital employed (ROCE), see Appendix E. We can see from Appendix A, that, in 2012, one of the major current asset and current liability category is the short-term marketable securities $18,383 million and the accounts payable $21,175 million respectively. In the case of an estimation error of these categories corrections would have to be made: decreasing the amount in case of an overestimation and increasing when underestimation occurs (see Appendix F for the calculations). If both are decreased by 10% to correct the error, accounts receivable will be decreased to a larger extent due to higher value causing a denominator increase in the ROCE calculation, the ROCE will decrease by 0.08% to 40.47%. If both categories are increased by 10%, accounts receivable will increase to a larger extent and ROCE will increase by 0.08% to 40.63%. If short-term marketable securities will be increased by 10% and the accounts payable will be decreased by 10% the profitability will decrease by 1.14% to 39.41%, more severely than in the first case as both changes increase the denominator in the formula. If vice versa happens, the profitability will increase by 1.20% to 41.75%, a higher increase compared to second case as both corrections decrease the denominator in the calculation.
Risks Attached to Each Current Liability and Current Asset Categories
Cash and cash equivalents risk losing value through inflation. Short-term marketable securities like US securities may fall in value if the US credit rating is downgraded (which was a big issue after the economic crisis in 2008). Account receivables and Vendor receivables have the risk of becoming uncollectable if the owing party goes bankrupt for example. As mentioned previously high tech goods loos value fast, which is the risk of holding inventory. Accrued bring the risk of a liquidity crisis if the company does not have enough cash to pay. The same is for account payable; however there is another risk of spoiling the relationship with suppliers.
Apple’s Current Ratio Analysis
In 2012 Apple had a 1.50 current ratio. This indicates that the company has 50% more than enough current assets to set off all its current liabilities. Considering that more than half of the components of the current assets are highly liquid assets, and a very small amount of stock, it is safe to say that quick ratio will not be far of from the current ratio. This indicates that Company is unlikely to have short term liquidity problems. Even though the current ratio is good, it has fallen compared to 1.61 in 2011, if the tendency continues Apple’s liquidity risks may increase.
Apple’s Future Intentions that May Impact its Current Assets and Current Liabilities
According to Apple (2012) some components are supplied by single or limited sources. This puts Apple at risk of component supply shortage and price increase, which, in turn, may affect the inventory (consists of components and finished goods) volume and value in the future. The company is considering selling some of its marketable securities before their actual maturities for strategic reasons. Such operations may impact the short-term market securities of the company.
Apple has great liquidity however it has decreased over the 2011 financial year. The company manages inventory under the “inventory is evil” view. Inventory is kept low by recording most of it as prepayments in the other current assets category. Company’s future plans may impact their inventory and short-term marketable securities.