Liquidity and Capital Structure of Apple Company

Will Apple Company be able to meet its obligations as they become due?

In order to answer the question we will look at some financial ratios (see Appendix A) of Apple Company. Apple’s current ratio of 1.50 indicates that Apple has more than a sufficient amount of current assets to cover its short term debt obligations. A more severe liquidity test, via quick ratio, that excludes inventory as it is considered a less liquid current asset, shows that the company has 48% more liquid current assets than short term liabilities. The firm’s days sales outstanding (DSO) of 25.14, shows that, on average, the company collects its outstanding receivables within 25 days (less than a month), which is quite efficient. A high inventory turnover ratio of 112.12 indicates that Apple sold and replaced its inventory 112 times in 1012. By dividing 360 days by the ratio (360/112.12=3.21) we see that the firm turns over its entire inventory every 4 days. It is favorable for a consumer electronics business to have high inventory turnover rates “because the cost of holding on to goods in hypercompetitive, fast-evolving areas can be unacceptably high” (Vijayan, 2001, p.1). Total liabilities to total assets ratio shows that 32.9% of company’s assets are financed by debt, and that there is more than plenty amount of assets to cover companies total debt obligations. All the financial ratios indicate that company has an outstanding short term and long term liquidity and the company will be able to meet its obligations.

How does the firm’s liquidity compare Google?

Google has 4.22 current and 4.18 quick ratios, showing that company has significantly higher liquidity than Apple. Quick ratio indicates that the high ratio is not due to big amounts of inventory held. Highly liquid, assets such as, marketable securities and cash take up 55.10% and 24.45% respectively, of the total current assets (Google, 2013). Google is almost 3 times more liquid than Apple.

Recommendations

Even though Apple has shown a lower liquidity than Google, its current ratio of 1.5 is considered acceptable (Value Based Management, 2013). According to other ratios discussed Apple is doing exceptionally well, outperforming Google in most components. The only recommendation for Apple would be to analyze their high stock turnover rate, as very high turnover might be causing a loss of sales because of stock shortage.

Google’s quick ratio of more than 4 is unnecessarily high (considering 1.5 is adequate), implying that current assets could be managed better. Google should consider utilizing some its liquid assets, such as cash and marketable securities, by investing in company’s long term growth and profitability. Google should improve their DSO, 69.80 compared to Apple’s 25.14, and increase their inventory turnover ratio, 40.86 compared to Apple’s 112.12, in order to catch up with its main competition.

Would you loan money to Apple short-term? Would you loan money to Apple long-term?

As discussed previously, Apple has an outstanding financial liquidity, shown by its liquidity ratios and its ability to quickly turn current asset (inventory and account receivables) into cash. Thus I would loan to Apple short-term, considering company’s low liquidity risk. Apple’s 32.9% of total assets are financed by debt, thus the company has plenty more borrowing capacity. Apple has great profitability indicators – 35.3% return on equity, 23.7% return on assets and 26.67% profit margin. Due to these factors it is highly unlikely that Apple will face bankruptcy, any time soon, thus I would loan to Apple long-term as well.

Recommending to buy, sell, or hold the stock of Apple Company

Chart in Appendix B shows that, since the year 2009, apple has been constantly outperforming, while growing at a faster rate, the S&P Computer Hardware, S&P 500 and Dow Jones US Technology. “No other technology company has ever carried as much weight as Apple currently does in the global equity markets: it accounts for 4.8% of the S&P 500, 3.7% of America’s stock market and 1.3% of the global equity market” (Economist 2012). According to Goldman (2012), Apple is one of the most profitably companies globally. Goldman writes that, even though the company had a high share price growth of 64% in 2012, Apple Inc. could be undervalued.

I would recommend buying the stock of Apple Company based on all analysis done above. Apple seems to be outperforming all companies in its technological industry, refer to the capitalization chart (Economist, 2012). The company one of the most profitable company in the world, and has low bankruptcy risk. Apple would be a safe investment thus it will not bring abnormal returns.