Apple, Inc. Wesley Caproon Section 001

Executive Summary From every measurable perspective, Apple is strong. It outperforms its industry peers in almost every area and shows no sign of slowing growth. With the release of the iPhone 3G, now available in over fifty countries, Apple is poised to gain tremendous market share in the worldwide mobile phone market. While Apple’s customer base currently resides primarily in the United States, sales abroad continue to grow with increased international marketing and the presence of the company’s retail stores in eight countries on four continents.

Apple’s Official 10-K Report

Part A. Introduction

• Apple’s CEO is Steve Jobs • Apple is based in Cupertino, California • The most recent 10-K was filed for its fiscal year ending September 29, 2007.

Apple designs and sells personal computing, portable digital music and mobile communication devices. Apple engages in business all over the world, however, most of its net sales (approximately 60%) come from customers in the United States.

Part A. Audit Report • KPMG is Apple’s independent auditing agency. • The auditors stated that Apple maintained accurate financial records and verified the information contained in Apple’s 10-K filing as true.

Part A. Stock Market Information • Apple last traded at $97.07 • Apple has traded between $94.65 to $202.96 in the past 12 months. • Apple does not issue dividends. • This information was obtained 3-Oct-2008 • My opinion: Buy

Part B. Industry Situation and Company Plans The computer hardware industry is growing, despite current economic problems. The industry also shows great potential for strong long term growth. (http://thatweskid.com/SandP.pdf) Originally known as “Apple Computer,” Apple dropped the “Computer” from its name in 2007, showing its commitment to products for a digital lifestyle beyond desktop and laptop computers. Apple plans to produce at least 40 million iPhones this year, continuing to grow its share in the mobile phone market. (http://www.businessweek.com/print/technology/content/aug2008/ tc20080821_199140.htm) (http://search.ebscohost.com.ezproxy.sfcc.edu:2048/login.aspx?di rect=true&db=a9h&AN=23695006&site=ehost-live)

Part C. Income Statement • The income statement contained in Apple’s 10-K filing is most like a multi-step income statement. • Apple’s income increased well over 50% year over year. This strong growth stems from Apple’s decisions in product development and in growth of its retail stores.

2007

2006

Gross Profit

$ 8,154,000,000

$ 5,598,000,000

Income from Operations

$ 4,409,000,000

$ 2,453,000,000

Net income

$ 3,496,000,000

$ 1,989,000,000

Part C. Balance Sheet ``+ Stockholder’s Equity

Assets =

Liabilities

2007

$ 25,347,000,000

$ 10,815,000,000 + $ 14,532,000,000

2006

$ 17,205,000,000

$ 7,221,000,000 + $ 9,984,000,000

•Assets and Stockholder’s Equity increased the most. •This shows that ownership of the company rests mostly with the stockholders and not with creditors. •It also shows the company’s assets are growing more from capital obtained through increased ownership than from capital obtained through loans.

Part C. Statement of Cash Flows •Cash flows from operations are more than net income for the past two years. •The company is growing through investing activities. •The company’s primary source of financing is through issuance of common stock. •Cash has clearly increased over the past two years.

Part D. Accounting Policies • Significant accounting policies include: •Recognizing revenue when “persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable.” •Recording write downs for “inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value.” •Notes to the financial statements are headed: •Revenue Recognition •Allowance for Doubtful Accounts •Inventory Valuation and Inventory Purchase Commitments •Warranty Costs •Stock-Based Compensation •Income Taxes •Legal and Other Contingencies

Part E. Financial Analysis Liquidity Ratios 2007

2006

Working Capital

$ 12,657,000,000

$ 8,066,000,000

Current Ratio

2.36

2.25

Receivable turnover

16.62

17.99

Average days’ sales uncollected

21.96

20.29

Inventory turnover

51.47

63.07

Average days’ inventory 7.09 on hand

5.79

Apple is very liquid. It has amassed an even greater working capital year over year and has improved its current ratio. While receivable turnover and inventory turnover have decreased, these decreases are reasonable.

Part E. Financial Analysis Profitability Ratios 2007

2006

Profit margin

14.56%

10.29%

Asset turnover

1.13

1.35

Return on assets

16.43%

13.85%

Return on equity

71.91%

50.23%

Apple is very profitable. Its profit margin increased more than 4% year over year. Its return on equity rose dramatically by over 20% year over year. Even though asset turnover decreased, return on assets increased; showing Apple is increasing the efficiency of it’s assets.

Part E. Financial Analysis Solvency Ratio

Debt to Equity

2007

2006

74.42%

72.33%

Apple is very solvent. While its debt to equity ratio has increased slightly year over year, much of this stems from an increased number of leases for Apple’s retail stores causing an increase in liability. These stores have proven very successful and thus should prove well worth the increase in liability.

Part E. Financial Analysis Market Strength Ratios

Price/earnings per share

2007 (1-Oct-07)

2006 (29-Sep-06)

38.69

32.62

Shareholders continue to believe in Apple and their valuation of its success continues to rise. Shareholders are willing to pay almost forty dollars for a single dollar of earnings per share.