Understanding Financial Reports

The organization that has been selected for the financial report analysis is Apple, Inc.. Apple’s closes competitor is Microsoft. Microsoft and Apple are both publicly held companies. Apple’s most recent financials can be found at the following link: http://investor.apple.com/financials.cfm. The Apple homepage is as follows: http://www.apple.com/. The third source of financial information, per the assignment, can be found at Google Finance - https://www.google.com/finance?q=apple&ei=19ZKUvjJBIP-qAGH4gE. Apple’s cash flow and overall cash position are a source of competitive advantage over Microsoft.

In its business analysis, Apple has shown tremendous gains in cash flow (Table 1). From 2010 through 2011, Apple doubled its cash flow value, going from $18 billion to $36 billion, in just a year. That is 100% gain in cash flow activity. From 2011 through 2012, Apple again raised its cash flow by over $13 billion, going from $37.5 billion to $50.8 billion.

Return on assets calculations show the after tax rate of return being earned by the sum of the company’s assets. The goal of the measurement is to show how well the company is doing leveraging assets to obtain returns. Return on assets values fluctuate with the financial conditions. During 2012, Apple showed a peak return on asset value of 31.78 in March of 2012. The lowest return on asset value during 2012 was 25.31 in December of 2012 (Apple, 2013). Apple’s profit margin activity reflects the return on assets performance during the year of 2012. Apple showed a peak profit margin in March of 2012 at 29.66%. The lowest profit margin value during 2012 was during the fourth quarter of 2012 at 22.86%. Apple’s asset utilization rate also peaked in early 2012 and declined throughout the year. The Company opened the year with an asset utilization rate of 1.176. The rate declined throughout 2012 and bottomed out at 1.050. Conversely, the free cash flow at Apple rose gradually over the course of 2012. Free cash flow was at its lowest value in January at $59.86 billion and reached a peak during the fourth quarter of $89.74 billion. Apple lists holding over $121 billion in cash during 2012, up more than 100% from a cash holding position of just over $51 billion in 2010. In plain English, that’s a ton of cash.

Microsoft is one of Apple’s biggest competitors. Microsoft’s return on assets declined throughout the fiscal year 2012. The Company started the year with 22.55% return on assets and that number declined to 13.52% by the close of the year. Microsoft showed tremendous volatility with their profit margin during 2012. The Company experienced a huge dip in the middle of the year and profits went as low as -2.7%. Microsoft opened 2012 with a profit margin rate of 31% and then closed the year with a profit margin of 27%. Microsoft’s asset utilization rate gradually declined over the course of 2012. Microsoft started the year with a rate of .6687 and ended the fiscal year with a rate of .6056. The free cash flow activity at Microsoft showed unusual performance during 2012. The year started with $31 billion in free cash with a sharp decline during the second quarter to a level of $7 billion. This leveled off and the Company closed the year with $7.7 billion in free cash flow (Microsoft, 2013).

Per their quarterly 10-K, Apple is experiencing a financial competitive advantage over Microsoft. The cash flow data leaves me feeling like there really isn’t much of a competition. To put it simply, Apple is sitting on a huge pile of cash that keeps growing. Apple is likely holding cash because executives don’t want to pay a lot in taxes. They may be waiting until the political environment shifts to secure more of their cash. Until that day, I expect the company to keep the majority of its cash holding in offshore accounts. After all, Apple is a multinational company and there isn’t exactly anything illegal about hoarding cash overseas. Apple’s cash flow versus Microsoft is a beating. While both companies carry a ton of cash on the balance sheet, Apple’s cash holding is double that of Microsoft (Table 1, 2)

(Table 1 & 2 omitted for preview. Available via download)

References

Apple, Inc. (2013). “Homepage.” Retrieved from www.apple.com

Apple, Inc. (2013). “Investor Relations.” Financial History. Retrieved from http://investor.apple.com/financials.cfm

Google Finance. (2013). “Apple”. Financial Information. Retrieved fromhttps://www.google.com/finance?q=apple

Microsoft. (2013). Annual Report: Balance Sheet. Retrieved fromhttp://www.microsoft.com/investor/reports/ar12/financial-review/balance-sheets/index.html

Ycharts.com (2013). Microsoft. Retrieved from http://ycharts.com/companies/MSFT