Abstract Apple is a company that has exploded from a personal computer orientated business to a consumer electronics juggernaut.

Over the past eight years, the company has seen major changes and major growth. The two largest changes the company has made are its image and its product line width. Apple has connected with the younger generation and successfully differentiated itself from its top competitors. While at the same time, the company has created innovative product lines that keep consumers coming back for more. Using key financial ratios, statistics, and current news articles, this report documents how Apple has accomplished its impressive turn around and makes a determination on whether or not Apple Inc. is a solid investment. Introduction Apple Inc. is a consumer electronics company that manufactures and markets personal computers, portable digital music players, and mobile communication devices. The company also produces various related products such as software, peripherals, and networking solutions. Apple incorporated in 1977 under the name Apple Computer Inc., but the company has recently dropped computer from its name to emphasize its evolution (Ricker). Apple has been able to completely redefine its less than glorious image from the 90s, and it has become one of the fastest growing companies of the new millennium. Apple was able to accomplish this turn around by utilizing hip and clever advertising campaigns. The advertising campaigns are responsible for the overwhelming success of Apples i product line, which ranges from software, to media players, and even cellular phones. Apples current CEO is Steve Jobs, who was also one of the companys original founders. Apple operates in the technology sector, and two of its largest competitors are Microsoft Corporation and Dell, Inc. The following report discusses in detail Apples financial position in comparison to its top competitors and the industry as a whole. The report also analyzes current moves Apple is making, and how those moves will affect Apples financial position. Analysis and Discussion I retrieved the data for this project from Standard and Poors Research Insight Compustat North American Database for the years 2003 to 2008. For the purpose of this analysis, any use or mention of industry average will pertain to Apple and Dell only, and any dollar amount statistic will be in millions. Also for the purpose of this analysis, any use or mention of the phrase most recent or most recently reported will

refer to the following months and years: Apple, September 2007; Dell, January 2008; and Microsoft, June 2007. Over the past three years, Apple has been an industry leader in terms of liquidity. Since 2005, Apple has maintained a current ratio over 2.2. I feel that a ratio over 2.0 is a comfortable position for any company. Apples current ratio as of 2007 was 2.36, which is notably better than the industry average of 1.55. In comparison, Microsofts current ratio was 1.69, and Dells current ratio was 1.07. By examining Apples quick ratio, I was able to further confirm the companys strong, liquid position. Over the last three years, Apple has maintained a quick ratio of 2.0 or higher. I would consider a quick ratio over 1.0 to mean a company is financially healthy, and the fact that Apple consistently holds a quick ratio over 2.0 in a technology sector is a strong indicator of the corporations wellbeing. Since 2007, Apple has tripled its current liabilities due to growth and new product development, but its quick ratio has not dropped below 2.0 due to the success of the new product lines. In addition to its strong, liquid position, Apple has remained efficient in the area of asset management. Apple has seen a rise in its operating cycle (days) over the past three years, and I believe this is due to its rapid growth and new product lines. Even with the rise, the companys 2007 operating cycle of 59 days was only one day longer than the industry average of 58 days. For the previous two years, Apple had beaten the industry average by a measure of five days each year. I think Apple will be able to overcome this rise with additional experience manufacturing its new products. Apple has also seen a decline in inventory turnover over the course of the last three years. In 2007, Apple reported an inventory turnover ratio of 50.55, which was a decline of 22.67 from 2005s mark. Both Microsoft and Dell have experienced this trend as well, with only Microsoft showing a slight rebound in 2007. I think this trend is the result of the current economic predicament. During the previous three years, Apple has enjoyed steady growth of its net profit margin. Beginning in 2005, Apples profit margin has risen at an impressive rate. In 2005, Apple reported a net profit margin of 9.58. This margin was nearly triple that of the previous year. As of 2007, Apples net profit margin was 14.56. In each of the last two years, Apple has beaten the industry average for net profit margin by at least 200%. Apple has dominated Dell in this category; Dell has only managed an average net profit margin of 5.24 over its last three reported years. Microsoft, on the other hand, is the clear front-runner

with an average net profit margin of 28.92 over the same three years. While Microsoft is the leader in net profit margin, its profit margin has declined in each of those years, but Apples numbers have consistently increased. I was able to find further evidence of Apples increasing profitability by examining the companys return on average assets. Following a large spike of growth in 2005, Apples return on average assets has increased each year. As of 2007 the company reported a return on average assets of 16.43, which thumped the industry average of 10.78. By contrast, Dell reported a return on average assets of 11.08; however, Apple still finds itself trailing Microsoft. Microsoft reported a return on average assets of 21.19. I trust that Apples growth over the last three years will continue due to its hip marketing strategy and innovative products, and I believe this growth will allow Apple to reach and surpass Microsoft over the next five to ten years. In my opinion, leverage is an excellent indicator of how viable a company is. Apples debt to total equity ratio has remained at 0.00 for the past three years. In comparison, the industry average over that period has been .09, and Dell reported an average debt to total equity of .16 during the same period. This low ratio demonstrates Apples low risk of filing Bankruptcy. Apples lack of long-term debt provides the company with the means to grow even further by using its own capital, or its ability to borrow. In terms of market valuation, a common ratio used is the price-earnings ratio. Apple has only slightly been ahead of the industry average in this category. For example, in 2007 Apples price-earnings ratio was 37.99, and the industry average was 35.51. By comparison, Dell most recently reported priceearnings ratio was 15.07. In my opinion, the price-earnings per share ratio has the ability to be deceptive. While Apple has only been slightly above the industry average for price-earnings per share, Apples price close and earnings per share have been notably higher than the industry averages. Apples price close has risen 286% since 2005, and its earnings per share has risen 260% since 2005. Apples most recent reported close price of 153.47 was 44 points higher than the industry average; on the other hand, Dells most recent reported close price was only 20.04, which is 89 points below the industry average. Apple tops it competitors in earnings per share as well. The companys most recent posted earnings per share was 4.04, while Microsoft posted 1.44 and Dell posted 1.43. After breaking down the price-earnings per share ratio, it is clear that Apple is an industry leader in terms of market value.

As previously mentioned, much of Apples recent success is a result of marketing and in particular marketing of its i product line. Apples iPhone has taken the cellular phone market by storm, and it has revolutionized the consumers expectations about cellular phones. Time magazine even named the iPhone the invention of the year (Grossman). Even with the success, Apple is not content. In the technology sector, a business must constantly produce new and innovative ideas to stay on top. Apple currently has two plans in place to increase the iPhones ability for profit by taking different market shares. First, AT&T and Apple are working together to make give the iPhone the power to be used as a modem for a laptop. AT&T currently offers a similar plan for use with a Blackberry device (Kane). By broadening the iPhones capabilities, Apple is increasing the market share of the cellular industry it can occupy. Second, Apple is currently pursuing various deals with gaming-industry organizations. Cellular gaming is a feature most phones on the market offer, but the iPhones large screen, graphics technology, and internet capability make it a strong competitor with hand-held gaming giants such as Sonys PSP and Nintendos DS. The iPhones unique features are a cause for great concern among Apples competitors. Companies such as Sega Corporation And Id Software Inc. are already dedicating more resources to create games for the iPhone. The iPhone gaming is and will be extremely profitable for Apple; because, for each purchase Apple receives 30% of the sales earnings without having to spend anything on developing the games. In my opinion, these two plans show Apples commitment to innovation and growth. The iPhones versatility has enabled it to become more than just a higher end product. Lower-income families are quickly becoming the fastest growing consumer segment for the iPhone (Silver). These families are using the iPhone as a onestop shop for all of their digital needs including phone, internet, gaming, and even picture taking. Apple is currently a trendsetter in the personal electronics industry. Even during the current economic hard times, Apple refuses to budge on style or pricing. Normally, I would consider this a bad business plan, but Apples strategy of tailoring to a higher end customer has paid off. For example, Apple decided to overhaul its laptop product line. The new Macbooks now offer an aluminum case design and a revolutionary glass track pad that operates much like the iPhones touch screen. Many market strategists thought the new Macbooks would enter the market at a much lower price, but Apple has remained firm in keeping the price high. I feel Apple has chosen to do so in order to maintain its high-end appeal. By maintaining its image, Apple gives each customer a feeling of status. I think that when a consumer buys an

Apple product, the consumer is making a statement. Apple has done an excellent job of differentiating itself from Microsoft and Dell. By not targeting the market for low-end devices, Apple has carved out a market share of its own. I strongly believe this separation is how Apple has been able to not only survive in the down economy but to excel as well. Apples dedication to higher quality led the company to reporting a revenue gain of 27% for its fourth quarter of 2008. Apple is well aware that the current economic crisis will eventually affect its profits, but CEO Steve Jobs stated that the company feels Apple customers will only delay purchase, rather than abandon the brand (Benoit). Producing a superior product and having confidence in customer loyalty is Apples current model for success, and so far it has been more than effective. Conclusion Apples success is not a fluke or accident. The companys new age philosophy and focus on quality and chic design set it apart from the competition. Apple has successfully created a niche in a market where the only limitation is ones imagination. Now that Apple has captured a portion of the market share, it will only continue to branch out as is apparent with the versatile iPhone. Apple is determined to be different, and the consumers are responding. The consumer response is clearly evident after analyzing the financial data and seeing the signs of rapid growth. Apple is a solid technology sector investment and would be an excellent addition to any portfolio.