Apple - Cash flow from assets PDF

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III. Analysis of Apple Inc. cash flow from assets from 2014 to 2016 Cash flow is always a major concern when analyzing a company. It’s defined as the net amount of cash and cash equivalents moving into and out of a business. Therefore, how a business performs can be seen through its cash flow. This section of the report will focus mainly on free cash flow, or cash flow from assets. In its core, free cash flow (FCF) is the amount of cash that a company can put aside after it has paid all expenses at the end of an accounting period. It measures a company’s ability to generate internal growth and to return profits to shareholders. Growing free cash flow is a sign of increased earnings due to revenue growth, efficiency improvement, dividends distribution, etc. However, negative FCF does not necessarily means a company’s struggling. It can be due to companies’ investment into other businesses or its borrowing more money to finance its operations. FCF can be calculated as Operating cash flow (OCF) – Capital expenditure (CAPEX) – Change in net working capital. Through this equation, it can be said that FCF reflects a company’s ability to generate cash from its activities (OCF), its spending on fixed assets (CAPEX) and its ability to pay short term debts (Change in NWC). Presented below are Apple’s indices: (All numbers are in thousands)

EBIT + Depreciation −Taxes = Operating cash flow

Ending net fixed assets −Beginning net ¿ assets + Depreciation = Net capital expenditure

Ending NWC −Beginning NWC = Change in NWC

2014 - 2016 Operating cash flow 2016 2015 $61,372,000 $72,515,000 10,505,000 11,257,000 15,685,000 19,121,000 56,192,000 64,651,000 Decreased 13% Increased 36%

2014 $53,483,000 7,946,000 13,973,000 47,456,000

2014 - 2016 Capital expenditure 2016 2015 $27,010,000 $22,471,000 22,471,000 20,624,000 10,505,000 11,257,000 15,044,000 13,104,000 Increased 15 % Increased 21%

2014 $20,624,000 16,597,000 6,757,000 10,784,000

2014 - 2016 Change in net working capital 2016 2015 $27,863,000 $8,768,000 8,768,000 5,083,000 19,095,000 3,685,000 Increased 418% Increased 115%

2014 $5,083,000 29,628,000 -24,545,000

2014 - 2016 Cash flow from assets 2016 2015 Operating cash flow $56,192,000 $64,651,000 −Net capital spending 15,044,000 13,104,000 −Change∈NWC 19,095,000 3,685,000 = Cash flow from assets 22,053,000 48,862,000 Decreased 55% Decreased 20% Source: Yahoo Finance & Apple’s financial statements.

2014 $47,456,000 10,784,000 -24,545,000 61,217,000

In 2016, the biggest change is no doubt the change in net working capital, there was a 418% increase from 2015 to 2016, which was the result of an over 500% increase in NWC from 2014 to 2016. To analyze, we need to look further in to Apple current assets and liabilities. From 2014 to 2015, both accounts had similar increases. In contrast, in the next year, current assets rose to over $106 billion while current liabilities remained relatively the same. In 2016, Apple invested more into short-term marketable securities, more than double from 2015 to 2016. The company had to borrow more money to finance its activities which was the reason behind its increase in long-term debts. Another element contributing to FCF is OCF. Apple’s OCF saw a decrease of 13% in 2016 despite the company’s new releases. In 2016, iPhone 7 and 7 plus as well as Apple Watch 2 were introduced to the public. However, due to the lack of a headphone jack and a mandatory purchase of the AirPods, iPhone 7 faced a small decrease in demand. The same could be said for the small improvements in the Apple Watch 2. Adding an aging iPad to this result and we have the reasons for Apple’s first annual revenue decline since 2001 in 2016. The sudden change in net working capital and drop in sales altogether led to Apple’s 2016 diminished cash flow from assets, which declined approximately 55% from 2015. The company did not live up to the hype. Its success with the refreshed MacBook Pros, the new 9.7 inch iPad Pro, the upgraded watchOS 3 was not able to support the low revenue from iPhone 7 and the company’s investment in 2016. Contrary to 2016, 2015 was a productive year for Apple and it can be seen through its cash flow results. The company’s OCF rose 36% because of its soaring revenue of over $232 billion from just $191 billion in 2014. This was a result of its move into the wristwear market with Apple Watch in April. The watch already scored highly even before it was released. The high EBIT was also due to Tim Cook’s effective management the Apple’s supply chain issues. The success could be related to Apple’s various other success during 2015, such as the launch of Apple Music, the record breaking iPhone 6S sales of 13 million units, the $548 million Samsung paid to Apple. In addition, the company’s NWC saw a new light, after dropping from over $29 billion to $5 billion in 2014, it rose back to almost $9 billion in 2015 and back to $27 billion in 2016. This increased gave the company a strong foothold heading into 2017. Nonetheless, the company’s FCF decreased by 20%. In conclusion, 2015 and 2016 saw several major changes for Apple. In 2015, the company enjoyed success with its new products and profitable investments. It did not face any large obstacles. However, from a free cash flow stand point, 2016 was a mixture of both good and bad for Apple. The company still says that everything is fine but it cannot hide the surfacing softening signs. Apple will need to look for new opportunities to regain its markets if it does not want to relive 2016.

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