Speaker 1: I think a lot of us agree that financial statements can be quite confusing and intimidating, but understanding these reports is a skill that you want to have, especially if you're an analyst, manager, entrepreneur, or you want to be an investor. So in this video, I'm going to break down Apple's latest balance sheet in simple terms. By the end of the video, you're going to be able to read and analyze it, and you're going to be able to draw your own conclusions about a company's financial health. Let's go. So either you already have financial statements to analyze, or you download these reports directly from the company's website. Usually you're going to find them in the investor relations section. What we're after are the reports called 10K, which is for the full year, and 10Q for the quarter. They look like this. This one is for Apple, and we can see it's a 10K. It's an annual report for the fiscal year that ended September 25th, 2021. Now, when we scroll down, we get to the table of contents, and item eight right here is what we need. That's where we can find the financial statements. So let's just jump to the balance sheet. Something important to point out right away is that a balance sheet gives a snapshot of the financial situation for the business at a certain point in time. So in this case, it's September 25th, 2021. Now, to be able to make better sense of the numbers, we also get a comparison period. In this case, September 26th, 2020. Now, another important thing is the note up here that the numbers are stated in millions. So that number here is not $34,940, but $34,940 million, or $34.9 billion. The balance sheet always starts out with assets. That's the resources a company owns and uses. So they're classified in two main types, current and non-current assets. Current includes cash and other assets that are expected to be turned into cash within the next 12 months. This includes securities, so bonds where surplus cash is parked to earn some interest. Accounts receivable, this is the money that's owed by Apple's customers. Inventories, that's Apple stock of iPhones, iPads, and so on that they still need to sell. And other current assets. Now, in total, that's $134.8 billion. Let's move on to the next section. Non-current assets are all the things that Apple needs to run its business. So buildings, machinery, equipment, and so on. For Apple in total, that's $216 billion. Compared to last year, current assets decreased and non-current increased. So there was a shift to more long-term assets. Overall, total assets also increased by about 8%. We can see it down here with about $351 billion compared to $324 billion last year. Next are liabilities. That's the money that Apple owes to others. Just like assets, there are current and non-current liabilities. Current is everything that's expected to be paid by Apple in the next 12 months. So that's accounts payable, the money that Apple owes to its suppliers. Other current liabilities, deferred revenue, which is also called unearned revenue. That's when Apple already received payment, but they didn't deliver the products or services. And we know how long it can take to get your ordered iPhone. Then we have commercial paper, which is a way of financing. Now, you can check the accompanying notes to see if there are more details about this position. Now, let's actually do that. Let's just copy this, press Control-F, Control-V to paste this in, and let's see what we get. I'm just going to click on Next till we get to a place with more text. That this part looks good. Here we get more information about this position. We can see that Apple uses this program to raise funds for dividends and share buybacks. We can also see that the average interest rate was 0.06%, talk about cheap money. When we scroll down, we get more details about term debt. That's Apple's long-term financing. We can see that the majority are fixed rate obligations with maturities until 2060, and an effective interest rate that's between 0.03 to 4.78%. Now, when we scroll down a bit more, we even get details about the upcoming principal payments. It's quite interesting. You can find a lot of details in these accompanying notes. Just use the search tool to get more information about positions in the financial statements. I'm just going to go back to the balance sheet. So in total, that's 125 billion worth of current liabilities. Then it's non-current liabilities, which is the long-term debt. The biggest item there is term debt, which we just looked at in the notes. So adding current and non-current results in total liabilities of about $288 billion. Now let's move on to equity. It's important to understand that equity on its own doesn't really exist. It's the difference between assets and liabilities. In Apple's case, that's 351 billion in assets minus 288 billion liabilities. That's $63 billion in equity. So this is Apple's net worth that belongs to the owners. Or if you were going to say it in other words, that's what would be left if Apple was going to sell off all of its assets and pay back all its debt and obligations. Equity mainly consists of two positions, money invested by the owners, that's the shares or common stock here, and then it's retained earnings. So that's the net income that's accumulated over time, which is left in the company. So it's profit that wasn't distributed to shareholders. Now there's another smaller accounting item here, OCI, which represents unrealized gains and losses. The sum of these is total equity, which is $63 billion. Now generally, when you review balance sheets, you want equity to grow over time. This shows that the business is profitable and it's reinvesting its earnings into future growth opportunities. Now for Apple, that's not the case. I looked up the development and we can see that equity reduced by 17% annually from 2017 to 2021. So what's going on here? Let's see if we can find our answer in the statement of shareholders' equity. It shows the development from 2018, so this is the closing balance in 2018, where equity was 107 billion to the ending balance in 2021 at 63 billion. Positive figures show an increase in equity and negative figures represent a decrease. We can see that Apple had significant profits, especially last year, increasing equity, but it paid out about 14 billion dividends each year and a much bigger impact came from massive stock buybacks. So wow, more than $225 billion in three years. This means that Apple is using its own money, its own cash, to reduce outstanding shares. That's why equity is decreasing that much. Okay, so let's wrap up the balance sheet. In total, when we add up total liabilities and total equity, we need to get the same number as total assets. Only then the balance sheet is in balance. So now that we know about the content of a balance sheet, what does it all mean? Is this now a good or a bad balance sheet? Is Apple financially healthy or not? Putting the numbers into context is important. That's why financial analysts work a lot with ratios. So let's take a look at a few of them. Apple also gives us an Excel version of the reports, which is great. So I'm just going to jump directly to the balance sheet and down here, I've already set up some ratios that I want to calculate. The first one I like to do is the current ratio. It's simple and it gives us a good indication about liquidity. To calculate the current ratio, we just have to divide current assets by current liabilities. So let's quickly do that. We have about 135 billion in cash or items expected to be converted to cash in the next year versus the 125 billion that Apple will have to pay. This gives us a ratio of 1.1 compared to 1.4 for last year. And we want this ratio to be above one, meaning that there is enough short-term assets to pay for the liabilities. Now that's the case here, but in Apple's case, we could also consider the additional 128 billion of non-current securities. These have a maturity of over one year, which is why they're listed as non-current, but there is an active market for bonds. So Apple could quickly convert these to cash if they had to. So I'm just going to go and copy the formula from the formula bar because I don't want these references to change and I didn't put my dollar signs there. And I'm just going to add in that position here, close bracket, and we get a ratio of 2.1. So clearly there is no liquidity issue here. Now let's take a look at capital structure. So we're going to use the debt ratio, which is calculated as total liabilities divided by total assets. This gives us an indication if the assets were financed with debt or with own money. So generally we like that to be low because it means lower risk, especially in economic downturn situations. Now in Apple's case, this ratio is 0.8. This means that 80% of the cash needed to buy the assets was borrowed. Everything above 60% is considered high. So Apple did take on a lot of debts to finance the massive share buyback programs. But as we've seen, they can get money for very little interest. But to get more comfort about the high debt, let's do another check. Let's divide the non-current term debt, which comes to 109 billion by net income, which we don't find here, but we're going to find it in table 11 where we have the income statement and it's right here. So net income is close to 95 billion. The result comes to 1.2. This means that Apple can pay off all this long-term debt with less than two years of earnings. That's a very comfortable position. So everything within four years is pretty good. So in summary, yes, they do have more debt than we'd usually want to see, but because they're generating so much profit in cash, that's not a problem. Finally, let's take a look at operating efficiency to see how well Apple manages its assets. My favorite here are the working capital days. Now let's start with inventory days outstanding. So the formula for that is inventory divided by cost of sales multiplied with 365. The lower the number here, the better they're going to be in turning around their stock. Now let's also not take inventory from a single point in time, but let's calculate an average of the two periods that we have here. So let's start off with the average function, scroll up to get the inventory positions, which is right here. And now we need to divide this with cost of sales, which we can find in the income statement in table 11. Let's say right here, it's 212,981 and multiply it with 365. We get nine days. That's impressive. That's the length of time from when Apple purchases its raw materials to when they're going to be turned into MacBooks or iPhones and sold to retailers and to you. Compare this with companies like Samsung or Huawei to appreciate how good it is. You can do the same exercise for receivable days outstanding. The formula for that is accounts receivables divided by total net sales times 365. Again, let's start off by calculating an average. That's receivables right here. Divide this by total net sales from the income statement, which we can see right here. Multiply with 365 and we get 21 days. So on average, it takes Apple only 21 days to collect their outstanding invoices. That's also good because most other competitors have higher numbers here. And finally, let's do a similar calculation for payable days outstanding. It's calculated as accounts payable divided by cost of sales times 365. Again, let's start off by taking an average of the two years. Divide this by the cost of goods sold from the income statement, which is right here, multiplied with 365. That's 83 days. Wow, so on average, Apple pays their suppliers after 83 days. Now that we did the heavy lifting, we can put it all together and calculate the cash conversion cycle. That's an excellent measure of operational efficiency. We just need to add the receivable days with the inventory days and deduct payable days. In Apple's case, that's negative 53 days. So you want this ratio to be low, but negative days is something you don't see that often. It means that they still have more than 50 days left before payments are due to their suppliers while they already generated income by turning around and selling their products. That's really great. Compare that to Microsoft or Samsung. So let's summarize our findings. We identified that Apple clearly has sufficient liquidity. Their debt ratio is higher than we'd usually want, but they've taken on a lot of debt to finance their share repurchase program and dividends. But because of their high profit and their cash generation, we're not worried about this now. Also, Apple's working capital management is outstanding. A negative cash conversion cycle means that Apple's own cash is not tied up in inventory and receivables, but it can be used to finance future growth. You can get all of these insights by reviewing your balance sheet and calculating just a few ratios. To get a complete picture, you should always review the entire financial statement, including the P&L and the cash flow statement, but that's for another video. I hope this helps you understand how to read a balance sheet. And if it did, please give this video a thumbs up and do subscribe so we get to see each other more often. Many thanks for watching and I'm going to see you in the next video.