Source: Apple
Apple (AAPL +1.95%) stock tends to attract a lot of interest for multiple angles; but investors don't usually focus their attention on the company's balance sheet. However, going through the numbers in the balance sheet can be very enlightening when it comes to understanding a business and its financial position. Let's take a look at Apple's balance sheet in order to highlight a few important considerations for investors.
Extraordinary financial strength
To begin with, Apple's financial strength is nothing short of remarkable. As of June 28 the company has roughly $13 billion in cash and equivalents and $25 billion in short-term investments. In addition, it carries $127 billion in long-term marketable securities in its balance sheet. This means that Apple has more than $164 billion in cash and liquid assets.
Netting out roughly $2 billion in commercial paper and $29 billion in long-term debt, Apple has a gigantic net cash position of $133 billion. This is clearly more than enough when it comes to liquidity needs, especially since the business generates tons of cash flows on a recurrent basis. In fact, Apple´s net cash balance has increased considerably over the last several years.
| Assets and liabilities | June 2011 | June 2012 | June 2013 | June 2014 |
| Cash and equivalents | $12 | $8 | $11 | $13 |
| Short-term marketable securities | 16 | $20 | $31 | $25 |
| Long-term marketable securities | $48 | $90 | $104 | $127 |
| Total cash and liquid assets (1) | $76 | $117 | $147 | $164 |
| Commercial paper | 0 | 0 | 0 | $2 |
| Long-term debt | 0 | 0 | $17 | $29 |
| Total debt (2) | 0 | 0 | $17 | $31 |
| Net cash position (1)-(2) | $76 | $117 | $130 | $133 |
Data in billions. Source: SEC filings
Investors in Apple stock have no reason to worry about the company's financial strength. Even better, Apple has the financial flexibility to go shopping for high growth opportunities if management decided to invest its financial resources in acquiring smaller companies with exciting potential for expansion in the years ahead.
Apple is not prone to big acquisitions, and there is no reason to believe the company might be interested in going shopping anytime soon. However, it's good to know what the possibilities are. To put these numbers in perspective, eBay (EBAY +0.05%) has a market capitalization of roughly $68.8 billion, Netflix (NFLX 0.68%) is in the area of $26.4 billion, and Twitter (TWTR +0.00%) is worth around $30.8 billion at current prices.
Apple's big fat wallet not only provides safety for investors, it could also be enormously valuable if management wanted to invest that money in strategic acquisitions for growth.
A different kind of engineering
Apple has produced growing amounts of cash over the last years; however, the company has also issued new debt. Notably, Apple made two big bond issues, for $17 billion in 2013 and $12 billion in 2014. Why would a company with a big and growing cash balance issue new debt?
While high-quality product engineering has always been a key competitive advantage for Apple, the company is also relying on financial engineering in order to maximize shareholder value and distribute cash flows to investors.
Most of Apple cash is held overseas, which means the company would need to pay a huge tax bill if it decided to repatriate those funds. By issuing debt to distribute dividends and repurchase stock, the company is smartly saving a lot of money on taxes.
Looking at the cash flow statement, we can see that Apple generated nearly $46.5 billion in operating cash flows during the last three quarters, while capital expenditures required investments for $5.7 billion, producing $40.8 billion in free cash flows over the period. The company paid $8.3 billion dividends and allocated $28 billion to share repurchases, for a total of $36.3 billion in capital distributions to investors.
This shows that Apple could easily cover dividends and buybacks with the cash it generates from the business, so the only reason to issue debt is to save money on taxes. Dividends and buybacks absorbed approximately 89% of the free cash flows that Apple produced in the first three quarters of 2014, so cash balances should increase at a moderate rate over the coming quarters, as the company is distributing a big percentage of its cash flows to investors.
The bottom line
Apple has enormous financial flexibility; the company is sitting on mountains of cash, and this should allow investors to sleep smoothly at night without worrying much about Apple´s financial position. The business is generating huge amounts of cash on a recurrent basis, and Apple is distributing a considerable part of that money to shareholders via dividends and buybacks. Apple's balance sheet is a rock-solid fortress, and that's good news for investors in Apple stock.
