Apple is a good example for understanding how a company can generate substantial profits and cash flows from its activities. By analyzing Apple's financial statements, we can better understand the relationship between a company's revenue, profit, cash, and financial position.
Each year, Apple publishes its annual report, known as Form 10-K, which contains its financial statements and explanatory notes. Much of its financial data is also published in the digital XBRL format, which allows software to process and compare it. This application uses that data to present Apple's financial results over the years.
Where do Apple's revenue and profits come from?
Start with the income statement. Apple generates revenue from two main categories: products and services.
Products include the iPhone, Mac, iPad, Apple Watch, and other devices, while services include the App Store, iCloud, Apple Music, advertising, and other digital services.
An important distinction is that Apple's services usually have a higher gross margin than its physical products. This means that for each dollar of revenue from services, the company retains a larger share as gross profit. Growth in services revenue can therefore have a positive effect on the company's overall profitability.
Is net income the same as the cash the company generates?
Not necessarily. This is one of the most important lessons we can learn from Apple's financial statements.
Compare net income with net cash flow from operating activities (OCF). In some years, Apple has generated more cash from operating activities than it has reported in net income.
This happens because net income includes expenses that do not involve an immediate cash outflow, such as depreciation and amortization of assets, as well as employee stock-based compensation expenses. When the statement of cash flows is prepared using the indirect method, these expenses are added back to net income.
However, operating cash flow is also affected by changes in accounts receivable, inventories, accounts payable, and other working capital items. Operating cash flow can therefore be higher or lower than net income.
What does the balance sheet tell us?
Apple holds substantial amounts of cash and investments in securities, but it also has financial liabilities and debt. The company uses its financial resources to support its operations, investments, dividend payments, and share repurchases.
An important indicator to analyze is the Current Ratio, which measures the ratio of current assets to current liabilities.
In some years, Apple's ratio has even been below 1. This means that current liabilities have exceeded current assets. However, this indicator should not be interpreted in isolation from the company's ability to generate cash from operating activities and its other sources of liquidity.