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Jalal Antoine Haddad, 27 Jul 2016


In the middle of a public debate concerning Apple’s overseas cash stockpile of $216 billion, there is a similar discussion whether Apple truly holds that amount in cash. Some claim that the money is stockpiling because Apple is not able to bring it back to the United States for fear of being subjected to corporate taxes. There are, however, other more fundamental reasons, why a company basing itself on innovation chooses to save as much money as possible.

Not all assets are cash.

To first answer the main question, we need to understand what assets are and which timespans they relate to. Assets are economic resources that are available for a company’s use in order to operate and meet its targets and obligations. They include cash (by far the most important), tradable securities (bonds, stocks of other companies, derivatives), inventory, equipment, buildings, intellectual property, and so on. Although, the workforce is a key resource for operation, it is not considered an asset, as the employees are fortunately not a property of the company, in the technical and legal sense.

The corporate finance world has a tendency to look at two specific timespans:

1. Within one year from now: that is called the “current” or “short-term” period. This applies to readily available on-hand assets, including cash, receivables, and marketable securities. They are considered current because they are easily exchangeable to cash within this one-year period. It equally applies to debt, i.e., which are liabilities the company is obligated to pay back within the year.

2. After one year from now: this is called the “non-current” or “long-term” period. From asset perspective, it includes buildings, equipment, but also marketable securities intended to be held for longer than one year. In terms of liabilities, these are the different debts (financial loans, issued corporate bonds) the company has, but which mature in more than a year.

As of the latest quarterly report (June 2016), Apple reported $18.2 billion in cash, a small drop from the $21.1 billion from the September 2015 report. Yet, its current assets have increased by 5%, pushed by continuously strong sales and a net profit margin of 18.4% (for comparison, Samsung’s NPM is 10.6%). So where did the profit go? The answer is in marketable securities.

Among the different financial metrics which are used to evaluate a company’s performance, two are key in assessing its solvency and liquidity:

The debt ratio is an overall look at the total assets and liabilities, irrespective of timespan. Its purpose is to evaluate how solvent the company is on the long term, if it is able to meet all its debt obligations with the assets on hand. With $179.1 billion in liabilities, and $305.6 billion in assets, Apple’s debt ratio is 58.6%. With such a ratio, Apple is highly leveraged in debt, yet is still able to meet its long-term obligations.

On the other hand, a company still requires to fulfill all its short-term debts. The current ratio allows evaluating the current assets vs. current liabilities. In the case of Apple, this amounts to $93.8 billion / $71.5 billion = 1.3x. This means that Apple is able to meet all its short-term obligations and keep its engine rolling for another year.

So is the $216 billion of cash allegation wrong?

Technically yes, but in spirit no. Besides the $18.2 billion in somewhat accessible cash, Apple holds $43.5 billion in short-term marketable securities (readily exchangeable to cash), and a whopping $169.8 billion in long-term marketable securities as of 25 June 2016. The total of these three elements is $231.5 billion. Apple does not need to stockpile this entire amount in cash, exposing it to different risks such as currency exchange and inflation. The optimal scenario is for the current ratio to be just above, but as close as possible to 1. Any excess cash is better used in different ways. In the case of Apple, it’s investment in securities. These investments allow Apple to hedge against currency-related risks, and receive some revenue to keep up with inflation.

The key question should then be: Why is Apple sitting on so much marketable securities?

There are two answers for this question. The most common one is that Apple is not able to bring back those reserves from abroad without “sacrificing 40% of it” in the words of Apple CEO, Tim Cook.

The other reason, which is fundamental to a tech company such as Apple, is innovation. A successfully innovative product can only last some years in sales, before being replaced by a better and newer innovation, often times from a competitor.

Ever since the stellar release of the iPhone, Apple has yet to create a product that carries the flame of innovation. With 2/3 of its net revenues, the iPhone is still by far the most selling product Apple has to offer. However, stronger and fiercer competition from other smartphone makers -Samsung, HTC, and Sony- is keeping a constant and growing threat. While still going strong beyond past predictions with iPhone sales, those saved tradable securities may be Apple’s safety net in case things go south in the absence and while working for a new groundbreaking innovation. At the end of the day, in the corporate world, as in personal finance, one proverb always rings true: save money and money will save you.


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