Understanding Apple’s Capital Structure

Apple Inc. (AAPL) is the largest and arguably most successful company of the 21st century. From its humble start in a California garage in 1976 to become a company that has a $3 trillion market capitalization, as of Jan. 2022. Apple’s success has come from being a leading innovator, not only in the field of technology but in finance as well. One only needs to examine the shift in the company’s capital structure to witness how quickly Apple can adapt to its environment.

Equity Capitalization

Capital structure is simply a measure of how much equity and/or debt a company utilizes to finance its operations. Equity represents ownership in a company and is calculated by finding the sum of the common stock and retained earnings, less the amount of treasury shares. 

Apple’s total stockholder’s equity equals $96.5 billion, as of June 29, 2019. This consists of $43.4 billion of common stock at par value and additional paid-in capital, and $53.7 billion in retained earnings, less accumulated other comprehensive income of $639 million. Apple has roughly 4.57 billion shares outstanding.

Debt Capitalization

The second component of a company’s capital structure is debt, representing how much the company owes to creditors. Debt is first classified by time period. Current liabilities encompass debt that matures within a year and is important for investors to consider when determining a company’s ability to stay solvent. 

Apple’s current liabilities as of June 29, 2019, were $89.7 billion, consisting of $29.1 billion in accounts payable $13.5 billion in short-term notes and bonds. Long-term debt and other non-current liabilities amount to $136 billion, bringing Apple’s total liabilities to $225.8 billion, an increase of nearly 63% in the last three years.

Leverage

Due to the zero interest rate policy (ZIRP) environment, Apple began issuing its first bonds and notes in 2013, underwriting a total of $64.46 billion worth of debt. Apple made this move not because it needed the capital but because it was essentially receiving free money. 

With much of Apple’s bonds having nominal interest rates of less than 3%, the real returns on these instruments barely beat inflation. However, the accumulation of debt by Apple has changed its capital structure considerably. Apple’s current and quick ratios have risen by 33% and 59%, respectively, over the last five years. Its long-term debt has nearly doubled in the last three years. 

Debt vs. Equity

Additionally, the company’s debt-to-equity ratio has grown. This measurement is best used for determining the amount of ownership in a corporation versus the amount of money owed to creditors. It is calculated by dividing a company’s total liabilities by its shareholders’ equity. At the end of 2016, Apple had a debt-to-equity ratio of 50%. Over the course of three years, that ratio jumped to 112%, illustrating how quickly capital structure can change.

Enterprise Value

Enterprise value (EV) is a popular way of measuring a company’s worth and is often used by investment bankers to determine the cost of purchasing a business. EV is calculated by finding the sum of the company’s market cap and its total debt and subtracting that figure by total cash and cash equivalents. 

Apple’s EV went from $600 billion at the end of 2017 to $1.12 trillion, doubling. This comes as the company’s market cap and cash have risen steadily. With that, Apple’s net debt has fallen from nearly $50 billion last year to $14 billion as of the second quarter of 2019. 

Investors can’t forget that Apple is the most cash-rich corporation in America. With over $50 billion in cash and $45 billion in short-term marketable securities, as of June 29, 2019, Apple’s highly leveraged capital structure should not pose a threat to the company’s solvency for the foreseeable future.