Understanding Apple's Capital Structure (AAPL)

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 the more $500-billion company it is today, 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.

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 $119.36 billion, as of its 10-K filing in September 2015. This consists of $27.42 billion of common stock at par value and additional paid-in capital, and $92.28 billion in retained earnings, less accumulated other comprehensive income of $345 million. Apple has 5.579 billion shares outstanding and 29.72 million in diluted shares, also known as convertible securities, giving it a market capitalization (market cap) of roughly $600 billion, as of Aug. 7, 2016.

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 10-K from September 2015 calculates current liabilities to be $80.61 billion, consisting of $35.49 billion in accounts payable, $25.18 billion in accrued expenses, $8.94 billion in deferred revenue, and $11 billion in short-term notes and bonds. Long-term debt and other non-current liabilities amount to $90.51 billion, bringing Apple’s total liabilities to $171.124 billion, an increase of nearly 200% in the last three years.

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 more than 80% of Apple’s bonds having nominal interest rates of between 0.28% and 2.94%, the real returns on these instruments barely beat inflation. However, the accumulation of debt by Apple has changed its capital structure considerably, raising the company’s risk of default. Since September 2012, Apple’s current and quick ratios have fallen by 26% and 30%, respectively, limiting the company's ability to meet its short-term financial obligations.

Additionally, the company’s debt-to-equity ratio has experienced dramatic growth. 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. In 2012, Apple had a debt-to-equity ratio of 49%. Over the course of three years, that ratio jumped to 142%, illustrating how quickly capital structure can change.

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 from 2012 to 2015 increased by 900%, from $66.7 billion to $666.55 billion, as net debt rose 1,068%. While Apple’s debt accumulation may be worrisome to some, investors must keep in mind that Apple is the most cash-rich corporation in America. With over $18 billion in cash and $43.5 billion in short-term marketable securities, as of June 2016, Apple’s highly leveraged capital structure should not pose a threat to the company’s solvency for the foreseeable future.