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 its $3 trillion market capitalization, as of January 2022, Apple’s success has come from being a leading innovator, not only in the field of technology but also in finance. 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 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 equaled $71.93 billion as of December 2021. This consisted of $57.36 billion of common stock at par value and additional paid-in capital, and $5.56 billion in retained earnings. Apple had roughly 16 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 liabilities as of year-end 2021 were $309.25 billion, consisting of $54.76 billion in accounts payable to come to a total current liability amount of $125.48 billion. Long-term debt and other non-current liabilities amounted to $287.91 billion.

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 many 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 risen from $73.55 billion at the end of 2016 to $106.62 through the end of 2021.

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 56%. Over the course of five years, that ratio jumped to 148%, 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 $928 billion at the end of 2017 to just under $3 trillion by the end of 2021. This comes as the company’s market cap and cash have risen steadily. With that, Apple’s net debt had risen from nearly $3.45 billion at the end of 2020 to $11.64 billion to close out 2021. 

Investors can’t forget that Apple is the most cash-rich corporation in America. With over $62 billion in cash at the end of 2021. Apple reported in its 2021 10-K statement that it possessed $172.6 billion spread between cash, cash equivalents, and unrestricted marketable securities. Apple’s highly leveraged capital structure should still not pose a threat to the company’s solvency for the foreseeable future.

Tying It All Together

Apple is an enormous company that simultaneously manages to carry a large cash balance while increasing long-term debts. The company took advantage of the low-interest-rate environment and locked in significant income from issuing bonds. Apple's free cash flow has substantially increased over the past few years and, when compared against the debt and liabilities Apple carries, continues to make it an attractive investment for both main and wall street investors.

The Bottom Line

Apple is known as a company with innovative products and visionary founders, but the way they handle their immense business is worthy of admiration as well. In the past few years, the company has displayed incredible revenues and double-digit growth. Investors love Apple due to its high cash ratios and dependable business model.