How to Value a Company!! APPLE Inc Analysis...

This post will be explaining how to value a company, not based on hubris or sentiment (or even ‘gut feel’…), but based purely on numbers. I am going to look at Apple Inc today as an example.. Warren Buffet is a 'Value' investor, meaning he invests in companies based good solid financial health. He looks for the best 'value' he can find. I am going to give you an introduction into this form of investing.

This is designed for people who like to play the stock market, but might not do the research they should, or who want to do the research but don't know where to start. It's actually very simple, so give this a go… This is an uber simple guide, and I will build on this in Part 2. Do NOT invest in companies purely based on this, however use it as a filter to turn down investments, where the Statistics suggest that the share price is too high.

Any stock experts out there, by all means humour me in the chat (in fact please do), but see this for what it is, a beginners guide..

This is all designed to build a picture in your mind as to the financial health of a company, and what to expect moving forward. A little background on myself, I am a Oil Trader and Startup/Stock/Cryptocurrency Investor.

Let's start with the basics, and I will delve a little deeper in Part 2

Always good to compare companies like for like. Every sector has different valuation metrics to the next. Comparing Apple to Exon Mobile wouldn't be fair. The oil industry will generally be on a different trajectory, with different overall sentiment that will affect the value of all companies that fall into that sector.

So, for instance, if you ant to invest in a particular sector, but don’t know which company to back, this is great method to whittle down the contenders.

I use Digital Look: http://www.digitallook.com to get access to all the Data I require.

Here are the links for Apple Inc you will need:
http://www.digitallook.com/equity/Apple_Inc
http://www.digitallook.com/equity/Apple_Inc/financials/fundamentals

When you go to digital look you will be faced with this..

You can see the Current Share Price ($104.34) and the Market Capitalisation (Company Value: $562,230,120,000)

When you scroll down you will see this section

This is a great place to start. In the Key Fundamental Section, you can see information on past performance and projected future performance. Let’s look at last years performance to start with;

Year Ending: 2015/09/30:
Turnover/Revenue: $233,715,000,000
Pre-Tax Profit: $72,684,090,000

Price/Earning Ratio

If Apple performance remained static moving forward with can work out how many years it would take the company to earn it’s market cap (a very loose way of determining how many years it will take for you to double your money)

Company Value: $562,230,120,000
2015 Pre-Tax Profit: $72,684,090,000
Price/Earning Ratio (1/2): 7.73

The lower the number the better. In theory, this mean apple will earn it Market Cap back in 7.73 years if their performance remain consistent. The tech sector generally has a P/E ratio of around 20 (for an example, Microsoft by the same measure trades at 23.87). So by this measure Microsoft is 3 times more expensive than Apple.

Forward Price/Earnings Ratio

This is exactly the same as above, but calculated based on the company hitting projections (with MCap remaining static) in the following couple of years. Apple’s work out be;

2016: Forward P/E: 9.16
2017: Forward P/E: 8.85

This explains why Apple look so cheap at the moment. Forward projections are for profits to fall this year, and then start to recover in 2017, but still not to the same levels as 2015.

Microsoft by Comparison

2016: Forward P/E: 16.05
2017: Forward P/E: 15.67

Still much higher than Apple, but falling over time. In 2 years, Microsoft are projected to still be 2x more expensive than Apple.

Growth

For the purposes of simplicity, let’s concentrate on growth on a Profit basis for now. You can see in the last image the EPS column. This stands for Earnings Per Share, which is essentially how much profit per share Apple have/project to make. We can see that in 2013 and 2016 (projected) that there is a fall relative to the year before in this metric (EPS Grth shows this as a %). Investor like to see this growing constantly over time, however this is reflected in the relatively cheap price Apple Share Price is trading.

Microsoft by comparison are forecasting +87% followed by +4% the following 2 years of projections. These numbers are reflected in the Price Earning Ratio Above.

Dividends

You can see past dividends and future projected dividend in this section too. You can see that Apple have been, and are project to continue to pay around a 2% Dividend. At the top of this section, you can see section Div Cover. This number reprints how many times Apple can cover that Dividend each year. The Latest Number is 3.6, and that means that Apple are earning 3.6x the dividend payments in cash each year, so they have a lot left over to reinvest in the company.

Next we can move on to the income statement;

This show Apple Inc earning in a little more detail, with Operating Profit and Profit After Tax included. I will go into more detail about this next time, but you can see that Tax rate on this statement shows Apple are paying around a 35% tax rate on profits…

Balance Sheet

For some reason there is a lot of incomplete information on the Balance Sheet section, so use this link for now;

http://www.nasdaq.com/symbol/aapl/financials?query=balance-sheet

We can see here that Total Assets last year were quoted to be $290,479,000. I will dig deeper into these numbers next time, but for the purposes of simplicity, this number suggestes that if Apple dissolved the company and sold everything it owns, that is the rough number it would receive, less liabilities.

All companies of Apple’s size have liabilities (Essentially Debt)

Here, we can see these Debts add up to $171,124,000. When you take Total Assets and minus Total Liabilities, you get Net Assets, which is essentially the core value of the company, without earnings. This number coms out at;

$290,479,000,000 - $171,124,000,000 = $119,355,000,000(1)

So, if Apple liquidated tomorrow, shareholders would receive this amount of cash back against the Market Cap of $562,230,120,000(2). This would (1/2) 21% of the current share price.

Summary

So, with Apple on a Trajectory to pay back an investment in around 9 years, with 21% Net Assets to Market Cap, it looks like a reasonable investment from a purely financial perspective.

After completing these valuation calculations, it would be down to the individual to decide whether they believe Apple will continue to be a successful company over the coming decade, or whether there are reasons they may not happen? Apple don't need to grow for them to become a good investment, you have to just believe that they can maintain their current form. Microsoft however are twice as expensive, so you have to believe that they will grow at double the rate of apple over the coming 5-10 years in order for Microsoft to be 'as good' a buy as Apple.

Part 2 will be far more detailed and build on the simplicity of this Post.

Enjoy, and feel free to ask me some questions...

Photo by http://www.freepik.com

Hello @steemedbroccoli Thanks for your reply. I've been an Oil Trader and Investor for 7 year, still only 28, so definitely don't claim to know it all. If you don't want to get involved, index funds are definitely the best call. Funds Managers as a group consistently underperform the market, and the average 2% annual management fee is a killer. Index Funds are far more reasonable...Do check what fee's you are paying though, some of them can still be a rip off...

If you are interested, best thing to do is start small and learn by doing. I would recommend the Spread Betting platforms, as you can trade a really small amount on the stock side (i.e. if you trade $1 per point and the stock price is $1.00, then you will synthetically be buying $100 of total risk).

Best to have a little skin in the game, rather than the Simulator accounts IMO