Does Apple Inc's (NASDAQ:AAPL) Debt Level Pose A Problem?

Apple Inc (NASDAQ:AAPL), a large-cap worth US$1.1t, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to extending previous success is in the health of the company’s financials. This article will examine Apple’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AAPL here.

See our latest analysis for Apple

How does AAPL’s operating cash flow stack up against its debt?

AAPL has sustained its debt level by about US$114.5b over the last 12 months made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$66.3b , ready to deploy into the business. Moreover, AAPL has produced US$77.4b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 68%, signalling that AAPL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AAPL’s case, it is able to generate 0.68x cash from its debt capital.

Can AAPL pay its short-term liabilities?

Looking at AAPL’s most recent US$116.9b liabilities, the company has been able to meet these commitments with a current assets level of US$131.3b, leading to a 1.12x current account ratio. For Tech companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does AAPL face the risk of succumbing to its debt-load?

Apple is a highly levered company given that total debt exceeds equity. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies.

Next Steps:

Although AAPL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around AAPL's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure AAPL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Apple to get a more holistic view of the large-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for AAPL’s future growth? Take a look at our free research report of analyst consensus for AAPL’s outlook.
2. Valuation: What is AAPL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AAPL is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.