Is Apple Inc (NASDAQ:AAPL) Spending Too Much Money?

Apple Inc (NASDAQ:AAPL) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine Apple’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.

View our latest analysis for Apple

What is Apple’s cash yield?

Apple’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Apple to continue to grow, or at least, maintain its current operations. There are two methods I will use to evaluate the quality of Apple’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Apple’s yield of 4.49% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Apple but are not being adequately rewarded for doing so.

NasdaqGS:AAPL Net Worth July 25th 18
NasdaqGS:AAPL Net Worth July 25th 18

Does Apple have a favourable cash flow trend?

Does Apple’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, Apple’s operating cash flows is expected to grow by a double-digit 18.02%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Apple’s operating cash flow in the past year, as well as the anticipated level going forward.
Current +1 year +2 year +3 year
Operating Cash Flow (OCF) US$67.22b US$77.96b US$78.95b US$79.33b
OCF Growth Year-On-Year 15.98% 1.28% 0.47%
OCF Growth From Current Year 17.46% 18.02%

Next Steps:

Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Apple relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, You should continue to research Apple to get a better picture of the company by looking at:

  1. 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.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Apple’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

To help readers see pass 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.