Why does Apple have no debt?
There is no interest expense in their 10K.
5 Answers
Not only does Apple have no debt, they have almost $100 billion in cash, other current assets and long term investments. One might argue this is not an optimal leverage ratio for shareholders, (i.e. why not give all of the cash back to shareholders and lever up when they want to spend more than their earnings?) but to answer your question, one could think of why Apple would choose to maintain such a cash position. A few reasons include
1. It provides tremendous flexibility if they want to invest in their business or make an acquisition. One of the abilities often cited as an advantage for Apple is the ability to radically change direction very quickly. Think of the breakdown of Apple's businesses today vs. 5 years ago (iPhone, iPad, app Store, etc...). The ability to invest heavily in a new business and rapidly is supported by a strong cash position.
2. It insulates them from the credit markets. Given Apple's long term focus and the fairly recent credit market troubles it's probably not a bad thing to avoid this exposure.
3. [this is a structural reason - that is why they are even able to do this and other companies aren't] Steve Jobs has the latitude to do what he wants. Many CEOs could not maintain such a net-cash position as shareholders would claim it is destroying their value. Given Apple's tremendous success under Steve Jobs, I doubt he is concerned about such pressure.
1. It provides tremendous flexibility if they want to invest in their business or make an acquisition. One of the abilities often cited as an advantage for Apple is the ability to radically change direction very quickly. Think of the breakdown of Apple's businesses today vs. 5 years ago (iPhone, iPad, app Store, etc...). The ability to invest heavily in a new business and rapidly is supported by a strong cash position.
2. It insulates them from the credit markets. Given Apple's long term focus and the fairly recent credit market troubles it's probably not a bad thing to avoid this exposure.
3. [this is a structural reason - that is why they are even able to do this and other companies aren't] Steve Jobs has the latitude to do what he wants. Many CEOs could not maintain such a net-cash position as shareholders would claim it is destroying their value. Given Apple's tremendous success under Steve Jobs, I doubt he is concerned about such pressure.
Quite frankly, the capital markets are unimpressed by Apple, and I think Apple is pretty unimpressed with the capital markets. While these don't necessary follow from one another, it's nevertheless become the case. Even with the recent runup, Apple barely trades north of a 15 P/E. Netting out the cash and looking at the forward P/E (i.e. next 12 months), it's below 10. This is the fastest growing $100 billion company ever -- by far -- and it trades like some run of the mill stock, despite obliterating analyst estimates again and despite thoroughly outgrowing, for example, Netflix, another fantastic, albeit slower growing company, with a 65 P/E.
Normally, companies get savaged for carrying the kind of cash Apple carries and, in fact, Microsoft some years ago had to eventually carve out a giant one-time dividend because after sitting on tens of billions for several years with nothing to show for it, the company ultimately caved to shareholder demands to "do something" by returning a huge chunk of cash to shareholders.
Apple has not met that kind of shareholder ire for a couple of reasons, which I think will answer the debt question in a roundabout way:
1) Generally, companies return cash when it's believed their shareholders can do something better with it. For the better part of this millennium, that just hasn't been true. If you had made the argument at almost any time Apple should've just handed the cash back to shareholders, you'd now look foolish. They can point this out over and over.
2) Apple makes a ton of money abroad and probably holds the cash there, avoiding some significant portion of the repatriation taxation that would occur if they brought the money "home" (note: I haven't verified this, but it's almost certainly the case). This makes distributing the cash a lot more complex and absent a distribution of the cash the taking on of meaningful debt would be illogical.
(It's worth noting that there is a finance 101 concept here that says Apple should be borrowing money anyway and leveraging up because debt is a deductible expense and therefore the company is "worth more" simply by borrowing money. That said, there is a "reality 101" concept that a company that will enter 2012 with something on the order of $100 billion in cash and short-term investments on its balance sheet taking on debt would appear ridiculous. And generally speaking, appearing ridiculous will trump a finance textbook. Furthermore, given that Apple's P/E is indefensibly low anyway, it's not clear that the leverage effect would generate a meaningful change in Apple's stock price, but it would reduce the perception of the company having one of the most powerful balance sheets in history.... and about that... )
3) Apple has one of the most powerful balance sheets in the history of earth-based civilization. It could buy Netflix for less than 2 months of cash generation. Not profits, but the cash they are currently throwing into the bank. It could buy a state of the art LCD fab to ensure a supply of screens for its products for about 3 weeks worth of cash. Or a NAND flash fab. Or both. The reality is that when Apple goes to a supplier and says it wants to buy some obscene quantity of something at some point in the future it can assure the supplier it will pay -- or even go as far as to prepay. And it can do this over and over and over.
While it might seem like the ever-growing cash horde is illogically and purposelessly large, the reality is the future is uncertain and it's likely even Apple doesn't know what it will need $20 billion for in 2015. Or $50 billion for in 2020. It would like to be in a position where it has that money, on hand, to complete whatever transactions it deems appropriate.
4) Apple nearly went out of business in the 1990s. With the current cash, Apple can weather years of losses before facing that kind of near-death moment again. If and when the day comes where Apple doesn't have the hottest products in multiple segments and needs -- again -- to invent the future, it would have the greatest rainy day fund ever. There has been much criticism that a lot of HP's recent financial success has come at the expense of R&D and development of the "next big thing". The Palm acquisition was -- to some extent -- an outsourcing of R&D to compensate for this.
Apple would rather be in a position where it can keep funding the next thing regardless of how much money it made this quarter or will make next quarter. Or perhaps it will someday buy one, two, or 12 companies. A company servicing debt on its balance sheet might be tempted to shave R&D expenses in tougher times or to pass on possible acquisitions in a way a company that can simply pay for them might not be. Whether this is essential to Apple's thinking or not, it certainly creates "option value" for the company.
The fundamental truth is that Apple has created a company that is in unprecedented territory in terms of value creation. Unlike an oil company where the market price of oil has created much of the market capitalization in recent years, Apple has built entirely new markets (or radically altered them) and created 100s of billions in value. It's very likely that in the next 12-24 months, it will become the first company worth more than $1 trillion. Rules that apply conventionally have yet to produce a situation like this, so perhaps a better question someday might be: Why do so many companies carry so much debt instead of producing cash rich balance sheets they can wield like weapons?
Normally, companies get savaged for carrying the kind of cash Apple carries and, in fact, Microsoft some years ago had to eventually carve out a giant one-time dividend because after sitting on tens of billions for several years with nothing to show for it, the company ultimately caved to shareholder demands to "do something" by returning a huge chunk of cash to shareholders.
Apple has not met that kind of shareholder ire for a couple of reasons, which I think will answer the debt question in a roundabout way:
1) Generally, companies return cash when it's believed their shareholders can do something better with it. For the better part of this millennium, that just hasn't been true. If you had made the argument at almost any time Apple should've just handed the cash back to shareholders, you'd now look foolish. They can point this out over and over.
2) Apple makes a ton of money abroad and probably holds the cash there, avoiding some significant portion of the repatriation taxation that would occur if they brought the money "home" (note: I haven't verified this, but it's almost certainly the case). This makes distributing the cash a lot more complex and absent a distribution of the cash the taking on of meaningful debt would be illogical.
(It's worth noting that there is a finance 101 concept here that says Apple should be borrowing money anyway and leveraging up because debt is a deductible expense and therefore the company is "worth more" simply by borrowing money. That said, there is a "reality 101" concept that a company that will enter 2012 with something on the order of $100 billion in cash and short-term investments on its balance sheet taking on debt would appear ridiculous. And generally speaking, appearing ridiculous will trump a finance textbook. Furthermore, given that Apple's P/E is indefensibly low anyway, it's not clear that the leverage effect would generate a meaningful change in Apple's stock price, but it would reduce the perception of the company having one of the most powerful balance sheets in history.... and about that... )
3) Apple has one of the most powerful balance sheets in the history of earth-based civilization. It could buy Netflix for less than 2 months of cash generation. Not profits, but the cash they are currently throwing into the bank. It could buy a state of the art LCD fab to ensure a supply of screens for its products for about 3 weeks worth of cash. Or a NAND flash fab. Or both. The reality is that when Apple goes to a supplier and says it wants to buy some obscene quantity of something at some point in the future it can assure the supplier it will pay -- or even go as far as to prepay. And it can do this over and over and over.
While it might seem like the ever-growing cash horde is illogically and purposelessly large, the reality is the future is uncertain and it's likely even Apple doesn't know what it will need $20 billion for in 2015. Or $50 billion for in 2020. It would like to be in a position where it has that money, on hand, to complete whatever transactions it deems appropriate.
4) Apple nearly went out of business in the 1990s. With the current cash, Apple can weather years of losses before facing that kind of near-death moment again. If and when the day comes where Apple doesn't have the hottest products in multiple segments and needs -- again -- to invent the future, it would have the greatest rainy day fund ever. There has been much criticism that a lot of HP's recent financial success has come at the expense of R&D and development of the "next big thing". The Palm acquisition was -- to some extent -- an outsourcing of R&D to compensate for this.
Apple would rather be in a position where it can keep funding the next thing regardless of how much money it made this quarter or will make next quarter. Or perhaps it will someday buy one, two, or 12 companies. A company servicing debt on its balance sheet might be tempted to shave R&D expenses in tougher times or to pass on possible acquisitions in a way a company that can simply pay for them might not be. Whether this is essential to Apple's thinking or not, it certainly creates "option value" for the company.
The fundamental truth is that Apple has created a company that is in unprecedented territory in terms of value creation. Unlike an oil company where the market price of oil has created much of the market capitalization in recent years, Apple has built entirely new markets (or radically altered them) and created 100s of billions in value. It's very likely that in the next 12-24 months, it will become the first company worth more than $1 trillion. Rules that apply conventionally have yet to produce a situation like this, so perhaps a better question someday might be: Why do so many companies carry so much debt instead of producing cash rich balance sheets they can wield like weapons?
Same with Google, and I believe Oracle is a debt free company. Another reason why Apple has no debt that wasn't added here was because they have historically given out little to no dividends to their stock holders and they do not donate to any philanthropic efforts. Not that it would bankrupt them, but it does help on their financial statements.
