Apple Inc.’s Cash-to-Assets Ratio: 1 Fundamental Ratio Investors Need to Carefully Consider

Warren Buffett’s recent purchase of over $1 billion of Apple Inc. (NASDAQ:AAPL) stock over the past months is notable, especially considering Berkshire Hathaway’s purchases spanning a range of prices with purchases at levels significantly above $100. The independent investor must ask, What sort of fundamental security-analysis ratios did Mr. Buffett use in analyzing Apple to justify this investment, considering his extreme tech-averse stock-selection modus operandi?

One set of ratios that Warren Buffett has spoken about and don’t garner enough media attention are liquidity ratios, and these ratios work overtime when assessing Apple due to its large cash hoard (approximately $220 billion with $200 billion overseas). This ratio of cash to net assets is one way of quantifying Warren Buffett’s esteemed “margin of safety,” which is paramount in his investment decisions, and we will see through analysis that Apple is indeed a very “safe” bet given its size and financial slack, relative to comparable companies.

apple Source: 2015 Apple Annual Report

Apple’s cash situation

Looking at Apple’s financial statements, we see that the year-end cash and cash equivalents have grown substantially year over year, accompanied by an increase in “term debt.” The average investor can see that the cash generated from operating activities basically covers cash used by investing activities and financing activities (i.e., the capital needed to keep the business profitable over the long term), but the cash proceeds have risen almost in lockstep with debt creation.

This means the company is essentially piling all of its cash from operations back into the company via investing and financing activities, while building its cash hoard using cheap debt (most of which is long term with options to hedge interest-rate exposure).

The effects of debt in calculating a company’s cash-to-assets ratio can skew the data; as such, we will compute Apple’s net-excess-cash-to-assets ratio (as well as the other top 10 firms of the S&P500), subtracting debt from the company’s cash position to provide a clearer picture of each company’s true margin of safety via excess cash.

Apple’s cash-to-assets ratio

Company Market Capitalization Cash Position Assets Debt Net-Excess-Cash-to-Assets Ratio
Apple 533.17B 205.67B 290.48B 79.91B 43.29%
Microsoft 395.85B 108.58B 176.22B 46.77B 35.08%
Exxon Mobil 378.38B 37.95B 336.76B 43.11B -1.53%
Johnson & Johnson 321.19B 38.38B 133.41B 23.56B 11.11%
General Electric 281.12B 102.46B 492.69B 186.05B -16.97%
Amazon 338.43B 19.81B 65.44B 17.61B 3.36%
Facebook 327.31B 18.43B 49.41B 0 37.3%
Berkshire Hathaway 349.15B 117.28B 552.26B 101.54B 2.85%
AT&T 249.43B 6.73B 402.67B 133.08B -31.38%
JP Morgan Chase 227.52B 573.08B 2,351.70B 591.54B -0.78%

All numbers are calculated as of June 16, 2016, with total assets estimated from each company’s balance sheet. Apple clearly has the most excess cash among some of the largest firms in the S&P500, with excess cash representing over 43% of the company’s total assets. The only two firms that come close to Apple are Facebook (primarily due to the fact that Facebook has no long-term debt) and Microsoft (due primarily to its large cash hoard).

The margin of safety excess cash provides is related directly to the liquidity of the firm. In the unlikely event of a market crash or buying opportunity, the company with excess liquidity can easily capture opportunities that competitors cannot, contributing to a greater long-term competitive advantage—the primary “stuff” investors such as Warren Buffett look for.

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Fool contributor Motley Fool Staff has no position in any stocks mentioned. David Gardner owns shares of, Apple, and Facebook. Tom Gardner owns shares of Facebook. The Motley Fool owns shares of, Apple, Berkshire Hathaway (B Shares), ExxonMobil, Facebook, General Electric, Johnson and Johnson, and Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple.

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