This Is What Apple Inc. (AAPL) Earns on Its Cash

The other two ways that companies can classify these types of securities (held-to-maturity or trading securities) entail different accounting methods.

A numbers game
Another negative side effect of having all of this cash is that it makes management look less effective, which is why Apple has received criticism over its capital allocation strategy lately. Many of the ratios that investors use to measure management effectiveness are based on the balance sheet, which includes an inordinate amount of cash for Apple. Return on assets and return on equity in particular suffer since Apple’s ballooning cash balance increases the denominator in each ratio.

In its statement responding to David Einhorn yesterday, Apple admitted that early last year it gathered more cash than it needed for operations. A year ago, its cash position was $97.6 billion, and it’s added nearly $40 billion to its coffers over the past 12months. Let’s say that Apple only “needs” $100 billion to run the ship, and had aggressively returned anything beyond that over the past year.

Just to illustrate the difference it could make, this is how return on equity would have differed over the past year if Apple had theoretically put a maximum of $100 billion on its cash and returned everything in excess of that figure.

Sources: SEC filings and author’s calculations.

This was just to prove a point, since in actuality it’s not realistic to think that Apple would have returned nearly $40 billion to shareholders over the course of one year (its current plan is to return $45 billion over three years). That being said, the company can certainly afford to give more back and in the process will improve one of the most important metrics that investors look at.

The article This Is What Apple Earns on Its Cash originally appeared on Fool.com and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

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