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Apple is now Debt Free
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When ever any company or person does this I smile. I hope to do the same with my finances. Kudos to Apple.
Debt interest of $300 million is a good thing? At prime rate or even lower, that is still a lot of money to throw at interest when it could just be paid off and be done with. Apple has the cash to do it, so why not? It's like you keeping revolving debt on your credit card. Doesn't make sense. You want to pay it off as soon as you can.
People are talking about leveraging. I think Apple is better leveraging with its ample cash reserve than having to take on interest-bearing debt to finance new projects.
Good for Apple, even if some consider it a PR move. You only need to take on debt if you don't have the cash in the first place, am I right?
People are talking about leveraging. I think Apple is better leveraging with its ample cash reserve than having to take on interest-bearing debt to finance new projects.
Good for Apple, even if some consider it a PR move. You only need to take on debt if you don't have the cash in the first place, am I right?
This is not good news or bad news. What matters is what they *do* with nearly $5 billion. The worst thing they could do is use it to ride off losses in the coming years. They need to aggressively invest in profit-making opportunities. Jobs has done good work in righting Apple's ship, but now he needs to take it somewhere--not just drift aimlessly until the supplies run out.
people are thinking too short term on this issue. yes, that interest payment is a significant amount of money to you and me, to a company not so much. more importantly: because the money they are using to finance projects is virtually free it is entirely possible that thier ROI is greater than the interest that is being paid. leverage is good.
not that paying off debt is bad ... but it isn't any kind of silver bullet here and has broader impacts than many of the posters are considering.
Financials
If Apple can make more money investing money that they have borrowed, then not having debt is a waste. For example about six months ago in the UK, I could have got a fixed mortgage at 3.99% and I could also get a savings account paying 4.3%. I could have made .31% doing absolutely nothing clever or risky.
Basically if Apple could make more money on that $300m than they were paying in debt repayments, then this would be a bad move. Of course they could use some of their $4.8b to fund that investment, so there is no point giving away some of the profit to the lender. Of course that only works if there aren't enough investments for the full $4.8bn, otherwise you might as well borrow and make even a small margin. The difference with my example above is that I don't have any money to put into a savings account, so if other factors hadn't weighed in (like not having a house to mortgage for a few months), I would have done just what I suggested.
Under normal circumstances debt for companies is far from a bad thing, as long as it is handled carefully and not excessive compared to the company's value (debt / equity ratio). Often the investors would prefer a company to borrow money rather than issue more shares to raise money for expansion. This doesn't apply due to Apple's existing war chest.
I raised an eyebrow thinking with interest rates so low they must be able to get a better return, but I have to respect the fact that this is a very basic part of running a company this is likely the best financial course of action for Apple.
If Apple can make more money investing money that they have borrowed, then not having debt is a waste. For example about six months ago in the UK, I could have got a fixed mortgage at 3.99% and I could also get a savings account paying 4.3%. I could have made .31% doing absolutely nothing clever or risky.
Basically if Apple could make more money on that $300m than they were paying in debt repayments, then this would be a bad move. Of course they could use some of their $4.8b to fund that investment, so there is no point giving away some of the profit to the lender. Of course that only works if there aren't enough investments for the full $4.8bn, otherwise you might as well borrow and make even a small margin. The difference with my example above is that I don't have any money to put into a savings account, so if other factors hadn't weighed in (like not having a house to mortgage for a few months), I would have done just what I suggested.
Under normal circumstances debt for companies is far from a bad thing, as long as it is handled carefully and not excessive compared to the company's value (debt / equity ratio). Often the investors would prefer a company to borrow money rather than issue more shares to raise money for expansion. This doesn't apply due to Apple's existing war chest.
I raised an eyebrow thinking with interest rates so low they must be able to get a better return, but I have to respect the fact that this is a very basic part of running a company this is likely the best financial course of action for Apple.
just a note: Apple needs to keep this seemingly huge chunk of cash in the bank in order to deter a possible takeover. Not that this all that is needed, but it certainly helps. As far as putting more money into R&D, this really does not have any affect on that. In fact it probably has the opposite effect because the amount of money paid yearly to service the debt was only a fraction of the $300 million payment it just made.
So you're saying its better to take on debt to pay for their losses?
Aren't they already trying to do that with iTunes Music store, the iPod Mini, the HP, Pepsi, Target, and AOL deals?
Ummm... I don't want to sound crass but you are stating the obvious.
if you ask me, apple was clearing their debt so they could negotiate better interest rates on new investment loans/financing packages. it's far easier to demand a low interest rate when you have no outstanding debt. anyone who's bought a car knows this.
i wouldn't be surprised if they went back into "good" debt as soon as six months from now. still, it's a sign of a healthy company, so i'd say it's a positive.
i wouldn't be surprised if they went back into "good" debt as soon as six months from now. still, it's a sign of a healthy company, so i'd say it's a positive.
Example:
Company A spends $1000 of its own money and makes $1100. Its profit is $100. It just made a 10% return on its money.
Company B spends $100 of its own money and borrows the other $900(extreme, but easy to figure out the percentages). It makes $1100. It just made a 100% return on its money.
Company's B profit is still $100 if not less? Company B spends $100 of its own money, plus borrows $900, wich of course must be payed back. So the $1100 so called profit is really ($1100) - ($900) - ($100) - (any intrest accumulated on the borrowed $900). You are left with a total profit that is really less than a $100. Sure some interest could be writen off, but thats not untill the end of the year. So in a sense you have just lost some money.
-SidedCircle
It was small change the amount they actually invested in the marketing deals with HP, Pepsi, Target and AOL. The iTunes Store was supposedly breaking even as near as dammit by Christmas, which leaves the iPodmini. I think Apple invested $500m in all R&D last year, and wasnt that all accounted for in the course of the year? So really, they have not done an awful lot with the war chest.
I'm not so sure about that. It seems that their cash on hand makes them an even better target for a takeover. Think about this:
1. Apple's current market capitalization (total amount of all outstanding shares at current price) is $8.5B.
2. Cash on hand is $4.5B.
This means the real cost to buy Apple (at current price) is only $4B. Not much.
If you think about assets (tangible or otherwise) including brand, intellectual property and patents...etc. Is Apple WORTH $4B? Probably easily. Shoot, Microsoft will spend that much on building Longhorn alone!
This is what I was going to ask about. I am of the understanding that Apple's large cash reserves are a takeover liability. So doesn't that mean that paying off their debt is a mixed bag, because it makes them an even more enticing target for takeover?
Hey , how about Apple taking some of that cash
and investing it into production of 2 GHZ G5 970FX iMacs and eMacs ? Once you have produced 1 milllion units of each (which should sell well ) , then get the G5 Powerbooks and iBooks produced.
and investing it into production of 2 GHZ G5 970FX iMacs and eMacs ? Once you have produced 1 milllion units of each (which should sell well ) , then get the G5 Powerbooks and iBooks produced.
SOmething else to think about is that APple is generally getting some financial matters in order to make some bigger moves soon. The recent thread about Apple consolidating office space in Austin, TX should probably be viewed in this light.
Could also be the (new, coming) CFO (Oppenheimer) taking a bigger role and making his own mark in some way as well.
Could also be the (new, coming) CFO (Oppenheimer) taking a bigger role and making his own mark in some way as well.
Honestly, who rates these types of news items as NEGATIVES! Please, show yourselves and EXPLAIN!!!
I haven't read all the posts so I may be repeating someone else's argument.
Having a lot of debt is bad. Having some might not be bad.
Think of it this way. Apple has $300M in cash. What can they do with it? They can pay off debt that costs them perhaps 8% a year. Or they could buy a government bond which pays around 4%. Or they could invest in R&D or a new store or something like that and presumably get a larger return.
In this sense, it could be a good thing for Apple to have some debt. I'm not arguing that they should, just explaining how some debt is not bad.
The same goes for money in the bank. If you could grow your business faster with more investment then why pile up cash? In Apple's case, having $5B in the bank is not only a good cushion against hard times but a message to investors that Apple is sound and not on the edge of disappearing.
www.investorwords.com
war chest:
Cash set aside by a corporation in anticipation of a capital-intensive event, such as an acquisition or a market consolidation.
Yes, this is good, for symbolic value. With 4 billion in the bank, they could've paid it off at any time. Maybe they could run a sale to celebrate. "Apple is completely out of debt. No more interest payments. And we are extending our savings to you for the next _ months!"
the down side is...
actually... if Apple is carrying no debt, has a large cash reserve, and has a low stock price.
That's a recipe for being attractive for a take-over. *fear*
Dharvabinky
actually... if Apple is carrying no debt, has a large cash reserve, and has a low stock price.
That's a recipe for being attractive for a take-over. *fear*
Dharvabinky
Thanks for saying it. I'm a finance major, and you're dead on the money (no pun). You could fit most people's understanding of corporate finance into a thimble. I know very little myself, but this is 101 stuff.
Apple SHOULD borrow money right now. (FED rate = 1%, not for much longer) Say, 500 mil on a 5 year note. This would allow them to streamline distribution, better utilize economies of scale, lower prices, and increase cash flows and profit margins.
Also, inflation estimates are ~ 2.5% right now, which is great. It's time for Apple grow, or at least improve the things they do best.
Kudos to Jobs for positioning Apple in such a lucrative manner.