Influence of the External Environment on the Company’s Business
Any organization, including Apple Inc., finds itself sensitive to changes in the external environment. Such reactions are especially noticeable for large companies, which guarantee transparency to increase their investment attractiveness and compliance with laws and find themselves under the pressure of a global agenda. Political factors are among the fundamental determinants for business operations since the legal environment’s development and nature determine the ability to conduct business activities. The political climate in a country has a particular impact: increasing political instability leads to general uncertainty, which has a destructive effect on strategic planning opportunities. For example, the uncertainty associated with the Russian invasion of Ukraine entailed the need for the prompt withdrawal of Western companies from the Russian market, which led to high costs (McDonald’s, 2022). From the political factor comes another influence on business, namely the government’s actions. One of the critical government influences is changes in tax policy, such as corporate tax — an increase or decrease in this parameter will lead to changes in the size of corporate profits. At the same time, for multinational companies, an increase in value-added tax would also result in a severe reduction in net profits (Hall, 2022; Apple Inc., 2019). Governments can also orchestrate import-substitution policies to support the development of domestic goods: in the case of foreign companies, this practice creates solid competitive pressure, while for local companies, it is a favorable factor for commercial development.
Along with political and governmental effects, business is also affected by currency fluctuations. If a company operates in foreign markets, as in the case of transnational corporations, strong currency fluctuations lead to a fall or increase in operating costs and, consequently, net profit for the company in equivalent terms. Thus, strengthening the Russian currency against the background of the geopolitical crisis reduces the gap between RUR and USD, which leads to a decrease in revenues for Western companies (Ivanova, 2022). At the same time, the rise in the price of foreign currency leads to higher costs associated with the purchase of imported equipment, affecting the corporation’s commercial efficiency. Global economic conditions also affect business development, which is especially relevant to large companies. The rising cost of foreign labor, strikes by outsourced workers, as was the case at Foxconn, and supply chain disruptions caused by COVID-19, for example, have also significantly impacted companies (Kaye et al., 2021). Finally, the final factor for discussion is environmental safety. When disasters occur, companies are vulnerable because they lose material resources, including equipment and employees, and suspend production indefinitely. A concrete example of such an impact is the destruction of the Fukushima nuclear power plant in Japan in 2011, which left the prefecture isolated, which led to the complete cessation of local business (Nobuoka & Suzuki, 2019). Thus, each of the factors mentioned affects the viability and sustainability of companies and can lead to both favorable development and destruction.
Market Impact on Apple Inc.
The Fed is the key government regulator in the U.S., working to increase economic stability through job growth, interest rate manipulation, and taxation. The main changes to the Fed’s monetary policy in 2019 were to keep the short-term interest rate (STIR) at 2.5%, along with forecasting higher inflation and economic growth in the country (BGFRS, 2019). This is a positive move for businesses because, with a minimum STIR, borrowing turns out to be more profitable for corporations: it impacted Apple Inc. stock up nearly six percentage points throughout July and up 46 percentage points by the end of the year (Yahoo! Finance, 2022). On the other hand, by the end of 2019, Apple Inc. held nearly $205.8 billion in cash, according to its annual report (Apple Inc., 2019). Given the low-interest yields, the added returns were not as high as for higher STIRs. In response, the company repurchased up to 6.7% of its stock, thereby boosting its earnings (Apple Inc., 2019; Apple Inc., 2018). In addition, amid falling interest rates, Apple Inc. issued 30-year bonds with a record low yield of 3% for the company, which caused a decline in investment appeal (Wirz & Trentmann, 2019). The company’s effective income tax rate was also reduced to 15.9%. The company was at the center of several lawsuits in 2019, including a conflict with Qualcomm, the FCA, and VirnetX, and an iOS performance class action — in all cases, the company has appealed the lawsuits against itself, and the annual report does not report the fines Apple Inc. was required to pay. It was also reported that Apple does not guarantee that its employees and suppliers will follow the regulations but pledges not to encourage such behavior because it negatively affects the company’s reputation. From the previous, Apple Inc. has been dynamic and initiative-taking in responding to market changes and has taken advantage of available opportunities, including negative ones, to increase its equity.
Comparison of Financial Performance
Examining annual financial reports at companies in the context of time provides a comprehensive assessment of corporate finance strategy and identifies an organization’s role in the industry marketplace as an open, dynamic system. In 2019, PE Ratio nearly doubled from 2018 (year-end), from 12.6x to 23.6x (Finbox, 2022). The rise in PE Ratio could signal increased investment interest in Apple Inc. stock, which was reflected in an increase in the stock price while the profitability of that stock declined; this likely means the company’s stock is overvalued. The PB Ratio also rose (14.13 vs. 6.13), confirming the company’s increased investment appeal as perceived by investors (Macrotrends, 2022). Part of the investor interest was increased asset utilization, which was reflected in an increase in ROA (17.13% vs. 16.33%), meaning that Apple Inc. was making more money with less investment. There was also an increase in the company’s finance income, which was reflected in an increase in ROE from 50.92% to 60.18%. Thus, from a financial perspective, 2019 was a better year overall for Apple Inc. from an investor perspective, despite a drop in net income and sales, according to the annual report.
References
Apple Inc. (2018) Form 10-K [PDF document]. Web.
Apple Inc. (2019) Form 10-K [PDF document]. Web.
BGFRS. (2019). Monetary policy report – July 2019. Fed. Web.
Finbox. (2022). P/E Ratio for Apple Inc. Finbox. Web.
Hall, M. (2022). Governments’ influence on markets. Investopedia. Web.
Ivanova, I. (2022). Russia’s ruble is the strongest currency in the world this year. CBS News. Web.
Kaye, A. D., Okeagu, C. N., Pham, A. D., Silva, R. A., Hurley, J. J., Arron, B. L.,… & Cornett, E. M. (2021). Economic impact of COVID-19 pandemic on healthcare facilities and systems: International perspectives.Best Practice & Research Clinical Anaesthesiology, 35(3), 293-306. Web.
Macrotrends. (2022). Apple Price to Book Ratio 2010-2022 | AAPL. Macrotrends. Web.
McDonald’s. (2022). McDonald’s to exit from Russia. McDonald’s News. Web.
Nobuoka, H., & Suzuki, T. (Eds.) (2019). The residual tsunami risk after the reconstruction projects in Fukushima prefecture. Springer.
Wirz, M. & Trentmann, N. (2019). Apple leads corporate bond Bonanza. The WSJ. Web.
Yahoo! Finance. (2022). Apple Inc. (AAPL). Web.