The assets rule
January 31st, 2021
1 minute read
APPL v AALI
AAPL just released astonishingly great fourth quarter financial results. Sales was an incredible USD 111 billion in just one quarter. That’s USD 1.2 billion of sales every day. Cashflow was USD 35 billion! Another stock, AALI, has three letters the same... but the finances are the opposite. Here’s how these two are opposites & why that must now change .
Theory
Here’s a simple financial theory. In order to make sense financially there should be an inverse relationship between the amount of assets it takes to run a business & the profitability of that business. The more assets you need, the bigger a margin or lower cash cost ratio you should have. Let’s see how this works out with these cases.
Apple
Back in 2007 AAPL started it’s iPhone, iPad, Apple Watch, AirPods journey. The company had sales of USD 24 billion, non cash assets of USD 10 billion. That’s a low assets ratio, 0.4X. The cash costs ratio was 83%. 2020 sales were USD 237 billion on USD 158 billion of assets, a 0.6X ratio. Cash costs are down to 70%.
AAL1
In 2007, AALI had sales of Rp 6 trillion, larger than assets of Rp 4.4 trillion, a 0.7X ratio. The cash cost ratio was a profitable 63%. 2020 sales are at Rp 18 trillion while assets have increased to Rp 26.3 trillion, so the ratio is 1.4X. But the cash cost ratio has increased to a much less profitable 88%...
Reverse
The AAPL case follows the simple assets & profitability rule. As assets have increased relative to sales, so the profitability has logically increased too. AALI however is the wrong way around. As assets have increased relative to sales, profitability has collapsed. The solution is AALI sales must now surge, presumably through higher palm oil prices which will boost the profitability.
1 minute read
APPL v AALI
AAPL just released astonishingly great fourth quarter financial results. Sales was an incredible USD 111 billion in just one quarter. That’s USD 1.2 billion of sales every day. Cashflow was USD 35 billion! Another stock, AALI, has three letters the same... but the finances are the opposite. Here’s how these two are opposites & why that must now change .
Theory
Here’s a simple financial theory. In order to make sense financially there should be an inverse relationship between the amount of assets it takes to run a business & the profitability of that business. The more assets you need, the bigger a margin or lower cash cost ratio you should have. Let’s see how this works out with these cases.
Apple
Back in 2007 AAPL started it’s iPhone, iPad, Apple Watch, AirPods journey. The company had sales of USD 24 billion, non cash assets of USD 10 billion. That’s a low assets ratio, 0.4X. The cash costs ratio was 83%. 2020 sales were USD 237 billion on USD 158 billion of assets, a 0.6X ratio. Cash costs are down to 70%.
AAL1
In 2007, AALI had sales of Rp 6 trillion, larger than assets of Rp 4.4 trillion, a 0.7X ratio. The cash cost ratio was a profitable 63%. 2020 sales are at Rp 18 trillion while assets have increased to Rp 26.3 trillion, so the ratio is 1.4X. But the cash cost ratio has increased to a much less profitable 88%...
Reverse
The AAPL case follows the simple assets & profitability rule. As assets have increased relative to sales, so the profitability has logically increased too. AALI however is the wrong way around. As assets have increased relative to sales, profitability has collapsed. The solution is AALI sales must now surge, presumably through higher palm oil prices which will boost the profitability.
