Financials

Financials

Apple's financial profile is unusual: a $4.2 trillion company growing 16-17% on the top line for the first time in three years, throwing off ~$100B of free cash flow a year, returning roughly 113% of FCF to shareholders, and trading at a record valuation — 34.8× trailing earnings versus a 12-19× pre-COVID range — because the recent re-rating has done most of the work the fundamentals haven't. The single financial number that matters now is gross margin: management guided the June quarter to 47.5–48.5%, down from 49.3% in the March quarter, on rising memory costs that even Apple's scale and long-term supplier contracts cannot fully absorb.

1. Financials in One Page

What the strip says, in one sentence per number:

• Revenue is back to mid-teens growth after the FY23–FY24 stall — the first time since FY21.
• Operating margin of 32.6% on a TTM basis is at the structural high; the pre-COVID range was 24-31%.
• FCF $98.8B for FY25 is below FY24's $108.8B because working capital and capex both drained cash.
• Net debt $44B is rounding-error against $4.2T of equity value.
• ROIC 48% confirms the moat — but the absolute return on each new dollar is rising because the equity base has been bought down to almost nothing ($74B book vs $4.2T mcap).
• P/E 34.8× is roughly 2× the pre-COVID 18× median; the market has decided this is a new asset.

2. Revenue, Margins, and Earnings Power

Revenue is the dollar value of products and services sold. Gross profit is revenue minus the direct cost of those goods. Operating income subtracts research, sales, and overhead — it is the cleanest measure of earnings from running the business before financing and taxes. The margin is each of those numbers divided by revenue, expressed as a percentage.

The 21-year revenue picture is the single most important chart on this page. Apple grew revenue 30× from FY2005 to FY2025, but the curve flattened decisively after FY2015 and stalled outright in FY2023–FY2024. The recent re-acceleration is the reason the stock has re-rated to a new high.

Three regimes are visible. The iPhone-launch growth wave (FY07–FY15) ran revenue from $24B to $234B at ~30% CAGR. The maturity plateau (FY16–FY20) held revenue between $215B and $275B for five years as iPhone ASP took over from unit growth. The services-and-pandemic re-rating (FY21–FY25) added $150B of revenue in five years to land at $416B in FY25 and $451B TTM through Q2 FY26.

This is the more important chart. Gross margin has expanded ~700bps since FY20 (38.2% → 46.9%) because services — now 26% of revenue at ~76% gross margin — is the marginal mix. Operating margin followed because R&D and SG&A grew more slowly than revenue. The FY24 net-margin dip to 24.0% is a one-time tax event: Q4 FY24 carried a $14.9B European Commission state-aid back-payment, which dropped Q4 EPS to $0.97. Strip that out and FY24 net margin would have run ~28% — confirming the underlying margin trajectory is still up.

The recent quarterly pattern shows the same story acutely:

Growth has stepped from a 4-10% band through FY25 to mid-teens in Q1–Q2 FY26. iPhone revenue grew 22% YoY in Q2 FY26 (March quarter) — the strongest iPhone print in three years — and Services hit an all-time record of $31B (+16% YoY). This is the new earnings power the market is paying 34× for.

3. Cash Flow and Earnings Quality

Operating cash flow (OCF) is the cash a business actually receives from running its operations, after working-capital movements but before investments. Free cash flow (FCF) is OCF minus capital expenditure — what's left to pay dividends, buy back stock, repay debt, or acquire businesses. If FCF tracks net income closely over time, the earnings are real.

Apple's earnings convert to cash with almost no friction over multi-year averages, which is why the company can return more than 100% of profit every year without leverage building.

Three things to notice. First, 8-year cumulative: Net income $670B vs FCF $708B — FCF has actually run 1.06× net income over the cycle, the gold-standard quality signal. Second, FY25 is an exception: OCF ($111.5B) just touched net income ($112.0B) — one-quarter coverage of 1.00× — because working capital absorbed cash (receivables grew $6.7B, payables grew only $0.9B) and capex stepped up to $12.7B (+35% YoY) for AI/silicon and U.S. manufacturing build-out. Third, FCF in FY25 fell to $98.8B from $108.8B — that is a real $10B step-down, and explains why FCF margin dropped from 27.8% to 23.7%.

The watch item is stock-based compensation (SBC). At $12.9B in FY25 it is 3.1% of revenue, up from 1.6% in FY18 — and yet the company still buys back enough stock to absorb dilution and shrink the share count. SBC is real cost (it is a transfer of equity from shareholders to employees), and FCF as reported does not net it out. SBC-adjusted FCF would be ~$85.9B for FY25, or 20.7% of revenue.

4. Balance Sheet and Financial Resilience

Net debt is total debt minus cash. Net debt / EBITDA measures how many years of pre-tax operating cash flow it would take to pay off all debt. Below 1× is conservatively financed; above 3× starts to constrain optionality.

Apple's balance sheet is unusual because management has spent the last decade deliberately converting equity into buybacks. Cash is no longer a fortress — it is a working tool.

The peak debt year was FY22 ($124.7B total) — Apple has been net-repaying since, with total debt down to $98.7B by FY25. Cash + marketable securities sit at $54.7B. Net debt is $44B — about 0.22× FY25 EBITDA of $145B.

Two oddities a beginner needs to understand here. First, working capital is negative — current liabilities exceed current assets by $17.6B. For most companies this is a red flag; for Apple it is a feature. Suppliers carry the inventory, customers pay before fulfilment for many services, and Apple sits on the float. Days payable outstanding is 115 days versus days sales outstanding of 61 days — Apple holds supplier cash for 54 days net.

Second, retained earnings are negative ($−14B at FY25 end). This is not a loss-making story — it is what happens when a company buys back so much stock that cumulative buybacks exceed cumulative profits since the start of the buyback program. It signals a balance sheet engineered to maximize per-share value, not balance-sheet optics.

The Altman Z-Score, a 1-9 distress indicator (below 1.8 is distress, above 3.0 is safe), is not the right lens for AAPL because the model penalizes negative working capital and low book value. Cash flow coverage is the right lens: at $111B OCF against $98.7B total debt, Apple could repay all debt with one year of cash flow.

5. Returns, Reinvestment, and Capital Allocation

ROIC (return on invested capital) = after-tax operating profit divided by debt + equity used. ROE (return on equity) = net income divided by book value. ROA (return on assets) = net income divided by total assets. ROIC is the cleanest measure of business quality. ROE can be inflated by debt or by buybacks that shrink the equity base.

Three reads. ROIC has stepped up from a 23-25% band through FY19 to 40-48% post-COVID — that is the operating-margin step plus the buyback effect. ROA at 31% is an absolute number you almost never see in a $360B-asset business; it tells you Apple has compressed asset turnover (1.15×) into a thin layer of high-margin economics. ROE at 171% is the buyback effect — book value is so small relative to earnings that any sensible normalization of equity would compress this number, but it does correctly say "shareholders are getting their capital back at a premium."

The picture is unambiguous: buybacks dominate everything else. Eleven-year cumulative buybacks of $792B vs $164B of dividends and $124B of capex. There has been almost no M&A spending — Apple has built, not bought, its way through the AI cycle. The biggest acquisition in the last decade remains Beats Electronics ($3.0B in 2014).

Diluted share count has fallen from 26.5B in FY12 to 15.0B in FY25 — a 43% reduction. EPS would have grown from $1.58 to $4.27 on the FY12 share count; on the actual count it grew to $7.46. About 75% of the EPS growth from FY12 to FY25 came from earnings; about 25% came from buybacks. The split tilts more toward buybacks in the slower-growth years (FY16, FY19, FY23) and reverts to earnings in the growth years (FY21, FY25).

The judgment: management is running a capital-return engine, not a reinvestment engine. That has been the right call for 12 years because new investment opportunities at AAPL's scale are scarce. The risk is that the AI capex cycle (apparent in the FY25 capex jump to $12.7B) marks a regime shift that requires reinvestment to pre-empt — and the share count can't compound forever.

6. Segment and Unit Economics

Apple discloses revenue by product line and by geography. The mix is what matters: services at 26% of revenue but ~40-45% of gross profit are the structural margin story.

Gross-margin estimates are derived from the disclosed Q2 FY26 split (Products 38.7%, Services 76.7%) applied to the FY25 mix. The headline finding: Services contributes more gross profit than iPhone (~$84B vs ~$81B) on less than half the revenue. That is why every reset in the Services growth rate or Services gross margin (currently 76.7% and rising) is the most leveraged number on Apple's P&L.

Geographic mix from the FY25 10-K (Americas 43%, Europe 26%, Greater China 17%, Japan 7%, Rest of Asia Pacific 7%) reinforces a known concentration: 24% of revenue depends on the China–Japan–rest-of-Asia complex. Q2 FY26 commentary noted "strong double-digit growth in Greater China and the rest of Asia Pacific" — the China stabilization that bears have been waiting to call wrong has, in fact, reversed.

7. Valuation and Market Expectations

P/E (price-to-earnings) divides the share price by per-share profits. EV/EBITDA divides enterprise value (market cap + net debt) by earnings before interest, tax, depreciation, and amortization — useful when comparing companies with different capital structures. P/FCF divides price by free cash flow per share — the truest yield measure for a cash-compounder.

The valuation re-rating is the dominant fact of the last five years.

The pre-COVID 6-year median P/E was 15.4×. The post-COVID 6-year median is 30.7× — a 99% expansion. At the May 6, 2026 close of $287.51 and TTM EPS of $8.27, the market is paying 34.8× trailing earnings, slightly above the 6-year post-COVID average and roughly 2× the pre-COVID norm. EV/EBITDA at ~26.8× tells the same story.

The implied range is roughly $187 (bear) to $332 (bull) — call it −35% / +16% from spot. The center of gravity is fair-to-slightly-rich because the post-COVID multiple has stuck and earnings are accelerating. Note that the bull case requires both the multiple to expand and FY27 EPS to print at $9.50 — implying ~13% earnings growth from FY25's $7.46. The bear case requires the multiple to compress to 22× and growth to decelerate — neither alone is sufficient.

The Q2 FY26 results validated the upper part of the range: $111B revenue, +17% YoY, and EPS $2.01 vs. consensus $1.94. Several brokers raised targets after the print — Morgan Stanley to $330 (Overweight), JPMorgan to $325 (Overweight). Consensus 12-month target sits at roughly $312, implying ~9% upside from $287.51.

8. Peer Financial Comparison

The peer set is six US large-caps: the four mega-cap platform competitors (MSFT, GOOGL, AMZN, META) and the two pure-PC peers (HPQ, DELL). Numbers come from each company's most recently reported fiscal-year-end snapshot — fiscal year-ends differ, which is the right caveat to carry into the table.

Three useful peer reads. Versus megacap platforms (MSFT/GOOGL/AMZN/META): AAPL's 34.8× P/E is in the middle (META cheapest at 28.1×, MSFT richest at 36.5×); its 26.8× EV/EBITDA is the highest of the cohort, reflecting the premium for hardware-tied recurring services. AAPL's ROIC (48%) is the highest of any peer — the buyback effect compounds. Versus PC peers (HPQ/DELL): AAPL trades at 3-4× the multiple of HPQ/DELL because AAPL's Mac business sits inside the iPhone ecosystem — that's the ecosystem premium quantified. Versus services-comparable peers: AAPL's Services gross margin of 76.7% is comparable to the platform-economics businesses at MSFT (Office 365) and GOOGL (Search), confirming Services should be valued like a software business, not a hardware accessory.

9. What to Watch in the Financials

What the financials confirm. Apple is a structurally higher-margin business than it was five years ago (op margin 32% vs 24%), the cash engine is intact (FCF averaging $103B per year over the last five), and capital allocation is a buyback machine that has shrunk the share count by 43% in 13 years. Growth has unambiguously re-accelerated: mid-teens in Q1–Q2 FY26 versus a 4-10% band through FY25. The balance sheet is conservative on every cash-flow-based test (0.22× net debt/EBITDA), even though it looks levered on book-value tests because management has chosen to convert equity to per-share value.

What the financials contradict. The free-cash-flow story is less clean than it was. FY25 FCF fell $10B YoY because capex stepped up and working capital absorbed cash; SBC at $12.9B is now real friction; and the FCF-to-net-income ratio of 0.88× in FY25 is the lowest in eight years. The valuation re-rating to 34.8× P/E happened on the assumption that growth and margins both step up — if growth normalizes back to single digits while the multiple holds, the stock would have to grow into its multiple rather than lift through it.

The first financial metric to watch is gross margin in the June 2026 quarter (Q3 FY26). Management guided 47.5–48.5% versus 49.3% in March, attributing the step-down to "significantly higher" memory costs. A print at the high end of guide (48.5%) preserves the structural margin re-rating thesis; a miss to 47% or below — especially if framed as broader cost pressure rather than a single-quarter memory blip — would fundamentally change how the market should value the next four quarters of EPS, because it would unwind the single biggest contributor to the post-COVID re-rating.