Apples $14.5 billion EU tax fine might take a larger bite from the iPhone maker than investors are acknowledging.
Shares of the iPhone maker fell just 82 cents, or less than 0.8% on Tuesday, to $106, after a European tax commission stated Apple had to pay the $14.5 billion in back taxes, plus interest, that it had actually prevented paying European governments for years since of a sweetie deal with Ireland. EU regulators discovered that Apple was paying a tax rate of 0.5%, when it should have been paying 12.5% if it were really following Irelands tax guidelines.
Get Data Sheet, Fortunes technology newsletter.
Undoubtedly, the technology giant will have no issue covering the fine. Apple has $231 billion in money and financial investments. The EU levy would consume up just 6% of that. Whats more, the business produced nearly $11 billion in cash circulationcapital from operations in the last quarter alone. Then theres the rumbling among some experts that Apple may not even need to pay the full amount. Both the computer company and Ireland are likely to appeal the ruling. Even if Apple loses, it might be able to balance out some of that cost with US tax credit.
Still, the multi-billion dollar tax hit could slice a larger portion from Apples bottom line and its share rate than it appears.
See also: Why Irelands Government Doesn’t Want Apples Cash
First off, shares of Apple
trade at a price-to-book ratio of 4.5 times the iPhone makers net worth. That suggests shareholders have actually been valuing every dollar of net possessions that the iPhone maker holds at $4.50, most likely on the presumption that Apple will have the ability to turn those assets into more money. That indicates if Apple needs to shell out (no tax pun planned) $14.5 billion in money, that need to slice $65 billion off of Apples market worth. Yet, Apples market capitalization fell less a tenth of that on Tuesday or around $5 billion.
It is realholds true that Apples cash probably gets a lower premium than a few of its other assets, like say its patents. However its likewise probably not one-to-one either. Subtract the cash, and the rest of Apples possessions trade at 7 times its book worth. That would be more than Googles price-to-book value of just over 4 times incomes, and around what Facebooks properties are valued at. But both of those companies are growing their earnings much faster than Apple, and ought to get a higher book value.
See also: What the Web Is Saying About Apples $14 Billion Tax Battle With Europe
As for Apples bottom line, the company made $39 billion in its fiscal 2014, which ended in September and the last year covered by the tax offer. That represents about 20% of the earnings it made during the 11-year period covered by the $14.5 billion tax fine. So if Apple had paid its full taxes, it would have owed nearly $3 billion in additional taxes.
Assume it will need to pay those taxes in the future, and expected earnings this year would drop to $41 billion. Apply Apples p/e ratio of around 12 to that, and you get a market cap of $482 million, or roughly $88 billion less than where the stock trades today.
Apple has actually resided in a world for more than a years– or most likely more like two– where it hasn’t needed to pay much taxes on a great portion of its incomes. Financiers, it appears, still think they are residing in that world.