It is no longer the world's largest company by market capitalisation but Apple (APPL:NDQ) is a name that resonates with any investor. The company's earnings reports help shape broader market sentiment, while popular British stocks such as ARM (ARM), Imagination Technologies (IMG), CSR (CSR), Wolfson Microelectronics (WLF), Volex (VLX) and Laird (LRD) are all suppliers. Good or bad news from the Californian giant move their share prices, according to their varying degrees of sales exposure.

Apple fell 8% after its first-quarter results last week (27 Jan) as chief executive officer Tim Cook's guidance for its second fiscal period, to end-March, implied broadly flat earnings per share (EPS) year-on-year. At $496 a share, the Cupertino-headquartered concern trades on just 11.6 times and 10.7 times consensus EPS forecasts of $42.8 and $46.2 for the years to September 2014 and 2015 respectively. Those multiples go below eight if you strip out the $159 billion net cashpile. With operating margins in the 25% to 30% range and activist investors crawling all over demanding more action, Apple on the face of it looks screamingly cheap, especially when the US market trades on nearer 18 times consensus estimates.

Yet the soggy share price speaks loudly of broader market scepticism. A look at the balance sheet helps to explain why and using the growth, risk and quality framework we employ each and every week, it is possible to quickly eyeball Apple and take a view on what needs to change for the shares to rise again, and possibly drag some of those UK-listed firms along for the ride.

Three-step process

Remember that every time you buy or sell a stock you are saying the market has got it wrong, as in your opinion it is paying too low or high a price. For the market to come round to your way of thinking, some or all of the following have to happen, and it is easy to apply this thought process to Apple:

• Growth has to come in higher or lower than expectations for the shares to rise or fall. Consensus may be looking for 8% EPS growth at Apple this year and next but Cook has already guided to a flat opening quarter, back-end loading the figures.

• Risk has to fall or rise for the shares to advance or decline. The balance sheet is strong but figures from researcher IDC show Apple is losing market share in smartphones, with Korea's Samsung (005930:KS) and China's Lenovo (0992:HK) and Huawei (020502:SZ) winning out. Moreover, last autumn's iPhone 5 launch looks to have left Apple with the sort of inventory bulge that could require some discounting.

• Quality of earnings must improve or worsen for the shares to go up or down. Apple is best known for its iPads, iPhones and iMacs and its great brand brings loyal customers. Better still, the iTunes and app ecosystem generates substantial sales and profits and this is intuitively a much higher profit margin, and therefore higher multiple, business than just banging out consumer electronics gadgets. The share buyback demanded by activist investor Carl Icahn is interesting but is no more than financial engineering and frankly low-quality growth.

In sum, bulls argue its brand, loyal clients, cashpile and very profitable app income mean Apple is too cheap. Bears counter the firm is ex-growth, faces competitive threats and quality of earnings is mixed, especially as the apps business is just 10% of the total and hard to value. What Apple really needs is a new blockbuster product. If earnings forecasts start to rise, the bulls will take control. Cook must therefore prove he can innovate and generate new products to drive growth, just like his predecessor, Steve Jobs. Whether AppleTV or wearables will do the trick is an open question and a research and development budget that is barely 3% of sales suggests Cook is going to have to be very nimble.

With thanks to Michael Cahill for his help with this piece.