Financial Analysis of Microsoft Corp. Essay
Financial Analysis of Microsoft Corp.
This report is issued in order to inform the public about Microsoft Corporation. We analyzed the profitability and liquidity of this company. In addition, we were able to provide recommendations for investments or credits in Microsoft for the best interest of the public. Profitability ratios refer to the relative measure to what an actual created profit. Through these ratios the company is allowed to see how profitable the company. In addition it can serve as an examination of the overall performance of the company’s operations and how do these compare to past performances or other companies. The ratios in which accounting measures the profitability of a company are Profit Margin, Price over Earnings, Return on Equity and Return on Assets.
In terms of Profit Margin it has a high ratio, which means that our company is turning 76.3% more of each dollar that we sell. The results of this could be the increase in the quantity sold, increase in the price, and decrease in costs. Compared to Apple, whose profit margin ratio is 46.2%, Microsoft is able to be more profitable in terms of profit margin. The Price over Earnings ratio helps to determine how much does a share cost is compare to how much the company is earning and it is interpreted as how long it will take you to earn back what you invested in a company. In this case for someone who invests in Microsoft it will take them approximately 15.3 years, compare to Apple’s 13.5 years, to earn back the amount that they will invest.
The Return on Equity ratio helps to measure the profitability of a company for the investor and how it manages its equity. In this case, Microsoft experiences a 10.3% of Return on Equity. Ideally, a company would like to have a higher Price over Earnings ratio; compared to Apple’s 51.5% Return o n Equity, Microsoft stands at a lower percentage which might not attract others to invest in the company. Return on Assets ratio evaluates how a company is able to produce a profit before being on debt; it reflects on the efficiency of the management. In this case Microsoft’s 5.9% was again below Apple’s 33.4% in its ratio.
Cash Flows are the inflows and outflows of cash in a company, which are directly related to the revenues and expenses in Microsoft’s income statement. The Net Income that Microsoft recorded for 2012 was $16,978.00 and its Cash Flows from Operating Activities equaled to 31,626.00. In this case the company recorded higher cash flows from operating activities compared to its net income. This was a result of the company’s management on its current liabilities and its current assets. Also, the addition in depreciation and amortization, goodwill, and stock-based compensation; these accounts are not part of the cash flows yet they still make an impact on the income of the company.
Liquidity being, that which represents how fast the company is able to convert its assets into cash, is denoted with various ratios. The current ratio (D) takes the current assets of a firm and divides them by the firm’s current liabilities. Currently Microsoft’s current ratio is 2.9, showing that its current assets exceeds its current liabilities. Apple Inc., which is Microsoft’s contender, has 1.6 for its current ratio indicating that it’s not as quick in converting its assets into cash.
Another liquidity ratio is the quick ratio (E); this ratio is calculated by subtracting inventory from current assets and dividing that difference by the firm’s current liabilities. Microsoft’s quick ratio is 2.6, showing that the company is still doing well in converting its assets into cash even after removing its most liquid asset –inventory. Apple’s quick ratio is 1.1, which shows how much inventory constructs the company’s current assets. Microsoft has been doing very well within its liquidity measures and meets its obligations as they become due.
When discussing solvency, we analyze ratios that measure the long-term liability of a business to pay off its debts. The times interest earned ratio (H) is a solvency ratio; taking earnings before interest and tax, and dividing that total by the interest expense. Microsoft’s times interest earned ratio is 87.7, showing that this firm is very successful especially before any interest or tax is deducted from its overall earnings. Apple’s times interest earned ratio could not be calculated due to the fact that their data didn’t indicate a specific interest expense to complete the equation. Another solvency ratio is the debt to equity ratio (I); taking the firms total liabilities and dividing that total by owners’ equity.
Currently Microsoft’s debt to equity ratio is 0.8, showing that there is less risk among the firm’s financials. This also means that the company doesn’t rely too much on external lenders. Apple’s debt to equity ratio seems to also be within good standing because it is .5, so it doesn’t rely too much on external lenders either. Overall, both liquidity and solvency ratios represent how financially stable this company is within converting its current debt into cash as well as its long-term debt. In most cases Apple Inc. falls behind Microsoft Corp. within its short and long term debt solvency.
When analyzing Microsoft’s capital structure the percentage of liabilities that construct the firm’s total assets is 42.87%. Showing that less than half of the firm’s total assets are represented by liabilities. Now the percentage of the total assets that are represented by stockholders’ equity is 57.12%. Showing that stockholder’s equity represents slightly more than half of Microsoft’s total assets.
When analyzing the capital structure of Microsoft’s competitor Apple, there are distinct differences. The percentage of liabilities that construct the firm’s total assets is 36.06%. Showing that unlike Microsoft’s percentage of liabilities to assets, there are a lot fewer liabilities representing the total assets of the firm. Now the percentage of stockholders’ equity that constructs the total assets of the firm is 64.93%. Showing that more than half of the firm’s total assets are constructed out of its stockholders’ equity. Apple seems to have fewer liabilities supporting its total assets and a higher percentage of stockholders’ equity. Overall, it seems that Microsoft Corp. has a significantly different capital structure than that of its competitor Apple Inc..
IFRS refers to the International Financial Reporting Standards; it is a set of accounting standards constructed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB). IFRS provides regulation for the company to prepare its financial statements off of, rather than setting rules for industry-specific reporting. The International Accounting Standards Board (IASB) is an independent, private-sector body based in London that currently develops and approves International Financial Reporting Standards. The IASB is thoroughly responsible for all technical matters of the IFRS Foundation including, the full discretion in developing and pursuing its agenda, subject to certain consultation requirements with the Trustees and the public, and exposure drafts, following the approval and issuing of Interpretations developed by the IFRS Interpretations Committee.
Some of the differences between IFRS and GAAP is that IFRS is considered to be more of a principles based accounting standard whereas in contrast the U.S. GAAP is considered more of a rule based accounting standard. Under IFRS, the LIFO method for accounting for inventory costs is not allowed. Under U.S. GAAP, either LIFO or FIFO inventory can be used. The move to a single method of inventory costing could potentially enhanced similarities between countries, and removes the need for analysts to adjust LIFO inventories in their comparison analysis.
The reporting for each would differ. For instance the treatment of intangible under U.S. GAAP is recognized at fair value, while under IFRS, it is only recognized if the asset will have a future economic benefit and has measured reliability. Under IFRS, if inventory is written down, the write down can be reversed in future periods if specific criteria are met. Under U.S. GAAP, once inventory has been written down, any reversal is prohibited. The potential adoption of IFRS is likely to impact not only reporting structures but also how individual transactions are captured and processed. In many cases, operating leases under GAAP could become finance leases under IFRS. Impacts could be mostly identified on taxes and balance sheet ratios. IFRS may generate running obligations sooner than under GAAP due to the “more likely than not” principle. Contracts would need to be evaluated carefully under GAAP.
Based on the previous analyses of the company’s data I can say I would definitely loan money to Microsoft Corp. short-term and long-term. The liquidity of the company calculated using current ratio and quick ratio represents how fast the company is able to convert its assets into cash. Seeing that the firm showed signs of quick asset to cash turnover within both current and quick ratio, shows that they are able to pay off any loans they might incur. In contrast to Apple its contender, which had low ratios depicting negative signs of asset to cash turnover.
When looking at the solvency measures, we can see the long-term viability of a business to pay off its debts. We used the times interest earned ratio and the debt to equity ratio to depict what trend this firm had with balancing debt. Microsoft seemed to show very high earnings before interest and taxes, which resulted in a high times interest earned ratio overall. This high ratio means that this firm has great ability in paying off its interest and debt; this serves to be another viable reason for Microsoft to be approved for a loan. Another solvency measure that was taken was through the debt to equity ratio, which represents the degree to which the assets of the business are financed by the debts and the shareholders’ equity of a business. This ratio showed that Microsoft’s overall business doesn’t rely too much on the external lenders of the company.
It shows it can attain profit through its own activities, and therefore has overall less risk. Overall, due to the fact that Microsoft has quick asset to cash turnover, increasingly high earnings before interest and tax, and a low debt to equity ratio; Microsoft would be an ideal candidate for short and long term loans. When discussing whether an individual should buy, sell, or hold on the stock of this company, I would recommend the hold on stocks. Based on the profitability ratios, which help us calculate how a firm is performing, Microsoft, compared to its competition Apple, is behind in terms of profitability.
Microsoft has a higher profit margin then Apple does; however, its price over earnings, returns on equity and returns on assets fall below its competition. This can be a discouragement for anyone who is interested in the company. Yet, even though Microsoft’s overall profitability is not as good as Apple’s profitability, there could be still a chance in which the company can provide investors with more profitable income since the company is not at risk. Thus, this could take longer then expected, that is why it is better to hold on the stocks of this company. So, I recommend this individual hold on their stocks and see how the turnout ends for the most recent advancements Microsoft has made as a company, and from those figures on either decide to sell or buy more stocks.
Subject: Balance sheet,
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 10 November 2016
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