Financial Analysis of Microsoft Corporation
Company Overview
The name Microsoft is known by many people like a protuberant technology firm. In the year 1975, Bill Gates, together with his friend Paul Allen turned BASIC programming language in support of personal computers. The two friends started a Microsoft, a name which was acquired from Microsoft and software. The company turned out to be incorporated as a public corporation in the year 1986. In the mid-1990s, Microsoft turned out to one of the robust as well as profitable firms within the history of America. In the year 1995, the corporation brought to the market the operating system of Windows 95. This outdid the utilization of the operating system produced by its competitor-Apple Computer Mac Operating system. Thus, it made an operating system an essential thing in most American homes. By the year 2001, the company ventured into the market of video games, having launched Xbox console. In the year 2010, Xbox became the most sought gaming system within multiple American homes. Xbox was outselling the Sony Play station 3 and Nintendo. Having programs like PowerPoint, Excel, Word, and Microsoft office, the company has turned out to be the leading software products in the market.
For the past years, Microsoft has bought multiple firms that add to the number of services which the company offers through Yahoo, which is the search engine of the company. The company bought Skype, which is the company for voice communications. Not only is Microsoft the leading corporation in the technology field, but the firm is also similarly funding multiple scientific kinds of research over the globe. Through various studies, Microsoft has attained carbon neutrality within its business operations. The company since 2014 is powered by renewable energy. This has made the management to venture into renewable studies. Besides, the firm is making renewable energy to be more inexpensive for business practices. All through its life, Microsoft has been leading within technological fields. Moreover, they are no signs that Microsoft will soon stop in its research and develop to continue being a leader in the technology sector.
As shown in the above income statement, it can be noted that Microsoft Corporation has its ups and downs. For the past two years, as indicated in the income statement, the corporation has registered an increment in its revenue. Again, the firm has seen a rise in its cost revenues. Even though there has been an increment in its revenue, Microsoft Corporation still witnessed a gross margin for the fiscal years of 2019 and 2018. As there was an increment in revenue, the company is likely to suffer a net income when the financial draft of fiscal 2020 would be drawn later this month. This can be said so as a result of the Corona pandemic, which has affected many of the operations of the many firms globally. Cost revenue rose between 2018 to 2019 because of marketing and research, which the firm made in various technological tools. There was an increment in marketing products of Microsoft in the wake of Apple releasing its Apple iPhone 6 as well as the company’s new model of MacBook. The company’s earnings per share in the fiscal year 2018 took a toll. This is an indication that the firm’s stock is reducing its profitability. Again, a cross look at the balance sheet shows that the firm’s total assets have augmented in the two-year stint as outlined in the year 2018 and 2019.
Nonetheless, the total liabilities of Microsoft have similarly increased between the two years. The positivity side of the balance sheet indicated above is that the assets of the company significantly outweigh its liabilities. The stockholder equity investment for the company increased from 1862 in 2018 to 2649 in 2019. In most cases, the firm’s stockholder equity investment is considered the book value of such an organization. The key thing to pick from this balance sheet is the fact that Microsoft will continue making a profit even if it reduces its liabilities.
Current ratio (CR)
Current assets calculate this from the balance sheet divided by current liabilities. The calculation of CR for the fiscal year is 2019 is calculated by:
The current ratio is the 2019 fiscal year is This is an improvement from 2018, which was lower as compared to 2019. The CR is revealing
Firm’s relative amount of the Microsoft working capital. As calculated above, the fiscal year 2019 drew a CR of. This is an indication that Microsoft would in a position of paying off its current liabilities through liquidation of the current assets. Even if this is likely to Microsoft with fewer current assets, it will be possible for the company to pay off as well as have some money left behind in funding its operations.
Quick Ratio
This is calculated by. As indicated by the company’s financial records of 2017 and 2018, there was an improvement in its quick ratio. However, the ratio deteriorated through 2018 and 2019 fiscal years. The quick ration of Microsoft is calculated as follows:
The quick ratio of the 2019 fiscal year is. The value is an indication that Microsoft still permits liquidating of cash, investments in short-terms as well as receivable accounts to pay off its current assets at the same time having some money left over in support of its costs of operation.
Cash Ratio
This is a measurement of a firm’s liquidity. It is particularly the proportion of a firm’s total cash as equivalent to its current liabilities. From the data of FY2019, Microsoft Cash Ratio is attained by:
There was a significant deterioration of the company’s cash ratio in the fiscal year 2018 and 2019 as compared to the figure, which was calculated in FY2017and 2018. Cash ratio is calculating Microsoft’s capability of repaying its short-term debts using its cash resources. With the cash ratio, Microsoft creditors can decide how much money they are willing to loan an organization. As the company’s cash ratio is deteriorating, creditors will be ready to lend less amount of cash to the company.
Financial condition
The amounted to $133.8 billion for the fiscal year 2019 and 2018. The investment equity for FY2018 was $1.9, while that of FY2019 reached $1.9. From the information, there was a tremendous reduction. The company’s short term investment, majorly extended to facilitate capital preservation as well as liquidation. Predominantly, the short term investment majorly composed of securities of fixed-term income. These were diversified amongst various users in the organization. The securities of US dollars majorly predominated the share market. However, this included the foreign currency security dominations, which the financial team diversified to various risks. The fixed income of Microsoft Corporation in the FY2019 got exposed to credit and interest rate risks. The credit risk, as well as the average portfolio of fixed income rate, was managed towards achieving economic returns, which are correlating to the particularly fixed income rates. The risk of settlement associated with these ventures. The credit risks and interest rate risk get exposed to the company’s investments, which reduce the profitability of Microsoft Corporation. The average maturity and credit risk of the company’s fixed-income group are managed to attain economic returns, correlating to the particular indices of fixed income. The risk settlement associated with these investments made by the Microsoft Corporation is insignificant, provided that investments are held within a short term basis. Again, such investments should be significant in liquid investments having fixed investment security incomes.
Valuation
Overall, Microsoft is using prices which have been quoted within active marketplaces in support of identifying liabilities and assets. This assists in determining the fair value of the firm’s financial instruments. The methodology of pricing is used by the securities of U.S governments for the mutual funds, preferred and common stocks. When the quoted prices within the active markets are the same liabilities and assets, they can be used as certificate deposits when Microsoft Corporation is acquiring loans from the creditors.
Cash flows
The operating cash of FY 2019 is $52.2 billion, an increment from the figure recorded in FY2018. The increase happened as a result of money received from clients, offsets within parts of increments, which have been caused by an increment in paying employees as well as suppliers. Again, operating costs skyrocket as a result of income taxes, which Microsoft pays to the government. The cash is used in financing the company’s operations went high from $3.3 billion towards $36.9 billion in the FY 2019. This is major as a result of an increase of common stock repurchases by $8.8 billion as well as a dividend paid of $1.1 billion. There was a reduction of debt repayment by $6.2 billion. Invested cash increased with $9.7 billion up to $15.8 billion in the fiscal year of 2019. This happened as a result of the reduction in cash investment by $6 billion as of the net investments on the purchases, maturities as well as sales. Besides, there was an increment of property and equipment investment by $2.3 billion. The firm used $1.5 billion in the acquisition of other firms.
Recommendations
From the analysis above, I would not advise one to invest in Microsoft Corporation. A decline in stockholder’s equity at a decent rate is a clear indication that at one time, it will increase. The company’s assets have increased continuously over time. However, the firm’s liabilities are growing at a similar rate. Microsoft’s long-term debt is similarly igrowing at a price, which is alarming. This shows that they will have to borrow money continuously for its operations.
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