Company-to-Company Comparison

Company-to-Company Comparison

Table 1: Ford and Microsoft Ratios

Table 1 shows a comparison between the companies’ ratios and their respective industrial averages. When deciding for the best investment, profitability, and leverage ratios are essential. The profitability ratios show the investor the general expectation of returns that he will make after investing in the company. On the other hand, the leverage ratios show the amount of risk that the investor could expect on his investment. As such, the comparison of these ratios will be a good criterion for choosing the best company that the investors should consider.

Company-to-Company Comparison

The profitability ratios are important predictors for the investor. The investor can gauge the expected return of the investment by checking the historical profitability ratios. Table 1 shows that the operating and net profit margins of Ford Motors are negative (-4.54%, and -5.81% respectively). The negative ratios show that the company made losses in the last quarter. Microsoft’s operating and net profit margins are positive and very high (37.05% and 30.07% respectively). The return on equity ratio is lower for Ford Motors at -6.67% than for Microsoft at 17.67%. Thus, Microsoft has been more profitable than Ford and an investor would have higher chances of better returns if he invests in Microsoft.

While checking these ratios, the investor should also understand the operations of the individual company and its comparison to the industry. Ford seems to be lagging behind in the industry in all the ratios. For example, while Ford Motors’ operation and net profit margins are negative (-4.54%, and -5.81% respectively), the industry’s are positive at 2.38%, 1.33% respectively. This means that there are other companies within the industry that are making a profit, while Ford is making losses. Microsoft cooperation is doing well. Its ratios profitability ratios are above those of the industry. As such, a rational investor would be more willing to invest in Microsoft than in Ford.

The liquidity ratios are also essential measures for the investors; they determine the ease of covering the immediate or current liabilities using the current assets. Microsoft has a current quick ratio of 2.904, 2.344 respectively. Therefore, the company can cover more than twice its current liabilities using the current assets. On the other hand, Ford’s ratios are way lower at 1.315 and 0.825 for current and quick ratios respectively. The low ratios mean that the company would have difficulties covering the current liabilities using its current assets. It could have difficulties paying suppliers, and other creditors. The same comparison applies to their respective industries. Microsoft ratios are higher than its industry’s ratios. This means that it is managing its current assets and liabilities better than the other companies within the industry are. Ford is also doing better than industrial averages. However, when comparing the two companies, a rational and risk avert investor would choose to stick with Microsoft.

The investors also have to consider the equity and liquidity ratios to understand the share of returns and risks that they have to earn in every financial period. In this case, the EPS is 1.40 for Microsoft Corporation and 0.5 for Ford Motors.  Thus, an investor in Microsoft is likely to receive more return on a single dollar of investment that those who invest in Ford Motors. Market to book value for Ford is 0.666, which means that the company’s shares’ market price is lower than its actual value. Investors would have to sell their shares at a loss. The same ratio is 1.132 for Microsoft, which means that an investor would sell the share at a higher value than its actual value. Ford’s debt-to-equity ratio is very high at 7.909. This means that the company’s long-term debts are over 5 times more than its shareholder’s assets. As such, a larger part of the company would go to the debtors in case of liquidation. It is also way higher than the industrial average, which is 0.37.  Microsoft’s debt-to-equity ratio is relatively lower at 1.493. It is also lower than the industrial average, which is 1.564. As such, Microsoft makes a less risky investment than Ford Motors.

Historical Evaluation

The historical information of a company is also essential while determining its risks and expected returns. In this case, Yahoo Finance is a good source of historical data. The graphs below show the historical stock performance of the two companies.

Figure 1:Microsoft Historical Share Performance

Figure 2:Ford Motors’ Historical Stock Performance

From these tables, it is evident that Microsoft has been doing well over the past year. The share prices have been rising except for are slight fall between March and April. As such, the company’s stock would be appropriate for short-term investment because the investor would be confident of getting his money back once he resells the share. On the other hand, Ford Motor’s shares have not been declining in market value for the last one year. A short-term investor would, therefore, worry that the stock price will reduce once he buys the shares thus causing him losses if he decides to sell the shares. As such, any rational investor would choose to invest in Microsoft.

Conclusion

In conclusion, Microsoft Corporation is doing way better than Ford in all ratios. It is also doing better than the industrial average, meaning that it is ahead of many competitors. Ford Motors seems to be behind its industrial averages in most of the ratios, which means that there are competitors doing better. the operating and net profit margins of Ford Motors are negative (-4.54%, and -5.81% respectively), while Microsoft’s operating and net profit margins are positive and very high (37.05% and 30.07% respectively). Thus, Ford had made losses in the last quarter, while Microsoft made huge profits. Microsoft’s liquidity, leverage, and equity ratios are also better than Ford’s. This means that the investor faces fewer risks of losing investment when investing with Microsoft.  Microsoft has a current quick ratio of 2.904, 2.344 respectively. Therefore, the company can cover more than twice its current liabilities using the current assets. On the other hand, Ford’s ratios are way lower at 1.315 and 0.825 for current and quick ratios respectively. The historical data has also shown that Ford has been declining over the last year. On the other hand, Microsoft has been on the rise. As such, a rational investor would choose to invest in Microsoft.

Ford Motor Company (F). (n.d.). Retrieved from https://finance.yahoo.com/quote/F?p=F&.tsrc=fin-srch

Microsoft Corporation (MSFT). (n.d.). Retrieved from https://finance.yahoo.com/quote/MSFT/