3. INTRODUCTION:
MicrosoftCorporation is a software company based in Redmond, Washington.
Microsoft'sflagship product, the Windows operatingsystem, is the single
most popular operatingsystem for home desktop use. Its other desktop
products, namely MicrosoftOffice, Internet Explorer, and WindowsMedia
Player, are either bundled directly with the Windowsoperatingsystem, or are
often sold together with Windowsaspreinstalled softwareon new computer
systems. Additionally, the company manufacturesand sells computer
hardwaresuch as keyboardsand mice, and ownsor possesses interest in
several content-distribution channels such as MSNBC, the
MSN Internet portal, and the Microsoft Encarta electronic encyclopedia.
Data CollectionDate:
22 April, 2016
4. Chose Company: Microsoft Corporation
Company Ticker Symbol: MSFT
Company Financial Statements:Income statement andBalance
5.
6. Calculationof Ratios and their interpretations:
Financial statements will be analyzed in a fallowing four categories:
‘’Liquidity Ratios’’
These ratios focuson a company’sability to pay bills when due. If liquidity
ratios remain relatively high for a prolonged period, too much capital may be
invested in liquid assets (e.g. Cash, short-term investments) and too little
devoted to increasing shareholders value.
I: Current Ratio:
It measures a firm'sability to pay off its short-term liabilities with its current
assets. The currentratio is an important measureof liquidity because short-
term liabilities are duewithin the next year.
Company Data
Heads Year 2014 Year 2015
CurrentAssets $114246 $12712
CurrentLiabilities $45625 $49858
Financial
Statments
Liquidity
Leverage Activity
Profitability
7. MicrosoftCurrentratio is mostly similar in both years which means that
company has its ability to pay back its short term liabilities. Ratio is morethan
1 which meansthat company hasits ability.
II:Asset Test Ratio / Quick Ratio:
The acid test ratio measuresthe liquidity of a company by showing its ability
to pay off its currentliabilities with quick assets. If a firm has enoughquick
assets to cover its total currentliabilities, the firm will be able to pay off its
obligations without havingto sell off any long-term or capital assets.
Company data:
Heads Year 2014 Year 2015
Current Assets $114246 $12712
Inventory $2660 $2902
CurrentLiabilities $45625 $49858
Microsoftquick ratios are very efficientbecause they are higher than 1 which
means that company can easily pay its debts without inventory.
Formula
Current Ratio = Current Assets
Current Liabilities
2014
2.50
2015
2.50
Formula
Quick Ratio = Current Assets - Inventory
Current Liabilities
2014
2.44
2015
2.44
8. ‘’LEVERAGE RATIOS’’
These ratios consider a company’suseof borrowed funds(rather than
shareholders equity or investments)to expand its business. The goal is to
borrow fundsat a low interest rate and invest in a businessactivity that
producesarate of return exceeding the target rate of return for investments.
I: Debt –To-Equity Ratio:
The debt to equity ratio shows the percentage of company financingthat
comes from creditors and investors. A higher debt to equity ratio indicates
that more creditor financing(bank loans) is used than investor financing
(shareholders).
Company Data:
Heads Year 2014 Year 2015
Total Debt $2000+20645 $4985+27808
Shareholders Equity $89784 $89784
MicrosoftDebt-to-equity ratio is high in 2015 whichmeans company position
is getting down because there is a moreamountis used of debt relative to
2014.
II:Debt – To- Total Assets Ratio:
It tells you the percentage of total assets that were financed by creditors,
liabilities, debt.
Company Data:
Heads Year 2014 Year 2015
Total Debt $2000+20645 $4985+27808
Formula
Debt-to-equity ratio = Total Debt
Shareholders Equity
2014
0.25
2015
0.36
9. Total Assets $172384 $176223
MicrosoftDebt-to-total asset ratio is getting higher in 2015 whichindicates
that company’smoreassets are now financed by debt which is not in favor of
the company.
‘’COVERAGE RATIOS’’
The coverage ratio is a measure of a company'sability to meet its financial
obligations. In broad terms, the higher the coverage ratio, the better the ability
of the enterpriseto fulfillits obligations to its lenders.
I: Inventory Turnover Ratio:
This measureshow many timesaverage inventory is "turned"or sold duringa
period. In other words, it measureshow many times a company sold its total
average inventory dollar amountduringtheyear.
Company Data:
Heads Year 2014 Year 2015
Cost of goods sold $27078 $33038
Inventory $2660 $2902
MicrosoftInventory turnover ratio is getting higher in 2015 whichmeansthat
company isgetting down because higher the ratio is worst and not in favor of
Formula
Debt-to-Total Assets Ratio = Total Debt
Total Assets
2014
0.13
2015
0.18
Formula
Inventory Turnover Ratio = Cost of goods sold
Inventory
2014
10.17
2015
11.38
10. the company.
II:Inventory Turnover in days Ratio:
Company Data:
Heads Year 2014 Year 2015
Days 365 365
Inventory Turnover 10.17 11.38
MicrosoftInventory turnover ratio in daysis lower in 2015 relativeto 2014
which meansthat this ratio is completely in favor of company because the
ratio if lower then it better.
II:Total Asset Turnover Ratio:
Asset turnover ratio is the ratio of the valueof a company'ssalesor revenues
generated relative to the valueof its assets. The Asset Turnover ratio can
often be used as an indicator of the efficiency with which a company is
deployingits assets in generating revenue.
Company Data:
Heads Year 2014 Year 2015
Net sales $86833 $93580
Total Assets $172384 $176223
Formula
Inventory Turnover Ratio = 365
IN DAYS Inventory turnover
2014
35.8
8
2015
32.0
7
11. MicrosoftTotal asset turnover ratio is a lot in favor of the company because it
goes upward in 2015 relativeto 2014 whichmeansthat company goes in a
good situation and has a ability to has a higher efficiency of total asset to
generate sales.
‘’PROFITABILITYRATIOS’’
These ratios vary from industry to industry, and should be compared to a
company’s ratios for prior years/periods.
I: Net Profit MarginRatio:
It measures the amountof net incomeearned with each dollar of sales
generated by comparingthe net income and net sales of a company. In other
words, the profit margin ratio shows what percentage of sales are left over
after all expenses are paid by the business.
Company Data:
Heads Year 2014 Year 2015
Net profit after tax $22074 $12193
Net sales $86833 $93580
MicrosoftProfit margin ratio is not in favor of the company becauseit goes
downward in 2015relativeto 2014 whichmeansthat company has low
ability to pay off its taxes. Higher the better, lower the worst.
Formula
Total Asset Turnover Ratio = Net Sales
Total Assets
2014
0.50
2015
0.53
Formula
Net Profit Margin Ratio = Net Profit After Tax
Net Sales
2014
0.25
2015
0.13
12. II:Return On Investment (ROI) Ratio:
It measures how much money wasmadeon the investmentas a percentage of
the purchaseprice. It shows investorshow efficiently each dollar invested in a
project is at producingaprofit. Investorsnot only usethis ratio to measure
how well an investmentperformed, they also use it to comparethe
performanceof differentinvestmentsof all types and sizes.
Company Data
Heads Year 2014 Year 2015
Net profit after tax $22074 $12193
Total Assets $172384 $176223
III:ReturnOn Equity (ROE) Ratio:
It measures the ability of a firm to generate profitsfrom its shareholders
investmentsin the company. In other words, the return on equity ratio shows
how muchprofit each dollar of common stockholders' equity generates.
Company Data:
Heads Year 2014 Year 2015
Net profit after tax $22074 $12193
Shareholders’ Equity $89784 $89784
Formula
Return on Investment Ratio = Net Profit After Taxes
Total Assets
2014
0.12
2015
0.06
Formula
Return on Equity Ratio = Net Profit After Taxes
Shareholders Equity
2014
0.24
2015
0.15
13. Microsoft Returnonequity ratio is not iin favor of the company because
its goes down in 2015 relative to 2014 which tells that company is not
using its equity well.
References:
1:https://www.microsoft.com/investor/reports/ar15/index.html#
balance-sheets
2: http://www.myaccountingcourse.com/financial-ratios/current-
ratio
3: Course pack book.
4: Books by Walter B. Meigs (Accounting)
