Microsoft Company - Economic Analysis - Essay Example

Microsoft Company Task Introduction This paper presents analyses of Microsoft Corporation. The analyses cover the economic analysis, review of the industry, the company’s stock analysis, financial ratio, liquidity ratios, activity ratios, leverage ratios, profitability ratios and common stock ratios. In addition, there is industry analysis and a recommendation whether to purchase the company’s stock based on the above analyses. Economic analysis – Microsoft Corporation, the leading producer of computer software and operating systems such as windows and others has its headquarters in Washington DC. The company has made a significant impact on the state of the economy in the state of Washington. The company’ growth experiences have had an intense effect on the employment growth in Washington. For 18 years of the company’s existence, the growth rate of employment in Washington alone has expanded at an annual average rate of 1.7 %. Secondly, the company’s consumption rate of goods and other transactions has had a significant boost in the level of income in Washington (Eicher, 2010). Industry analysis/ Benchmark – Microsoft Corporation is the leading producer of computer software. However, its products are facing a stiff competition from products such as Linux, UNIX and Macintosh. The company also faces a strong rivalry from various companies such as the American Software, Apple, Google, Autodesk Inc. and others. Fortunately, Microsoft’s products have unshaken competitive advantage over other companies for the reason that their products are user friendly thus has a stronger market share. For instance, an industry analysis between Microsoft and American software based on net income for two years, 2012 and 2013, shows that Microsoft had a higher net income as compared to its rival. That is, ($ 21,863,000 in 2013; $ 16,978,000 in 2012 for Microsoft) and ($ 10,411,000 in 2013; $ 11,343,000 in 2012 for American Software) (SEC filings, n.d.). Holding period return – the company’s holding period returns as measured by the return on equity and return on investments are as follows: ROE (net income/Total equity), ROI (net profit/Total assets). In 2011, 2012 and 2013, the company’s ROE = (47.6 % in 2011; 27.69 % in 2013; 25.58 % in 2012). This single factor DuPont analysis shows the investors’ reward for the equity contribution. The return could be classified as sufficient and it increased in the year 2013. The ratio shows that the company is efficient. Secondly, the ROI = (25 % in 2011; 15.35 % in 2013; 14 % in 2013). Return on investment shows the profit generated by the company’s assets. From the analysis, the figure increased to 15.35 % in the year 2013. The stock analysis – this analysis focuses on the trend of company’s share fluctuation. The current share price is $ 40.34 per share. In May, July, September and November 2013, the company’s share prices were as follows: $ 30.25, 30.35, 30.27 and 35.20 respectively. This analysis shows an increase in the company’s share price. From the value creation point of view, an increase in share prices is a sign of increase in the company’s value (Yahoo finance, n.d.). Liquidity ratios – this ratio measures the company’s ability to respond to short-term obligations. They are current and quick ratio. Current ratio for Microsoft in the year 2011, 2012 and 2013 = 2.6, 2.6 and 2.71 respectively. The current ratio indicates the company’s ability to pay its short-term debts as they come due. In both years, Microsoft’s has been able to pay its debts sufficiently. A current ratio of one and above shows a good financial position of a company. The ratio increased slightly, but the company was still financially healthy. Quick ratio, on the other hand, measures a company’s ability to pay debts using its immediate liquid assets. The ratio excludes inventory. For the year 2011, 2012 and 2013, quick ratio was 2.56, 2.56 and 2.7 respectively (Leach, 2010). Activity ratios – this ratio measures the efficiency with which a company manages its assets. It also assists in the determination of the value of a company. The ratios to be analyzed are inventory turnover and total asset turnover. The inventory turnover for Microsoft in the year 2011, 2012 and 2013 are 11.4, 15.4 and 10.4 times respectively. The ratio shows the number of times, in an accounting period, the company sold its inventory. The faster the turnover, the more the revenue, the less the storage costs. The ratio decreased in the year 2013 due to the increase in the Cost of goods sold and increase in the level of inventory (Palmer, 1983). On the other hand, total asset turnover for the company for the year 2011, 2012 and 2013 are $ 0.64, $ 0.61 and $ 0.55 respectively. Total asset turnover indicates the efficiency with which a company generates sales using its assets. For instance, in the year 2013, the every dollar invested in the total assets generated $ 0.55. The ratio also indicates the utilization level of the company’s assets. The ratio decreased to 0.55 in the year 2013 due to an increase in the total assets and a less than proportionate increase in the level of sales (Bull, 2008). Leverage ratios – this ratio shows a company’s dependency on debt. The ratios to be analyzed are debt/equity and debt ratio. The debt / equity ratio for Microsoft Corporation in the year 211, 2012 and 2013 are 0.35, 0.29 and 0.29 respectively. The debt ratio of a company shows the debt proportion in a company’s capital structure. From the above analysis, 0.29 means that for every $ 1 of equity capital, the company had $ 0.29 of fixed charge capital. The analysis shows that the company’s leverage level is low. Therefore, it faces low risks. On the other hand, debt ratio for 2011, 2012 and 2013 are 47.5 %, 45.3% and 44.6% respectively. Debt ratio shows the proportion of the total assets that have been financed using the long-term and current liabilities. For instance, in 2013, 44.6 % of the total assets were financed with debt while the other 55.4 % were financed with owner’s equity. The ratio decreased to 44.6 % in the year 2013 due to an increase in total assets and a less proportionate increase in total debt (Troy, 2008). Profitability ratios - the ratio indicates the capability of a company to generate revenue using its resources. The company’s gross profit margin for 2011, 2012 and 2013 are 77.7 %, 76.22 % and 73.99 %. The ratio shows the capability of the company to generate returns at the gross profit level. For instance, in 2013, the 73.99% of sales were gross profit while the remaining 26.01 % were consumed by the cost related to sales. The ratio slightly decreased in 2013. The ratio shows that Microsoft’s level of production efficiency is high (Beyer, 2010). On the other hand, net profit margin for the year 2011, 2012 and 2013 are 33.1 %, 23.03 % and 28.1 %. This ratio shows how well a company manages its operating expenses. For instance, in 2013, 71.9 % of sales were taken up by operating expenses and cost of sales, whereas, the remaining were net profit. This shows a high level of operating costs for the Microsoft Corporation (McKinney, 2004). The common stock ratio shows a company’s dependency on the internal and equity sources of finance. In 2011, 2012 and 2013, the ratios are 82.7 %, 85 % and 88.19 %. This means that in 2013, Microsoft’s dependency rate on long-term financing was 88.19 %. The ratio increased as compared to the previous year (Pratt, 2011) To conclude, after considering the trend in the company’s share prices, the return as measured by ROE, the profitability ratios and the liquidity ratios, the stocks should be purchased for the reason that there is anticipation of a further increase in share prices in the future. This also means that the company’s value is likely to rise. References Beyer, S. (2010). International Corporate Finance - Impact of financial ratios on long term credit ratings: Using the automotive examples of BMW Group, Daimler Group and Ford Motor Company. München: GRIN Verlag GmbH. Bull, R. (2008). Financial ratios: How to use financial ratios to maximize value and success for your business. Amsterdam: Elsevier/CIMA Pub. Eicher, Theo S. (2010). The Microsoft economic impact study. University of Washington, 23 (4), 1-21. Retrieved from http://assets.bizjournals.com/cms_media/pdf/msuwstudy.pdf?site=techflash.com. Leach, R. (2010). Ratios made simple: A beginners guide to the key financial ratios. Petersfield, Hampshire: Harriman House. McKinney, J. B. (2004). Effective financial management in public and nonprofit agencies. Westport, CT: Praeger. Palmer, J. E. (1983). Financial ratio analysis. New York, N.Y: American Institute of Certified Public Accountants. Pratt, J. (2011). Financial accounting in an economic context. Hoboken, NJ: Wiley. SEC filings. (n.d.). Retrieved from http://www.sec.gov/edgar/searchedgar/webusers.htm. Troy, L. (2008). Almanac of business and industrial financial ratios. Chicago, IL: CCH. Yahoo finance. (n.d.). Retrieved from http://finance.yahoo.com/quotes/MSFT,ANALYSIS,OF,SHARE,PRICES/view/dv. Read More