Company Background - Microsoft Corporation - Essay Example

?.Company Background: Microsoft Corporation Microsoft Corporation was founded in 1975 by Bill Gates. Bill Gates was able to use his expert negotiation skills to acquire the Windows platform for $50,000 from a software developer. The firm was incorporated in 1981 and it became public following an IPO on March 13, 1986 (Microsoft, 2013).Today the company is currently selling Windows 8 operating system. Microsoft is the industry leader in the software industry due to the fact that they have the most popular operating system. In the 21st century the company has diversified into other business sectors such as the video game industry. The firm in 2001 released the X-Box and subsequently in 2005 created the X-Box 360 which has sold millions of units worldwide. Microsoft has grown a lot during the last 28 years. The firm has a global workforce of 94,000 employees and a market capitalization value of $266.2 billion (Yahoo, 2013). The firm’s common stocks are sold in the NASDAQ under the symbol MSFT. As of April 25, 2013 the price of Microsoft common stocks was $31.94 (Yahoo, 2013). During fiscal year 2012 Microsoft generated total revenues of $73.72 billion. The net income of Microsoft during 2012 was $16.98 billion. I selected Microsoft because I have been a customer of the firm for over a decade. My preferred game console is the X-box 360 and I have Windows 8 installed in both my computers at home. This analysis will help me determine whether Microsoft would be a good investment option for my personal investment portfolio. The common stocks of Microsoft are considered blue chip stocks. A blue chip stock can be defined as a stock issued by a well-known company with an established record of making money and paying dividends (Tewales, Bradley, Tewales, 1992). A ratio analysis of Microsoft is illustrated below Ratio Analysis Accountants and business analysts can utilize ratio analysis to evaluate the financial performance of an enterprise. Ratio analysis uses the input from the common size financial statements of a company in order to insert that data into financial formulas. The five major categories of ratio analysis are profitability, market value, liquidity, leverage, and efficiency. One of the benefits of using ratio analysis is that any person with basic math knowledge can use the formulas to calculate the ratios of a company. The financial statements that must be used to calculate ratios can be retrieved from the annual report of public firms. One of the limitations of ratio analysis is that its results are not forward looking since they focus on the historical performance of a company. This report will focus on three financial ratios: net margin, asset utilization, and return on assets (ROA). The results of Microsoft are going to be compared against one of its main competitors and against the industry. The competitor chosen for comparison purposes was Oracle. The liquidity position of the company will also be analyzed by calculating the free cash flow ratio and through analysis of the cash flow statement of the company. The net margin measures the profitability of a company. The formula to calculate net margin is net income divided by the total sales. Microsoft had a net income in 2012 of $16.98 billion and total sales of $73.72 billion. The net margin of Microsoft in 2012 was 23.03%. Microsoft’s net margin in 2011 was 33.10% which implies that the company’s profitability decreased by 10.07%. When compared to Oracle the net margin of Microsoft was 3.85% lower than Oracle’s 26.89% result. The industry standard net margin in the software industry is 4.50% (Dun & Bradstreet, 2012). The software industry is classified under SIC code 7372 (Prepackaged software). Microsoft’s profitability was superior to the industry by 18.53%. The asset utilization is a ratio that measures how effective the company has been at using its assets to generate sales. During 2012 Microsoft had an asset utilization of 1.65. The asset utilization of the company has declined by 0.09 since the previous fiscal year. Oracle had an asset utilization of 2.11 in 2012. The asset utilization of Microsoft was lower than Oracle by 0.46 which implies that Microsoft did a worst job of generating sales from its assets than Oracle. The average asset utilization ratio in the software industry in 2012 was 1.07 (Dun & Bradstreet, 2012). Microsoft’s asset utilization was much better than the industry standard. The return on assets metric measures the ability of a company to obtain net income from its assets. The formula to calculate ROA is net income divided by total assets. The return on assets of Microsoft in 2012 was 14%. Oracle in 2012 had a return on assets of 12.74%. Microsoft’s return on assets in 2012 was superior to Oracle by 1.26%. The average return on assets in the software industry is 3.8%%. Microsoft’s ROA outperformed the competition by 10.2%. The net margin and asset utilization of Microsoft were lower than Microsoft, while its return on asset was better. Based on the results of this basic ratio analysis the performance of Oracle during 2012 was better than Microsoft due to its superior profitability and efficiency. The cash balance of Microsoft as of June 30, 2012 was $6.94 billion. Microsoft’s cash account decrease by 26.38% in 2012. Oracle’s cash position at the end of fiscal year 2012 was $14.96 billion. Oracle has more money saved up than Microsoft, thus the firm is more liquid. The cash from operating activities of Microsoft in 2012 was an inflow of $31.62 billion. Microsoft had an outflow from financing activities of $9.41 billion. In 2012 Microsoft had an outflow from investing activities of $24.79 billion. The free cash flow can be calculated by subtracting capital expenditures from cash from operating activities. The free cash flow of Microsoft is $32.62 billion as the company did not report any capital expenditures in its statement of cash flow for the year 2012. Oracle’s free cash flow in 2012 was $12.09 billion. Based on this ratio the cash flow position of Microsoft is better than Oracle in 2012. References Dun & Bradstreet (2012). SIC 7372 – Prepackaged Software. Retrieved April 25, 2013 from Dun & Bradstreet database. Microsoft.com (2013). Facts About Microsoft. Retrieved April 25, 2013 from http://www.microsoft.com/en-us/news/inside_ms.aspx Tewales, R., Bradley, E., Tewales, T. (1992). The Stock Market (6th ed.). New York: John Wiley & Sons. Yahoo.com (2013). Microsoft Corporation (MSFT). Yahoo Finance. Retrieved April 25, 2013 from http://finance.yahoo.com/q/co?s=MSFT+Competitors Read More