Analysis of Microsoft Financial Statements
Financial statements are frequently a key source of information for financial decisions and taking a look at Microsoft’s financial statements can help us decide certain things about the company. There are three different types of statements that will be discussed in this section. These include: the balance sheet, the income statement, and the statement of cash flows. They are discussed here in either the sense of quarterly or yearly statements and will be noted as so.
All information has been derived from Yahoo Finance. (http://finance. yahoo. com) The first statement that will be analyzed for Microsoft is the balance sheet. The balance sheet is essentially a snapshot of what the firm owns (assets), what the firm owes (liabilities), and the difference between the two (equity) at a single moment in time. When we analyze a balance sheet, we must keep in mind that the values on this statement are the book values and are not necessarily what the company is worth at this exact moment in time, or the market values.
Analysis of Microsoft Financial Statements Essay Example
Something we can see right away is an estimate of how much net working capital Microsoft has by analyzing the quarterly data of the period ending December 31, 2011. Net working capital shows how cash that will become available fairs with the cash that must be paid over the next twelve months by taking current assets and subtracting current liabilities. For Microsoft, this is $72,513,000,000-$25,373,000,000=$47,140,000,000 and is looked upon positively for a healthy firm. The use of debt in a firm’s capital structure is called financial leverage and the more debt a firm has (as a percentage of assets), the greater the financial leverage.
If we take a look at the yearly balance sheets for 2009, 2010, and 2011 for Microsoft, we can see that each year debt becomes a bigger percentage of total assets. In 2009, debt is 4. 8% of assets. In 2010, it is 5. 7%. In 2011, it is 11%. This could be viewed at in either a positive or negative light because high financial leverage can increase potential rewards to shareholders, while low financial leverage can possibly decrease the potential for financial distress and business failure. The second statement that will be analyzed is the income statement.
The income statement measures performance of a company over some period of time. It shows both revenues and the subtracted expenses with the result being net income. When we take a look at the annual income statements from 2009, 2010, and 2011, we can see that net income has increased each year and this is clearly a positive trend. Also, we can look at specific categories like research development and observe that it increased from 2010 to 2011, which shows that Microsoft may be trying to expand their products and innovations. The third, and final, statement that will be analyzed is the statement of cash flows.
Overall, what the cash flow statement provides is crucial to financial statement analysis and financial decisions. It illustrates the difference between the number of dollars that came in and the number that went out. The statement of cash flows provides us with a fundamental principal, which is known as the cash flow identity. It says that the cash flow from the firm’s assets is equal to the value of its liabilities plus the value of its equity. The first section of the statement of cash flows deals with the cash flows from operating activities, or the firm’s day-to-day activities of producing and selling.
In Microsoft’s case, this total result has increased from 2009-2011, from $19,037,000,000 to $26,994,000,000, and this is positive because it displays the fact that they are able to cover their everyday cash outflows with their everyday cash inflows more efficiently. The next section of the statement of cash flows is the investing activities section. As we can see, total cash flow from investing has decreased from $15,770,000,000 to $14,616,000,000, from 2009 to 2011, and there may be various underlying reasons for this occurrence including more investments to improve Microsoft in several areas.
The final section of the statement of cash flows is the financing section, which shows the dividends paid, the purchases of stock, the net borrowings, and other possible cash flows from financing activities. A positive trend for investors is the fact that dividends paid has increased (even though it is negative to the firm) as well as sale purchase of stock, from 2009 to 2011 and even increased quarterly in 2011. The net borrowings is off an on from 2009 to 2011 possibly because of certain funds needed in particular years. In 2009, it was $5,746,000,000 and in 2010, it was $190,000,000.
It shot back up again in 2011, with $5,960,000,000. The three statements that were provided in this section provide possible investors, competitors, and even those within the company with useful information to make important decisions that could affect their livelihood or the livelihood of Microsoft. Keep in mind that even though financial statements are a solid indicator of how a company is performing, one key principle about must be known when viewing them to make decisions. They do not always provide all of the information that you may need.
There are usually underlying topics that could affect the company that are not necessarily showing up on their financial statements. These topics are discussed in other sections of this report on Microsoft. We feel it important to compare Microsoft’s ratios not only to other companies and industry norms, but also to some of their own ratios from 2010 . From 2010 to 2011 Microsoft saw an increase in their current and quick ratios, which is typically good because high liquidity ratios display a greater ability to repay short term debt. Compared to Google which has a quick ratio of 5. %, Microsoft has less cash on hand.
Although, it is not necessarily a good thing that Google’s liquidity ratios are so high because they have little short term debt, which indicates that Google could potentially be investing some of the excess cash to generate more revenue. Microsoft’s return on assets only decreased by one percent which articulates to investors how much profit Microsoft made on $1 worth of assets. A common return on asset ratio is 20% for software companies; Microsoft is slightly below the 20% norm, but they are close which is good.
When considering a good return on assets, commonly the lower the ROA ratio the more asset-intensive a business is which simply means more money must be reinvested into the business to generate earnings. Apple’s return on assets stands at around 24% and Google’s is about 12%, which indicates that Google must make higher investments in their assets to generate profit. If Google were in the manufacturing industry this ratio would be acceptable since that is an asset intensive industry, but it is too low for the software industry.
Microsoft’s return on equity ratio is possibly one of the more important ratios that investors will be concerned about. The higher a company’s return on equity, the easier it is for them to generate cash internally. Since Microsoft’s ROE increased from 41% to 42% in 2011, we feel they are in good standing in regards to this ratio. They are making significant amounts of money for their investors, which will encourage new and existing shareholders to buy new and more stock in Microsoft. This in turn allows the company fund operations. In comparison to Apple and Google which have ROE’s of 46% and 20%, Microsoft is in a good position.
Again Google’s ratio is quite low for the industry trend, although compared to other industries their ROE is significant. Microsoft’s gross margin is fairly normal for the software industry. Their gross margin tells us how efficiently the company is able to use labor and supplies in production. The higher the gross margin, the more money the company has to spend on the funding of other operations. Respectively, Apple and Google have gross margins of 42% and 65%. Microsoft is most efficient in keeping a high percent of their sales revenue after labor and production costs are covered.
Now we will discuss turnover ratios and the importance of these ratios to a company. Total asset turnover is an indication of how much sales are generated for every dollar worth of assets. Being that Microsoft has a total asset turnover of 70% which is down 3% from 2010, they are still efficient in using their assets to generate revenue. Correspondingly, Apple and Google have asset turnovers of 101% and 60%. Apple is generating more revenue than they are spending on assets while still maintaining a fairly high profit margin, which is very good since the two ratios tend to have an inverse relationship.
Microsoft’s accounts receivable turnover compared to the other two companies indicates that it may be necessary for Microsoft to reevaluate its credit policies in order to ensure a more timely collection of funds. Their accounts receivable turnover rate is only 5. 4% for 2011 and was even lower in 2010 at 4. 8%. Apple has a strong receivables turnover of 17% and Google shows a turnover rate of 8. 5%. Apple’s very high AR turnover rate may be due to one of two things, they run mainly on a cash basis or that they are extremely efficient in collecting on their accounts.
In comparison to the two other companies we selected Microsoft fixed asset turnover is 9. 1% which is lower than Apple’s (18. 7%), yet higher than Google’s (4. 4%). This ratio is an indicant of how efficient the companies are at generating net-sales from fixed assets. This ratio actually means very little to a software company, it is crucial in the manufacturing industry where large capital is required in order to generate sales revenues.
A ratio that is quite important to the software industry is the turnover ratio. Microsoft could potentially have a much higher turnover ratio than it does (15. times). Most software companies have low inventory levels since software can be reproduced simply. Apple has a normal inventory turnover ratio for the software industry at about 69 times per year. What is implied if a company has a low turnover rate as Microsoft does is that they have poor sales rates and excess. Compared to Apple it is fair to say that Microsoft has sales numbers that are significantly lower, as well as a higher amount of money tied up into inventory. Microsoft has a total debt to equity ratio of 20% and Google shows only a 12. 5% total debt to equity ratio.
Microsoft most likely has such a high ratio because they are financing their growth with debt as opposed to assets. Microsoft is likely to generate more earnings this way than they could have by using more outside financing. However, it is possible that the cost of financing this debt may outweigh the return that the company generates, which will make the debt hard for the company to manage. Every company is different and financial professionals must find the balance that best suits their company. The debt to equity ratio is considered good for the software industry so long as the company keeps the percent below 50%, which Microsoft has done.