Ratio analysis of Microsoft corporation

ASSIGNMENT MUNEEB MCOM II ROLL NO BUSINESS FINANCE

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INTRODUCTION:Microsoft Corporation is a software company based in Redmond, Washington. Microsoft's flagship product, the Windows operating system, is the single most popular operating system for home desktop use. Its other desktop products, namely Microsoft Office, Internet Explorer, and Windows Media Player, are either bundled directly with the Windows operating system, or are often sold together with Windows as preinstalled software on new computer systems. Additionally, the company manufactures and sells computer hardware such as keyboards and mice, and owns or possesses interest in several content-distribution channels such as MSNBC, the MSN Internet portal, and the Microsoft Encarta electronic encyclopedia.

Data Collection Date:22 April, 2016

Chose Company: Microsoft Corporation Company Ticker Symbol: MSFTCompany Financial Statements: Income statement and Balance

Calculation of Ratios and their interpretations:

Financial stements will be analyzed in a fallowing four categories: ‘’Liquidity Ratios’’These ratios focus on a company’s ability 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,

ort-term investmens) and too little devoted to increasing shareholders value.I: Current Ratio: It measures a firm's ability to pay off its short-term liabilities with its current assets. The current ratio is an important m

sure of liquidity because short-term liabilities are due within the n

Heads Year 2014 Year 2015

Current Assets $114246 $12712

Current Liabilities $45625 $49858

Financial StatmentsLiquidityLeverageActivityProfitability

Microsoft Current ratio is mostly similar in both years which means that company has its ability to pay back its short term liabilities. Ratio is more than 1 which means that company has its ability.

II: Asset Test Ratio / Quick Ratio: The acid test ratio measures the liquidity of a company by showing its ability to pay off its current liabilities with quick assets. If a firm has enough quick assets to cover its total current liabilities, the firm will be able to pay off its obligations without having to sell off any long-term or capital assets.

Company data:

Heads Year 2014 Year 2015

Current Assets $114246 $12712

Inventory $2660 $2902

Current Liabilities $45625 $49858

Microsoft quick ratios are very efficient because they are higher than 1 which means that company can easily pay its debts without inventory.

FormulaCurrent Ratio = Current Assets Current Liabilities20142.5020152.50FormulaQuick Ratio = Current Assets - Inventory Current Liabilities20142.4420152.44

‘’LEVERAGE RATIOS’’These ratios consider a company’s use of borrowed funds (rather than shareholders equity or investments) to expand its business. The goal is to borrow funds at a low interest rate and invest in a business activity that produces a rate 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 financing that 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

Microsoft Debt-to-equity ratio is high in 2015 which means company position is getting down because there is a more amount is 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

FormulaDebt-to-equity ratio = Total Debt Shareholders Equity20140.2520150.36

Total Assets $172384 $176223

Microsoft Debt-to-total asset ratio is getting higher in 2015 which indicates that company’s more assets are now financed by debt which is not in favor of the company.

‘’COVERAGE RATIOS’’

The coverage ratio is a measure of a company's ability to meet its financial obligations. In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders.

I: Inventory Turnover Ratio: This measures how many times average inventory is "turned" or sold during a period. In other words, it measures how many times a company sold its total average inventory dollar amount during the year. 

Company Data:

Heads Year 2014 Year 2015

Cost of goods sold $27078 $33038

Inventory $2660 $2902

Microsoft Inventory turnover ratio is getting higher in 2015 which means that company is getting down because higher the ratio is worst and not in favor of

FormulaDebt-to-Total Assets Ratio = Total Debt Total Assets 20140.1320150.18FormulaInventory Turnover Ratio = Cost of goods sold Inventory201410.17201511.38

the company.

II: Inventory Turnover in days Ratio:

Company Data:

Heads Year 2014 Year 2015

Days 365 365

Inventory Turnover 10.17 11.38

Microsoft Inventory turnover ratio in days is lower in 2015 relative to 2014 which means that 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 value of a company's sales or revenues generated relative to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue.

Company Data:

Heads Year 2014 Year 2015

Net sales $86833 $93580

Total Assets $172384 $176223

FormulaInventory Turnover Ratio = 365 IN DAYS Inventory turnover201435.88201532.07

Microsoft Total asset turnover ratio is a lot in favor of the company because it goes upward in 2015 relative to 2014 which means that company goes in a good situation and has a ability to has a higher efficiency of total asset to generate sales. ‘’PROFITABILITY RATIOS’’ These ratios vary from industry to industry, and should be compared to a company’s ratios for prior years/periods.

I: Net Profit Margin Ratio:It measures the amount of net income earned with each dollar of sales generated by comparing the 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

Microsoft Profit margin ratio is not in favor of the company because it goes downward in 2015 relative to 2014 which means that company has low ability to pay off its taxes. Higher the better, lower the worst.

FormulaTotal Asset Turnover Ratio = Net Sales Total Assets 20140.5020150.53FormulaNet Profit Margin Ratio = Net Profit After Tax Net Sales20140.2520150.13

II: Return On Investment (ROI) Ratio:It measures how much money was made on the investment as a percentage of the purchase price. It shows investors how efficiently each dollar invested in a project is at producing a profit. Investors not only use this ratio to measure how well an investment performed, they also use it to compare the performance of different investments of all types and sizes.

Company Data

Heads Year 2014 Year 2015

Net profit after tax $22074 $12193

Total Assets $172384 $176223

III: Return On Equity (ROE) Ratio:It measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the return on equity ratio shows how much profit each dollar of common stockholders' equity generates.

Company Data:

Heads Year 2014 Year 2015

Net profit after tax $22074 $12193

Shareholders’ Equity $89784 $89784

FormulaReturn on Investment Ratio = Net Profit After Taxes Total Assets20140.1220150.06FormulaReturn on Equity Ratio = Net Profit After Taxes Shareholders Equity20140.2420150.15

Microsoft Return on equity 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)