Microsoft Corporation (MSFT) is an American multinational technology company with headquarters in Redmond, Washington. It develops, manufactures, licenses supports and sells computer software, consumer electronics, personal computers, and related services. Wikipedia
Microsoft Balance Sheet
Liquidity ratios help financial statement users evaluate a company’s ability to meet its current obligations. In other words, liquidity ratios evaluate the ability of a company to convert its current assets into cash and pay current obligations. Thanks to Rio for that brief description. But the question now is, how liquid was Microsoft Corporation from 2008 to 2012 and last quarter using the following ratio: working capital ratio, current ratio, and quick ratio?
- The working capital ratio of the company was 0.18, 0.29, 0.34, 0.42, 0.43 and 0.33 for the latest quarter. This is the percentage of networking capital against the company’s total asset.
- The current ratio was 1.45, 1.82, 2.13, 2.6, 2.6 and 2.68 for the latest quarter. It shows that current asset was 268 percent of current liabilities, meaning the company’s current resources was greater than its current obligation.
- And the quick ratio was 1.25, 1.58, 1.9, 2.35, 2.41 and 2.44 for the latest quarter. This also tells us that the company’s monetary asset (current minus inventory) was also greater than its current liability.
Above data show how financially stable Microsoft Corporation is as far as its current resources are concerned. Working capital as of the latest quarter shows its capability to continue running its business well.
Asset management ratios are the key to analyzing how effectively and efficiency your business in managing its assets to produce sales. The asset management ratios are also called turnover ratios or efficiency ratios.
Shown below are the efficiency ratios of Microsoft Corporation from 2008 to 2012:
- Inventory turnover ratio was 14 times average. This measures the number of times business sells its stock in a 12-month period.
- The company’s receivable turnover ratio was 5 times average. This shows how long, on average, a business takes to collect the debts owed to it by customers who have purchased their goods on credit.
- The payable turnover ratio was 16 times on average. This number reveals how quickly the company pays its bills. The payable turnover ratio reveals how often MSFT’s payable turn over during the year.
- And the asset turnover ratio got.71 average. This measures the productivity of the business (i.e. how much worth of sales revenue can be generated from the assets employed). This means that for every $1 of the net asset, the business generates $0.71 of sales revenue.
If we convert the inventory turnover of 14 times average in days, it is 26 days, while the company’s receivable turnover ratio of 5 times average will be 73 days and the payable turnover ratio of 16 times average was 22 days. Based on the above performance, Microsoft Corporation is efficiently managed.
For Microsoft Corporation, leverage ratios from 2008 to 2012 are detailed below. This will give us if the company is high leverage or not.
- The company’s debt ratio was .50, .49, .46, .47, 45 and .48 average in five years period. This is the comparison between the total liabilities against total assets. It shows that MSFT’s debt ratio did not exceed 50 percent wherein .45 in 2012 was its lowest so far.
- Debt to equity ratio measures total liabilities against its total equity. For Microsoft Corporation, it was 1.01, 0.97, 0.86, 0.90, 0.83 and an average of .91. The year 2008 was over by 100 percent but it is slowly reduced that in 2012 it dropped to .83.
- Solvency is the company’s ability to pay its total debt when becomes due. The company had 0.54, 0.45, 0.54, 0.50, 0.36 and 0.48 average in five years. As a rule of thumb, 0.20 ratio is good enough.
When it comes to debt management or leverage, the company observed fulofcontrol on its long-term investments on credit. As shown above, its debt ratio was up to 50 percent only while its debt to equity was managed to reduce to 0.83 in 2012. The company is also able to pay off its total obligations as they become due at 0.48 average solvency.
Property, Plant & Equipment
This category consists of assets that are tangible and relatively long-lived. The firm has acquired these assets in order to use them to produce goods and services that will generate future cash inflows. These are recorded at cost upon acquisition of these assets.
For MSFT, its investment on property, plant, and equipment from 2008 to 2012 is shown below:
- The company’s gross PPE was $16,221 average. As shown in the above table its fixed asset expanded per year, its lowest investment was in 2008 at $12,544 and its highest was in 2012 at $19,231.
- Accumulated depreciation was $8,654 average or 53 percent in five years period.
- And net PPE was $7,568 average which is equivalent to 47 percent.
Based on the above table, the average used life of the PPE investment is 2.7 years and the remaining useful life of the PPE investment would now be 2.3 years. This is based on the estimated five years shelf life of the property.
A financial statement that measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.
I guess most of us knew what an income is. But to have some refreshment here, it is the amount of money, as defined, a company actually receives during a specific period, including discounts and deductions for returned merchandise.
MSFT’s income from 2008 to 2012 is shown below:
- Revenue of the company was increasing except in 2009 which was lower by 3 percent, however in the succeeding years it continues to increase, its trailing twelve months was $72,359. It grew 5 percent on average.
- Gross profit was 48,822, 46,282, 50,089, 54,366 and 56,193, with ttm (trailing twelve months) of 54,438.
- The company’s operating income was 22,492, 20,363, 24,098, 27,161 and 21,763. Its ttm was $19,868.
- Its income before tax 23,814, 19,821, 25,013, 28,071 and 22,267. It has a ttm of $20,495.
- And finally, income after tax of MSFT has a trailing twelve months of 15706 which is 22 percent of total revenue.
Overall income of MSFT is doing well, its revenue and gross profit have the same trend of growth rate while its operating income in 2012 dropped down by 20 percent due to increase in operating expenses within the same year. Income before tax and after-tax income are 28 and 22 percent respectively. There’s no negative balance throughout the five years period.
These are money spent or cost incurred in an organization’s efforts to generate revenue, representing the cost of doing business. In five years period, from 2008 to 2012, the following are the expenses of Microsoft Corporation:
- MSFT’s cost of revenue was 11,598, 12,155, 12,395, 15,577 and 17,530. It had an increased each year for 5 years with an average growth of 11 percent. MSFT’s cost of revenue trailing twelve months was 25 percent of total revenue
- Operating expense’s trailing twelve months was 34570. This was equivalent to 48 percent of revenue.
- Other expense was 4,811, 5,794, 5,338, 4,011 and 4,785. TTM was 4,162 or 6 percent of revenue.
- Total expense was 31,141, 31,713, 31,329, 31,216 and 39,215 which was 64, 69, 63, 57 and 70 percent of revenue.
This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently pass on the costs to its customers. Let’s take a look at the margin of MSFT from 2008 to 2012:
- Gross margin of Microsoft Corporation was up and down trend, showing an average fluctuation of 1.5 percent.
- Its operating margin has no movement in 2008 and 2009, dropped by 2 and 3 percent in 2010 to 2011 and recovered by 8 points in 2012.
- The company’s pretax margin was low in 2012 at 30 percent but marked its highest percentage in 2010 and 2011 at 40 percent.
- Finally, its net profit margin was 29, 25, 30, 33 and 23 percent, with the highest percentage in 2011 at 33 percent and its lowest was 23 percent in 2012.
I’m not that familiar with different terminologies so I asked Rio for the definition of profitability and this is what I’ve learned. Profitability ratios show a company’s overall efficiency and performance. We can divide profitability ratios into two types: margins and returns. Ratios that show margins represent the firm’s ability to translate sales dollars into profits at various stages of measurement. On the other hand, ratios that show returns represent the firm’s ability to measure the overall efficiency of the firm in generating returns for its shareholders.
- The company’s average net margin was 9 percent, with 10 percent marked in 2009 while 7 percent in 2011. This is the bottom line result of the day to day normal business transactions.
- Asset turnover has an average of 71 percent. It is a measure of how effectively a company converts its assets into sales. It is inversely related to net profit margin, the higher the net profit margin the lower the asset turnover.
- Return on asset was 0.33, 0.25, 0.29, 0.26 and 0.18 in 2012. Its average was 0.26. It measures the amount of profit earned relative to the firm’s level of investment in total assets. A Higher percentage is better because the company is doing a good job using its assets to generate sales.
- Return on equity was 0.66, 0.50, 0.54, 0.49 and 0.34, with an average of 0.51. It is perhaps the most important of all the financial ratios to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in the company.
- Financial leverage was 2.01, 1.97, 1.86, 1.90, and 1.83, with an average of 1.91. It is useful to the investor, it allows to see what portion of the ROE is the result of debt.
- Return on invested capital was .49, .34, .37, .34 and .22. with an average of .35. It is the percentage result of net income over invested capital. For MSFT, its return on invested capital was 35 percent.
As far as its profitability ratios are a concern, the results of MSFT is quite good, there’s no mark of a negative result, so the company is doing good in its business.
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. It has three categories: operating cash flow, investing cash flow and financing cash flow.
Cash Flow from Operating Activities
Operating cash flows are cash received or expended as a result of the company’s internal business activities. It includes cash earnings plus changes to working capital. Over the medium term, this must be net positive if the company is to remain solvent.
Related transactions of MSFT’s operating cash flow from 2008 to 2012 are wrapped up below:
- Net income of Microsoft Corporation was 17,681, 14,569, 18,760, 23,150 and 16,978; ttm of 15706. This is the result of the company’s day to day business transactions. It consistently showed positive results.
- Depreciation and amortization was 2,056, 2,562, 2,673, 2,766 and 2,967; ttm was 2951.
- Its investments losses (gains) was 683, -208, -362 and -200; ttm of -159. In 2009, the company incurred an investment loss of 683 but thereafter its investments resulted in having gains.
- Deferred income taxes was 935, 762, -220, 2 and 954, with ttm of 590.
- Other working capital was -2,435, -2,393, 2,899, -1,049 and 829. ttm was -205. It shows negative in the year 2008-2009 and 2011, however, a positive result in 2010 and 2012.
- So, its net cash provided by operating activities was 21,612, 19037, 24073, 26994 and 31626. Its ttm was 31617. It shows consistent positive results.
The cash flow from operating activities of MSFT tells us that the company has funds to retire additional debts, pay dividends and expand through investment in another line of business.
Cash Flow from Investing Activities
Cash received from the sale of long-life assets or spent on capital expenditure (investments, acquisitions, and long-life assets).
- Total cash inflow was 27,729, 25,997, 22,578, 22,777 and 45,275, with ttm of 49,480. This represents sales/maturities of investment.
- Total cash outflow was -32,316, -41,767, -33,892, -37,393 and -70,061. These were an investment in PPE, acquisitions, purchase of investment and other investing activities.
- So, net cash used for investing activities was -4587, -15770, -11314, -14616 and -24786 which showed a negative balance because transactions affecting cash outlays exceeded cash inflows.
Cash flow from investing activities of Microsoft Corporation incurred a negative balance because cash outflows are more than cash inflows. It involves the only transaction on sales/maturities of investment.
Cash Flow from Financing Activities
Financing cash flows refer to cash received from the issue of debt and equity or paid out as dividends, share repurchases or debt repayments.
- MSFT’s total inflow was 3,494, 6,657, 6,523, 9,213 and 2,006. Included here were debt issued, common stock issued and the excess tax benefit from a stock base.
- Total cash outflow was negative 12,934, -7,463, 13,291, 8,376 and 9,408. It included debt repayment repurchased of common stock, dividends paid and other financing activities. This also showed negative results because outflows transactions were more than cash received by the company.
The company’s financing cash flow was a consistent negative balance because cash outflows exceeded cash inflows.
Free Cash Flow
The graph below will reveal the free cash flow of Microsoft Corporation from 2008 to 2012:
- Free cash flow of MSFT from 2008 to 2012 was 18,430, 15918, 22096, 24639 and 29,321. Its ttm was 29,145. It showed a consistent high running balance throughout its five years of operation.
- Free cash flow shows that the company had huge funds to pay its obligations; current, long term and dividends to its stockholders and even enough to invest new lines of business.
Cash Flow Ratios
Cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios that Rio used with her calculations and interpretation on Microsoft Corporation.
- Cash flow margin was 0.36, 0.33, 0.39, .39 and 0.43; its ttm was .44. Cash flow margin measures how efficiently a company converts its sales dollars to cash.
- Operating cash flow was 0.72, 0.70, 0.92, 0.94 and 0.97. ttm of .85. It measures how well current liabilities are covered by the cash flow generated from a company’s operations.
- Free cash flow was 0.85, 0.84, 0.92, 0.91 and 0.93. It shows that the company has excess funds after paying expenses and dividends.
- Capital expenditure was 6.79, 6.10, 12.18, 11.46 and 13.72. with ttm of 12.79. A ratio that measures a company’s ability to acquire long-term assets using free cash flow. The cash flow to capital expenditures (CF to CAPEX) ratio will often fluctuate as businesses go through cycles of large and small capital expenditures.
- Total debt ratio was 0.59, 0.50, 0.60, 0.52 and 0.58; ttm of 0.56. This ratio provides an indication of a company’s ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company’s ability to carry its total debt.
Cash flow ratios of MSFT show that the company’s cash flow margin has a ttm of .44. Therefore, the company is efficient in converting its sales in dollars to cash. Operating cash flow is also impressive at 0.85. Its capital expenditure is also high which means that the company is able to acquire long-term assets using its free cash flow. Finally, the total debt ratio is 50 percent and above, so the company has the ability to carry its total debt up to 50 percent.
Written by Rio
Edited by Cris