Financial Analysis of Microsoft Corporation

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Overview Microsoft Corporation (Microsoft) is one of the leading providers of software and storage products and services. The company is engaged in developing, manufacturing, licensing, and supporting software products worldwide. Coupled with these activities Microsoft also offers Project Management consultancy services. As one of the largest technology firms in the world Microsoft is at the cutting edge of new technology development and innovation, and as such both existing and potential shareholders expect a return on their investment. It is therefore important for the firm to make efficient use of the resources at their disposal. The following financial analysis of the Fiscal Years 2008 and 2009 will show that over the period Microsoft worked hard for its shareholders but that it was not immune to the global economic downturn and felt this most during the 2009 fiscal period.

Ratio Analysis Overview i Gross Profit Margin Operating Profit Margin Return on Assets Return on Equity Current Ratio Quick Ratio Debit/Equity Ratio Total Debt Ratio Time Interest Earned Asset Turnover Ratio Average Collection Period Inventory Turnover Ratio Change 08-09 -1.99% -5.46% -17.60% -17.60% 25.99% 26.54% 4.99% 3.28% -3.39 4.8% 2009 79.20% 34.85% 19.34% 38.42% 1.82 1.58 9.9% 50.9% 22.65 0.78 77 14.28 2008 80.80% 36.86% 23.47% 46.62% 1.45 1.25 0.0% 48.5% 0.00 0.80 75 13.63 2007 79.08% 36.07%

The above financial analysis is explained in greater detail below with additional commentary. Those ratios which warrant deeper analysis are treated on pages 7-8 in the report. Assumptions are expected in any analysis and as such can be found with explanatory notes on pages 10 through 11 with industry reference statistics for comparison.

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Please see assumptions on page 9. These are referenced in relation to calculations.

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QUESTION 1: (a) Calculate and interpret the following ratios from the 2009 annual report of Microsoft Corp: Profitability Ratios: Profitability Ratios measure whether a firm has generated a profit after it has deducted all costs including the cost of its equity capital. For most of these ratios, having a higher value either compared to or relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Gross Profit Margin =Sales-COGS/Sales: This measurement is used to assess a firm's financial health as it shows the proportion of money left over from revenues after discounting the cost of goods sold. Out of this margin the firm can pay for additional expenses and provide for future savings. Operating Margin=EBIT ¹/Sales: This measurement is the ratio of operating income divided by sales and is a measurement of what is left over before taxes and other indirect costs are taken into account. As such is it often referred to as Earnings Before Interest and Tax (EBIT). Return on Assets =Net Income/Average Total Assets: ROA gives an indication as to how efficient management is at using its assets to generate earnings. ROA tells you what earnings were generated from invested capital (assets). Return on Equity=Net Income/Average Total Equity: Return on equity measures how well a firm is performing for its shareholders as it indicates how much was earned for each unit invested by the owners. Equity can be both shareholder investment and debt financing. It is important therefore that managers make the best use of the equity at their disposal. Table 1 Change 08-09 Gross Profit Margin Operating Profit Margin Return on Assets ROA Return on Equity ROE -1.99% -5.46% -17.60% -17.60% 2009 79.20% 34.85% 19.34% 38.42% Change 07-08 2.18% 2.20% n/a n/a 2008 80.80% 36.86% 23.47% 46.62% 2007 79.08% 36.07%

The above figures for Microsoft indicate that while remaining profitable in 2009 it was not immune to the worldwide economic downturn and saw a 1.99% drop in Gross Profit Margin on 2008. When compared to its peers in Fig. 2, Microsoft’s operating margin is 80.8% higher than the Peer...
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