Financial Analysis of Microsoft Corp.

Topics: Generally Accepted Accounting Principles, Balance sheet, Financial ratio Pages: 7 (2292 words) Published: January 24, 2013
This report is issued in order to inform the public about Microsoft Corporation. We analyzed the profitability and liquidity of this company. In addition, we were able to provide recommendations for investments or credits in Microsoft for the best interest of the public. Profitability ratios refer to the relative measure to what an actual created profit. Through these ratios the company is allowed to see how profitable the company. In addition it can serve as an examination of the overall performance of the company’s operations and how do these compare to past performances or other companies. The ratios in which accounting measures the profitability of a company are Profit Margin, Price over Earnings, Return on Equity and Return on Assets. In terms of Profit Margin it has a high ratio, which means that our company is turning 76.3% more of each dollar that we sell. The results of this could be the increase in the quantity sold, increase in the price, and decrease in costs. Compared to Apple, whose profit margin ratio is 46.2%, Microsoft is able to be more profitable in terms of profit margin. The Price over Earnings ratio helps to determine how much does a share cost is compare to how much the company is earning and it is interpreted as how long it will take you to earn back what you invested in a company. In this case for someone who invests in Microsoft it will take them approximately 15.3 years, compare to Apple’s 13.5 years, to earn back the amount that they will invest.

The Return on Equity ratio helps to measure the profitability of a company for the investor and how it manages its equity. In this case, Microsoft experiences a 10.3% of Return on Equity. Ideally, a company would like to have a higher Price over Earnings ratio; compared to Apple’s 51.5% Return o n Equity, Microsoft stands at a lower percentage which might not attract others to invest in the company. Return on Assets ratio evaluates how a company is able to produce a profit before being on debt; it reflects on the efficiency of the management. In this case Microsoft’s 5.9% was again below Apple’s 33.4% in its ratio.

Cash Flows are the inflows and outflows of cash in a company, which are directly related to the revenues and expenses in Microsoft’s income statement. The Net Income that Microsoft recorded for 2012 was $16,978.00 and its Cash Flows from Operating Activities equaled to 31,626.00. In this case the company recorded higher cash flows from operating activities compared to its net income. This was a result of the company’s management on its current liabilities and its current assets. Also, the addition in depreciation and amortization, goodwill, and stock-based compensation; these accounts are not part of the cash flows yet they still make an impact on the income of the company.

Liquidity being, that which represents how fast the company is able to convert its assets into cash, is denoted with various ratios. The current ratio (D) takes the current assets of a firm and divides them by the firm’s current liabilities. Currently Microsoft’s current ratio is 2.9, showing that its current assets exceeds its current liabilities. Apple Inc., which is Microsoft’s contender, has 1.6 for its current ratio indicating that it’s not as quick in converting its assets into cash. Another liquidity ratio is the quick ratio (E); this ratio is calculated by subtracting inventory from current assets and dividing that difference by the firm’s current liabilities. Microsoft’s quick ratio is 2.6, showing that the company is still doing well in converting its assets into cash even after removing its most liquid asset –inventory. Apple’s quick ratio is 1.1, which shows how much inventory constructs the company’s current assets. Microsoft has been doing very well within its liquidity measures and meets its obligations as they become due.

When discussing solvency, we analyze ratios that measure the long-term liability of a business to pay off its...

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