Essay on Microsoft Corporation

The FIN400 Essay is based on Module 7, where the assignment was to choose a publicly traded firm, enlarge its financial statements, income statements, and perform a ratio analysis on the same. Microsoft Corporation is the corporation in question; it creates, supports, and grants licenses for software-related goods, services, and gadgets on a global scale.

Office 365 business products and services, such as Office, Exchange, SharePoint, Skype for Business, and associated Client Access Licenses (CALs), are provided by Microsoft’s Productivity and Business Processes division. Office 365 consumer services, such as Skype, Outlook.com, and OneDrive, are also available. He company provides dynamic business solutions, including financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications.“large organizations, and divisions of enterprises; and LinkedIn online professional network. Its Intelligent Cloud segment and licenses server products and cloud services, such as Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform for computing, networking, storage, database, and management services. It also offers enterprise services, such as Premier Support and Microsoft Consulting that assist in developing, deploying, and managing Microsoft server and desktop solutions, as well as provide training and certification to developers and IT professionals on Microsoft products.

Microsoft’s More Personal Computing segment comprises Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, MSN display advertising, Windows Internet of Things, and Windows Phone licensing system. Devices, including Microsoft Surface, phones, and computer accessories; search advertising, including Bing and Bing Ads. This segment also provides gaming platforms, including Xbox hardware, Xbox Live, video games, and third-party video games. The industry markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. (Yahoo)

Microsoft Corporation was founded by Bill Gates and Paul G. Allen in 1975 and has its headquarters in Redmond, Washington. It’s a multinational company, and a big player in the global economy and hence qualifies for this analysis. I have done a ratio analysis of the Du Pont equation variables as instructed for the current year or present industry ratios comparison to one of Microsoft’s top competitors the Apple incorporation. (Morningstar)

Apple Inc. designs manufacture and markets mobile communication and media devices, personal computers, small and mid-sized businesses, and portable digital music players to consumers and education, enterprise, and government customers worldwide. The company also sells related software, networking solutions, services, accessories, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a range of multi-purpose tablets; and Mac, a variety of desktop and portable personal computers. The industry also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. (Market Watch)

The company also offers Apple TV that connects to consumers TV and enables users to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal device; Also iPod, a line of portable digital music and media players. Further, Apple Inc. sells Apple-branded iOS-compatible accessories, and third-party Mac-compatible such as storage devices, headphones, displays, Beats products, and other connectivity and computing products and supplies. It also offers iCloud, a cloud service; AppleCare that provides support options for its customers; and Apple Pay, a mobile payment service. The industry sells and delivers digital content and applications through the iTunes Store, App Store, TV App Store, Mac App Store, iBooks Store, and Apple Music. It also makes sales of its products through its retail and online stores, as well as through third-party cellular network carriers, retailers, wholesalers, and value-added resellers. Apple Inc. Founded in 1977 and its headquarters in Cupertino, California.

The horizontal analysis of the Microsoft Income statement reflects a decrease in the revenue over time where we have a net reduction of 3,630,000 which shows a decline in sales. One can pose the question why is this happening? There seems to be a drop in sales promotions; the managers should take up re-engineering processes that could help improve sales for example Benchmarking. The reduction in sales has consequently brought about a decrease in profitability where we see a negative shift in the horizontal analysis of Gross profit of the past three years with a net change of 4,853,000.

The Microsoft company has been keen enough to invest more in research development over the three. Why? in consideration to It being a big player in Technology which is a very competitive field where new products are being developed rapidly with each new product better than the previous version with better upgrades integrated and user-friendly for most products. It is correct to say that this is a good move in ensuring the continuity of the firm and safeguarding clientele satisfaction by creating reliable and better outcomes. Research development has increased 991,000.

In the horizontal analysis of Microsoft Corporation, we see a trend in the operating income or loss docket where we have figures as at 6/30/2015,6/30/2016,6/30/2017 being

18,161,000, 20,182,000, 22,326,000 respectively. One can pose the question, what are the effects of this shift or this change? We see that the increase in operating income over the years has greatly influenced the Total Other Income/Expenses Net which increases and Earnings Before Interest and Taxes.

We move on to the vertical analysis of the Microsoft Corporation Income statement were I took sale/revenue as my base of 100 percent and analyzed the contents of the Income statement as at 6/30/2017. We have the Cost of Revenue at 38.1% and the Gross profit at 61.9% the relation between the two is that the increase in one entity affects the other which increases by default.

Their vertical changes in most entities represented in the Income statement were we have. A vertical shift of 14.49 in Research Development, Selling General and Administrative by 22.25 total operating expenses go down by 24.82. The primary purpose of vertical analysis of the Income statement is to generate a report representing each line in the financial statement as a percentage of the Income statement’s primary focus which in our case is revenue or sales.

When we look at the horizontal analysis of the balance sheet, we see that there are changes over the years where we have negative and positive change. In the instance of current assets, cash and cash equivalents, Microsoft experiences, a definite shift in 2,068,000 this is to show growth in the current assets over the years in our portfolio our focus is principally past three years. The balance sheet also reflects a definite shift in short-term investments where we see Microsoft having a 34,387,000 net change over the period from a base period of 6/30/2015 up to 6/30/2017

A negative spike witnessed in the horizontal analysis of the balance sheet where we have an instance of inventory where there is a parallel shift of 721,000 decreases this report helps us understand better the trends over the years since 6/30/2015 till 6/30/2017 which are the past three years of the economic study of Microsoft Corporation. Total Stockholder Equity also decreases significantly over the last three financial years were we have a significant drop of 7,689, 000.the company should consider appropriate strategies that promote stockholder’s equity in the firm

In the vertical analysis of the Microsoft Corporation balance sheet.We use total assets as the Focus of our study as 100%, and then carry out a vertical analysis of all entities in the balance sheet. We have the instance of total current assets at 66.30 hence showing a vertical shift of the same and therefore reflecting growth in Microsoft Corporation current holdings concerning overall assets. Each line of the balance sheet represented on the spreadsheet as a percentage of the focus of our report which is total assets=100 %, e.g., Accounts Payable 14,024,000 divided by total assets 241,086,000 gives us a result of 5.81 %.

Ratio analysis using ratios from Du Pont formula represented as;

ROE (DuPont formula) = Net profit margin * Asset Turnover *Financial average = (Net profit / Revenue) * (Revenue / Total assets) * (Total assets / Equity). In the excel spreadsheet, I have shown the comparison of present industry ratio analysis between Microsoft Corporation and Apple Inc. which where my select companies in which I compared and contrasted on the given ratios. (Ready ratios)

Asset turnover ratio for the year ended 6/30/2017. Asset turnover ratio is the financial ratio that measures the efficiency of the company’s use of assets to promote sales, where we have Microsoft having a current ratio of 0.41 and Apple having a present ratio of 0.7. Apple has a better asset turnover ratio

The debt-to-equity ratio for the year ended 6/30/2017. This solvency ratio indicates the relative proportion of the entity’s equity and debt used to finance an entity’s assets. Debt-to-equity ratio = Liabilities / Equity. From the spreadsheet we have Microsoft having a current ratio of 2.33 while its competitor Apple Inc. is having a present ratio of 1.5. Microsoft has a better debt-to-equity ratio compared to Apple Inc.(Nasdaq)

Net profit margin as at 6/30/2017. The ratio is a profitability calculated as net profits divided by revenue. Net profit margin = Profit (after tax) / Revenue(sales). Microsoft has a ratio of 0.61 while Apple Inc. has) 0.93. Apple reflects a higher net profit margin compared to Apple Inc.

Return on equity (ROE) as at 6/30/2017. ROE is the amount of total net income returned as a percentage of shareholders equity. ROE = Net profit after tax / Average shareholder’s equity. Microsoft has a ratio of 0.29 while Apple possesses a rate of 0.14. Microsoft Corporation attains a higher ROE compared to Apple Inc.

Return on Assets(ROA) for the year ended 6/30/2017. Shows the percentage of profit an industry or company earns to its overall resources or total assets. ROA = Net Income after tax / Average Total assets or Total assets. Microsoft has a current ratio of 0.09 while Apple has a ROA of 0.21. Apple returns more on Assets in contrast to Microsoft Corporation. (Chron)

In conclusion, we can see in our Ratio analysis, Microsoft and Apple do not have significant differences in their financial results although their management is different and hence differences in profitability and revenue generation. The two companies which are in the same industry that of Technology are big-time contributors to the global economy. It seems like they could borrow from each other where Microsoft can use Apple tactics to improve on sales, and proper asset utility and Apple can implement Microsoft’s strategies of ensuring higher returns on equity.

Microsoft’s management needs to benchmark which is an excellent strategy in business process re-engineering. Management also needs to promote sales and utilize assets more to achieve better returns on Assets. Management needs to consider a restructuring of the organization in some sectors that seem to be lacking, e.g., sales.

References

Du Pont Formula - Financial Analysis Software. (n.d.). Retrieved from https://www.readyratios.com/reference/profitability/dupont_formula.html

Microsoft Corporation Stock - Yahoo Finance. (n.d.). Retrieved from https://finance.yahoo.com/quote/MSFT/

Apple Inc. Stock - Yahoo Finance. (n.d.). Retrieved from https://finance.yahoo.com/quote/AAPL/

Microsoft Corporation Stock- Morning Star. (n.d.). Retrieved from

http://www.morningstar.com/stocks/XNAS/MSFT/quote.html

Microsoft Corporation ratio analysis- Nasdaq. (n,d). Retrieved from

https://www.stock-analysis-on.net/NASDAQ/Company/Microsoft-Corp/Ratios/Long-term-Debt-and-Solvency

Apple Inc. Stock – Market Watch. (n.d.). Retrieved from

https://www.marketwatch.com/investing/stock/aapl/profile

Comparing financial ratios to industry.- Chron. (n.d.). Retrieved from

http://smallbusiness.chron.com/compare-financial-ratios-industry-average-73351.html

Note: figures above are in thousands, e.g., 4,853,000.