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POLITEHNICA University of Bucharest

Faculty of Engineering in Foreign Languages

Analysis of financial ratios of


Microsoft Corporation (30 June
2014 30 June 2015)

Student: Nitulescu Gabriela

1. Compay description
Microsoft
Corporation is
an
American multinational technology
company headquartered in Redmond, Washington, that develops, manufactures,
licenses, supports and sells computer software, consumer electronics and personal
computers and services. Its best known software products are the Microsoft
Windows line
of operating
systems, Microsoft
Office,
and Internet
Explorer and Edge web browsers. Its flagship hardware products are the Xbox game
consoles and the Microsoft Surface tablet lineup. It is the world's largest software
maker by revenue, and one of the world's most valuable companies.
Microsoft was founded by Paul Allen and Bill Gates on April 4, 1975, to develop
and sell BASIC interpreters for Altair 8800. It rose to dominate the personal
computer operating system market with MS-DOS in the mid-1980s, followed
by Microsoft Windows. The company's 1986 initial public offering, and subsequent
rise in its share price, created three billionaires and an estimated 12,000
millionaires among Microsoft employees. Since the 1990s, it has increasingly
diversified from the operating system market and has made a number of corporate
acquisitions. In May 2011, Microsoft acquired Skype Technologies for $8.5 billion in
its largest acquisition to date.
With the acquisition of Nokia's devices and services division to form Microsoft
Mobile Oy, the company re-entered the smartphone hardware market, after its
previous attempt, Microsoft Kin, which resulted from their acquisition of Danger Inc.

2. Liquidity ratios
2.1 Currant ratio
Current ratio=

Total current assets


114,246 M
=
2,5
Total current liabilities 45,625 M

The value is bigger than one but not too big. It means that the company can
cover the sort-term obligations with the current assets but it does not hold a lot of
cash uninvested.

2.2 Quick ratio


Quick ratio=

Total current assetsInventory 114,246 M 2,660 M


=
2,44
Total current liabilities
45,625 M

The inventorys value did not affect too much the value of the ratio. With a small
inventory and a value of this indicator bigger than 1, the company will have no
problems in covering the short-term obligations.

2.3 Cash ratio


Cashratio=

Cash
8,669 M
=
0,19
Current liabilities 45,625 M

The cash ratios value is much less than 1 and it means that the current debt
can not be covered only by cash. The low value indicates that cash is not very
signifiant in companys assets.

3. Solvecy ratios
3.1 Debt equity ratio
Debt equity ratio=

Total debt 172,384 M 89,784 M


=
0,91
Total equity
89,784 M

The value of Debt equity ratio is close to 1 and it indicates that the company is
equilibred (not too leveraged or too conservative).

3.2 Interest coverage ratio


Interest coverageratio=

EBIT
27,820 M
=
46,6
Interest
597 M

The interest coverage ratio is very high and it means that the company has no
problems in covering its interest obligations.

4. Operating ratios
4.1 Asset turnover
Asset turnover=

Sales
86,833 M
=
0,76
Total assets 114,246 M

This indicator measures the assets efficiency (the revenue produced by the
assets). It means that the revenue represents 76 percent of the assets value.

4.2 Receivable days


Receivable days=

365Accountsreceivable 36519,544 M
=
82 days
Sales
86,833 M

This indicator shows that the company requires 82 days to collect a typical
invoice. This standalone value does not help us in order to analyze the situation of
the company. It would be useful to have the other values from the past years in
order to see the trend.

The value of 82 is a little bit big considering that all the companies wishes for as
small as possible values.

4.3 Days payable


Days payable =

365Accounts payable 3657,432 M


=
101 days
Cost of goods sold
26,934 M

This value indicates how long it takes to the company to pay its invoices from
trade creditors. 101 is a normal value but the term of normal is different from
company to company according to the industry it works and other criteria.

4.4 Days in inventory


Daysinventory =

365Averageinventory 3652,660 M
=
36 days
Cost of goods sold
26,934 M

This indicator measures how much time it takes to the compay to turn its
inventory (the goods it produces) into sales. The normal value alst differs from
industry to industry.

5. Profitablity ratios
5.1 Profit margin
Profit margin=

Net income 22,074 M


=
0,25
Sales
86,833 M

The profit margin represents how much of the total revenue earned represents
profit and 25% represents a good value for any company.

5.2 Gross profit margin


Gross profit margin=

Gross profit 59,899 M


=
0,69
Sales
86,833 M

This indicator measures the proportion of money left over from revenues after
accounting for the cost of goods sold. For Microsoft it has a big value and it means
that the company is able to invest more in quality keeping the same sale prices.

5.3 ROA
ROA=

Net income 22,074 M


=
0,13
Total assets 172,384 M

The return on assets indicates how profitable the company was relative to its
total assets. The value of this indicator indicates that the net income represents
aproximatively 13 percent of the total assets.

5.4 ROE
ROE=

Net income 22,074 M


=
0,25
Total equity 89,784 M

The value of the Return of equity indicator measures how much profit the
company generated with the money shareholders have invested.

6. Conclusion

As described at the beginning Microsoft is the world's largest software maker by


revenue, and one of the world's most valuable companies but it does not mean that
its performance can not be improved.
First of all, without considering the indicators values, in the IT market,
outsourcing R&D (research and development) activities became a trend. The
companies decides to keep only the management teams in order to ensure the
traditional quality. The only problem of this strategy is that the developmant time
increases and in Microsofts situation, the company that provides the most notorious
software in the world, even if the costs decreases, their clients do not accept a
longer development period between the releases.
Regarding the indicators, I think that the currant ratios value (~2.5) is a little
bit too big. It means that the company does not reinvest a lot of its profit. The other
indicators values are very good (maybe some of the best in the IT market) and it is
no improvement to suggest.