Microsoft Company's Background and Information

History 

Microsoft is the leading company regarding technology in the world. The headquarters of the corporation is located in Redmond, Washington. Paul Allen and Bill Gates were the pioneers of the company. The operations of Microsoft Company commenced in 1975. The initial aim of opening the firm was to develop primary interpreters. Subsequently, the company expanded its activities to producing PCs in the mid-1980s. By the end of the 19 th century, the firm developed Windows to support functions of the PCs ("Microsoft Corporation | History, Products, & Facts", 2019) . The company has been introducing products to the market after the commencement of business activities. The company introduced Windows and Office products from 1985 to 1994 ("Microsoft Corporation | History, Products, & Facts", 2019) . Also, the organization offered Xbox gadgets, Web, and Windows XP to the customers from 1995 to 2007. Subsequently, the firm created Windows 7 & Vista, Stores, and Azure from 2007 to 2011 ("Microsoft Corporation | History, Products, & Facts", 2019) . Between 2011 and 2014, the corporation offered Windows 8, outlook, and Advanced Xbox gadgets. Currently, most consumers of Microsoft products are using Windows 10 and Edge ("Microsoft Corporation | History, Products, & Facts", 2019) . The company develops its products to meet the needs of the customers and to remain relevant in the ever-changing technology sector. 

Current Activities and Operations 

The current activities of Microsoft Company include developing, manufacturing, licensing, or selling software, PCs, and electronics. The company is widely recognized for its high-quality Windows, Office Suite, and Browsers. The hardware produced in the firm includes touch PCs, Microsoft Surface, and Xbox gadgets. Since 2017, the company has been operating three business sections. Also, the company contains four engineering departments to facilitate the production of items. The board of directors is responsible for managing the activities in Microsoft Corporation. The BOD regulates the tasks of five teams including audit, governance, anti-trust compliance, compensation, and finance. The current CEO of the firm is Satya Nadella who was appointed in 2014. Amy Hood is the present CFO in the organization. The managers in the company are regulating the current tasks to ensure they achieve strategic goals. 

Financial 

The company conducted an IPO in 1986 to increase the shareholders. Consequently, the shareholders’ wealth increased due to the rise in stock value. Microsoft Corporation is diversifying from developing the OS to acquisitions since the 19 th century. For instance, the firm has expanded its operations by acquiring LinkedIn and Skype. In 2016, Microsoft earned the most considerable revenue in the software sector across the globe. The firm was ranked the 30 th among the Fortune 500 corporations in 2018. The firm generated revenue of $ 110.36 billion in 2018. The profit after tax and interest deduction was $ 16.57 billion. The company has adequate financial resources to meet its obligations due to its high income. 

Corporate Culture 

Microsoft offers technical support to developers and users of software or hardware. The corporation has developed a database called MSDN where technical experts and consumers can access information. Microsoft has created platforms for developers including wiki, channel, and internet forum. Users can obtain free technical assistance on Usenet and CompuServe. The company does not support the H1B Law of recruiting foreign employees. Directors argue that the implementation of the law would reduce the employment rates in the United States. In 2018, Microsoft incorporated the parental leave policy. The company agreed that men could take three-month leave, but women should take a break of five months. The company has a unique corporate culture as compared to the competitors. 

Mission, Vision, and Values 

The purpose of the company is to motivate every individual and institution across the world to achieve goals. However, the mission of Microsoft is to assist people and organizations in the world to identify their capabilities ("About - Microsoft", 2019) . The company encourages its stakeholders to exercise values such as diversity, innovation, CSR, philanthropy, environment, and trustworthiness ("About - Microsoft", 2019) . The company develops strategic goals after every five years to ensure that the tasks are aligned to the mission and vision. Microsoft provides employees with a code of conduct that describes the values ("About - Microsoft", 2019) . Therefore, the managers of Microsoft are responsible for the achievement of the mission and vision. 

Analysis of Financial Conditions 

Income Statement 

The total revenue of Microsoft has been increasing over the past years. The revenue increased from $ 91, 154 to $ 110, 360 million in 2016 and 2018 respectively. However, the revenue slightly increased to $ 96, 571 million in 2017 (Microsoft Corporation, 2018). The total income increased due to the rise in the sales volume from $ 63, 811 to $ 64, 497 million in 2017 and 2018. The sales decreased to $ 63, 811 million in 2017 (Microsoft Corporation, 2018). Further, the gross profits of Microsoft Company have been increasing over the past three years. The profits rose from $ 58, 347 to $ 72, 007 million in 2016 and 2018. Also, the gross profits increased to $ 62, 310 million in 2017 (Microsoft Corporation, 2018). The profits improved due to an increase in sales volume. 

The net income for the company significantly decreased to $ 16, 571 million in 2018. However, the company has been earning a high income over the past years. For instance, the total earning for 2016 to 2017 were $ 20, 539 and $ 25, 489 million (Microsoft Corporation, 2018). The total earnings have reduced due to the increase in the expenses and the income tax rates in 2018. The R & D expenses increased from $ 13, 037 to $ 14, 726 million in 2017 and 2018 (Microsoft Corporation, 2018). The expediture on research and development have increased because the corporation is still introducing new products in the market. The sales and marketing expenses increased to $ 17, 469 million in 2018. Also, there was a slight increase in the general and administrative costs to 4, 754 million (Microsoft Corporation, 2018). The sales and advertising expenses increased because the company is promoting new products in the market including Microsoft Edge and Windows 10. The income taxes rose to $ 19, 903 million which affected the overall earnings in the company (Microsoft Corporation, 2018). The company should minimize the operating and promotional expenses to increase its profits in the long-term. Microsoft is still earning profits in spite of an increase in operating costs. 

Balance Sheet 

The current assets of Microsoft Corporation have been increasing over the past years. The current holdings in the firm grew from $ 162, 696 to $ 169, 662 million. However, the long-term assets are less than the liquid materials in the company. Thus, Microsoft Corporation has not been investing but holding the cash in the bank. The short-term investments are more than the money in the company. Microsoft has been investing in stocks and bonds that are sold annually. An increase in the current assets indicates that Microsoft Corporation has high liquidity to fulfill short-term obligations. Although there is a slight increase in the properties, the company does not make investments in long-term assets. The short-term investments decreased from $ 125, 318 to $ 121, 822 million (Microsoft Corporation, 2018). The bonds or shares might have lost value which affected the total prices. Microsoft can resell financial assets after their prices rise. The company’s equity and investments have reduced from $ 6, 023 to 1, 862 million in 2017 and 2018 because they are investing in financial assets. The net assets in the firm increased to $ 258, 848 million which is more than the total liabilities (Microsoft Corporation, 2018). It is an indication that Microsoft Corporation is performing well. 

The long-term liabilities are more than the current liabilities. The long-term debts reduced from $ 76, 073 to $ 72, 242 million. Also, the short-term obligations of the company decreased from $ 9, 072 million to $ 0 (Microsoft Corporation, 2018). The income taxes in the corporation have increased from $ 13, 485 to $ 30, 265 million (Microsoft Corporation, 2018). Therefore, Microsoft Corporation can meet its long-term obligations using liquid assets. The stockholder’s equity decreased from $ 87, 711 to $ 82, 718 million which indicates that the company is at risk of settling the debts in the short and long-term. The retained earnings in the organization have reduced from $ 17, 769 to $ 13, 682 million (Microsoft Corporation, 2018). Thus, the net revenues in the company have decreased which is a threat to its performance. 

Statement of Cash Flow 

The total income for Microsoft Corporation has reduced over the past years from $ 25, 489 to $ 16, 571 million which indicates that the sales have decreased. The total cash generated from operating activities in Microsoft Corporation increased from $ 39, 507 to $ 43, 884 million (Microsoft Corporation, 2018). Thus, the corporation’s performance is growing gradually. One of the reasons for the increase in net income is that Microsoft Company uses the accrual technique to record transactions after they are earned. For instance, the accountants have recorded unearned revenues in the financial records. The increase in the unearned revenue from $ 3, 820 to $ 5, 922 million has affected the total income from the operating activities in the firm (Microsoft Corporation, 2018). The increase in depreciation and income taxes had a significant influence on the net cash collected from the daily operations. Microsoft’s net income is lower than the money earned from operating activities. Investors can purchase shares in the company due to the results of the positive cash flow. 

The total cash used in financing activities in the company has increased from $ 8408 to $ 33, 590 million. Thus, Microsoft has spent more finances in making investments including bonds and stocks. Microsoft Corporation repurchased more stock than it issued to the public. For example, Microsoft repurchased shares worth $ 10, 721 but issued stock valued at $ 1, 002 million (Microsoft Corporation, 2018). Secondly, the cash on financing activities has risen due to an increase in the repayment of short-term obligations. The compensation of short-term loans increased from $ 7, 922 to $ 10, 060 million (Microsoft Corporation, 2018). Thirdly, the corporation has been paying the shareholders the dividends for common shares. The dividends payments increased to $ 12, 699 million in 2018 (Microsoft Corporation, 2018). Microsoft is investing in short-term assets to meet its daily obligations. 

The total amount of investments has decreased from $ 46, 781 to $ 6, 061 million. The reduction in the amount of investments indicates that Microsoft is not purchasing long-term fixtures. However, the amount of additional property and plant has increased from $ 8, 129 to $ 11, 632 million (Microsoft Corporation, 2018). It is an indication that the company purchased new property or machine which reduced the cash in the balance sheet. Microsoft Company did not engage in acquisitions since the amount decreased to $ 888 million (Microsoft Corporation, 2018). The firm reduced its purchases on investments from $ 176, 905 to $ 137, 380 million in 2017 and 2018. The total cash increased to $ 11, 946 million because the company earned $ 43, 884 million from operating activities (Microsoft Corporation, 2018). The statement of cash flows indicates that Microsoft is in a good financial position because it has a positive net income. 

Statement of Shareholders Equity 

The analysis of the report indicates the company’s performance regarding its stock value. The stakeholders’ equity reduced from $ 87, 711 to $ 82, 718 in 2017 and 2018 (Microsoft Corporation, 2018). The balance of common stock and paid-in-capital rose to $ 71, 223 million because Microsoft repurchased stocks. Also, the company issues stock in the market to increase the earnings. The retained earnings decreased from $ 17, 769 to $ 13, 682million in 2017 and 2018 respectively (Microsoft Corporation, 2018). The reduction of net income to $ 16, 571 million in 2018 affect the retained earnings of the firm. Microsoft incurred a comprehensive loss of $ 2, 187 million in 2018 (Microsoft Corporation, 2018). Also, the net income affected the overall losses of the corporation. The decrease in retained earnings influenced the total stockholders’ equity. 

Analysis of Major Ratios 

Profitability ratios focus on examining a company’s potential to generate income to meet the expenses. The return on equity and gross margin ratios are essential in assessing Microsoft’s ability to earn profits to fulfill the obligations. The ROE involves the assessment of the firm ability to earning income from the stakeholders’ investments (Goel, 2015). Therefore, the ROE is computed as: 

ROE=Net income/ Shareholders equity 

=16, 571/82, 718 

=0.2 or 20% 

The results demonstrate that in each dollar the shareholder’s equity earned 0.2. Alternatively, the stakeholders earned 20% returns on the investments. The company needs to improve its performance to earn higher returns. The second ratio is the gross margin. The ratio focuses on establishing the relationship between the total profits and sales in the company (Goel, 2015). The gross margin of Microsoft is computed as: 

Gross margin= Gross profit/ Sales 

=72, 007/ 110, 360 

=0.65 

The results indicate for each dollar earned from the sales, Microsoft has 65 cents for meeting the operating costs. Thus, the firm has a high gross margin that is essential in the performance of daily activities. 

Liquidity ratios are vital in assessing the firm’s potential to settle obligation before the due date. The current and time-interest earned ratios are suitable for determining Microsoft’s ability to meeting obligations. The current ratio focuses on assessing the organization’s capability to settle debts using short-term assets (Goel, 2015). Thus, the current ratio is computed as: 

Current ratio = Current assets/ Current liabilities 

=$ 169, 662/ 58, 488 

=2.9 

Microsoft has met the industry standards on the current ratio which is at least 1.5. The results indicate that the current assets are almost three times the short-term liabilities. Therefore, Microsoft can fulfill obligations using short-term assets. It is an advantage because investors can decide to purchase the corporation’s shares due to its high financial strength (Goel, 2015). Secondly, lending organizations such as banks can advance any amount of credit to Microsoft Company. 

The time-interest earned ratio focuses on the amount used in meeting the interest expenses. Further, the results of the ratio indicate the income for future interest rates (Goel, 2015). The time-interest earned ratio for Microsoft Corporation is: 

Time-interest earned=EBIT/ Interest expense 

=35, 058/ 1, 416 

=24.76 

The standard TIE ratio is 2.5 which indicate few solvency risks. The time-interest earned ratio for Microsoft Corporation is high which demonstrates financial stability. The company does not use its excess profits to establish projects but settles debts on time. However, long-term investors might lose interest in making investments in Microsoft because there are no new initiatives that can be successful in the future. 

Leverage ratios are essential in establishing the amount of debts in an organization. The debt to assets and debt to equity ratios will determine the obligations of Microsoft Corporation. The debt to asset ratio indicates the financial ability of an organization (Goel, 2015). The DTA of Microsoft Company is calculated as: 

Debt to asset=Total debt/ Total assets 

=$176, 130/258, 848 

=0.68 

Microsoft has exceeded the industry’s standard of debt to asset ratio which is 0.4. The results demonstrate that the creditors fund 68% of the company’s assets. However, the shareholders finance 32% of the firm’s assets. Microsoft will face a few risks because the debts are less than the total assets. The company has low financial leverage because it cannot use the debts to increase production volumes. The debt to equity ratio is used to assess the financial leverage of an organization. 

Debt to Equity=Total debt/ Total stakeholder equity 

=$ 176, 130/ 82, 718 

=2.13 

Microsoft has attained a high debt to equity ratio which exceeds the industry’s standard of 1.89%. The high DTE ratio is risky because the shareholders stock value decreases and the company cannot obtain additional loans. 

Competitors and Competition 

The technology sector is competitive because there are subsequent changes that take place. The primary competitors of Microsoft Corporation include IBM, Oracle, Apple, and SAP. The corporation innovates and upgrades its products to remain competitive in the market. However, the company still faces competition from small firms with a narrow niche that manages human, financial, technical resources effectively. The technology sector has many industries because there are low barriers to entry. Further, the technology sector is competitive because new products emerge after some time and the users’ needs change (Microsoft Corporation, 2018). Microsoft ability to achieve a competitive edge depends on the innovation of products to meet the customers’ preferences. 

Microsoft has developed a platform-based structure to acquire different solutions from the stakeholders. Consequently, the company implements solutions to meet the needs of the clients. Microsoft has established a significant scale in the market to achieve and sustain high profits. Competitors have created competing networks to counter competition in the technology industry (Microsoft Corporation, 2018). The company has responded to competition by focusing on providing cloud-based facilities to the consumers. Competitors have also developed cloud services to attract consumers. Microsoft is investing in cloud services by incurring software improvement and infrastructural expenses (Microsoft Corporation, 2018). Secondly, the firm is investing in new products and services in spite of the low returns. The financial statements indicate that R& D and marketing expenses have increased over the past years. Microsoft acquires companies to achieve a competitive edge in the technology sector. For example, the company acquired LinkedIn in 2016 and GitHub in 2018 (Microsoft Corporation, 2018). Microsoft will remain as the leading firm in the industry due to its unique approach to competition. 

Risks and Predictions 

The company’s net income has reduced due to an increase in operating expenses. In case the income reduces in the subsequent years, there is a risk that Microsoft might incur losses. The firm should minimize its operating expenses on sales and marketing by using websites which are cheaper. The company can encourage their employees to conduct research independently to reduce the costs of consulting other corporations. The COGS has been increasing which is a threat to the company’s profits. The company needs to reduce production expenses including labor or materials. Microsoft can negotiate with suppliers to reduce raw materials costs. The short-term assets are more than the long-term fixtures. Microsoft might encounter risks in the long-term because the current assets are more liquid and can lose value due to economic trends (De, Lucchetta, & International Monetary Fund, 2012) . Microsoft should increase its non-current assets to avoid losses during economic downturns. The company might not get investors because it is investing in short-term financial assets. The firm has a high debt to equity ratio which can reduce the stock value of the shareholders. The creditors can acquire substantial compensation than the stakeholders if the company becomes insolvent. The risk of defaulting loans is high because the obligations rise after the debt to equity increases (De, Lucchetta, & International Monetary Fund, 2012) . Also, Microsoft will pay high interest in the loans which reduces the profits. Finally, the company might not obtain more credit from lending organizations due to the massive debts. Some banks provide that a firm should have a debt-to-equity ratio of 1.5 (De, Lucchetta, & International Monetary Fund, 2012) . Microsoft needs to mitigate the risks to enhance its performance. 

Summaries and Conclusion 

It is vital to establish a corporation’s background before performing financial analysis. A economic assessment is essential in identifying the current performance of a company. The analysis assists in the identification of strengths and weaknesses. Subsequently, the company develops mitigation strategies to prevent the occurrence of the risks. Organizations should perform a financial analysis frequently to track their progress and that of the competing companies. 

References 

About - Microsoft. (2019). Retrieved from https://www.microsoft.com/en-us/about 

De, N. G., Lucchetta, M., & International Monetary Fund. (2012). Systemic real and financial risks: Measurement, forecasting, and stress testing . Washington, D.C.: International Monetary Fund. 

Goel, S. (2015). Financial Ratios . New York; Business Expert Express. 

Microsoft Corporation | History, Products, & Facts. (2019). Retrieved from https://www.britannica.com/topic/Microsoft-Corporation 

Microsoft Corporation, Form 10-K, 2018. Retrieved from https://last10k.com/sec-filings/789019/0001564590-18-019062.htm 

APPENDICES 

Appendix 1: Income Statement 

Appendix 2: Balance Sheet 

Appendix 3: Statement of Cash Flow 

Appendix 4: Stockholders Equity Statements