Microsoft Corporation: Financial Research

Everyone desires to invest his or her money in a venture that has good or reasonable returns. To state succinctly, the main objective that drives people to invest their money is the desire to earn some profit from their investment. That means that nobody would want to invest in a firm, company or venture that makes losses. It would be an unwise move. However, many people face the challenge of making sound investment decisions because they do not have vital information to make wise investment choices. This article is an analysis of Microsoft Corporation as the best investment venture for a client. The client in this respect, although fictitious, will have the qualities of an ideal client. In an attempt to create a coherent flow throughout the analysis, the article will be split into different distinct sections. The first section will provide the rationale for selecting for selecting Microsoft Corporation as the best investment choice; the second section will analyze the profile of the client; the third section describes five financial ratios in respect to Microsoft Corporation; the fourth section explains the risk level of investing into the stock while the last section gives recommendations. 

Rationale 

Before delving into specifics, it is important to understand the nature of business that Microsoft Corporation conducts. First, Microsoft Corporation is an American multinational company which is headquartered in Redmond, Washington. To be more precise, Microsoft Corporation is a technology company. Although the leadership of the company has changed, Bill Gates has been the most prominent figure behind the success of the company. In fact, Bill Gates and Microsoft seem to be inseparable. Perhaps the main reason why Gates has been so prominent is because for a long time, he was ranked as the richest man in the world. During the inception of Microsoft, the company mainly created operating systems for personal computers. Specifically, the company is known for the Windows operating system. Nevertheless, the company expanded its operations and ventured into other sectors such as gaming, internet, mobile phone manufacture, and cloud computing. 

The rationale for choosing Microsoft Corporation as the most suitable company to invest in simply comprises of factors that favor it. According to Folger (2018), a good company to invest in ought to have a business model that can be understood easily. That means that the public ought to know how the company generates its revenue. In regard to Microsoft, almost every member of the public is aware of Microsoft’s nature of business, which is technology. Secondly, the company releases its financial statements every year, which are open to the public. From the financial statements, people can make comparisons in regard to the performance of the company in relation to the past years. One important thing is that the company does not generalize the performance rather; it splits the various elements into different sections for clarity. 

Secondly, according to Verbeke (2013), it is prudent to invest in companies that have established brands or brands that can be described as strongly emerging brands. Undoubtedly, Microsoft Corporation is a multinational company with operations in almost every country in the world. Even though Apple is a worthy competitor to Microsoft, Microsoft has been a vibrant brand throughout the years. Microsoft Corporation was founded in 1975 by Bill Gates and Paul Allen, partners who were boyhood friends. Nevertheless, the most important thing is that the duo came up with a company that has realized success since its inception. Perhaps people can argue that Microsoft was more prominent during its inception years because there was relatively low competition from rivals. Arguably, Microsoft Corporation was akin to a monopoly in the 20 th century. However, despite there being high competition in the technology industry in the 21 st century, Microsoft has remained stable. Microsoft is mainly popular for specialization in computer operating systems. In fact, almost everybody that has used a computer, has used Microsoft’s products. Perhaps even more significantly, the company has always been upgrading the operating system almost every year in an attempt to increase efficiency as well as remain stable in the technology industry. Another thing that makes Microsoft Corporation popular is that its products are easy to use; many people are taught at an early age how to use computers and while growing up, they get used to Microsoft products such as the Microsoft office. The Microsoft Office has virtually every program that people in the office ought to use. For instance, almost everybody uses the Microsoft Word to type documents, Microsoft Excel to analyze and present data, among others. These are just few among many aspects that make the Microsoft brand popular. Lastly, Bill Gates, one of the founders of Microsoft has been an influential figure behind the popularity of the Microsoft brand. One cannot mention Bill Gates without having Microsoft Corporation in mind. 

Thirdly, another significant factor that makes Microsoft Corporation an ideal company to invest in is because it has been a strong past performer. Although researchers such as Verbeke (2013) posit that the past performance of a company is not an accurate predictor of future performance, it is not prudent to invest in a company that has a bad performance record. Sometimes an investment choice is guided by intuition but it is not wise to risk and invest in a company that has consistently been making losses. Perhaps the argument put across by people against the use of past performance is that some companies ‘cook’ their financial books to portray themselves as being profitable when they are not. According to Verbeke (2013), some companies’ perceived success may be derived from the sale of their assets, misleading the public to think that they are the best investment choices. To give an abstract example of cows that produce milk, a farmer may decide to sell the cows (assets) to generate revenue. In such a case, the revenue that is generated is not derived from the operations (selling milk). In such an instance, the sale of the assets poses a great danger to people who may be coerced to invest their money. One of the things that could likely happen is that the sale of the assets reduces or eventually stops the operations, which leads to loss. Going back to the case of Microsoft, its revenue is predominantly generated from operations and not from the sale of assets. That means that the sale of products such as computer hardware, cloud computing services, and so on, is what contributes to the revenue collected. 

In regard to strong performance, it is vital to look at the revenue that has been collected by Microsoft in the past three years. In 2015, Microsoft made revenue worth $93.58 billion and $85.32 billion and $89.95 billion in 2016 and 2017 respectively (Zachary & Hall, 2018). In the past years, revenue collection had averaged at around $65 billion. 2015 seemingly was Microsoft’s peak year, while in 2016, the revenue dropped. However, the revenue picked up in 2017 and researchers such as Zachary & Hall (2018) project that the upward trend will probably continue in the coming years. One of the reasons why researchers such as Zachary & Hall (2018) are optimistic that the revenue collected by Microsoft will witness an upward trend is because the company has begun investing in cloud computing, a sector that many organizations are embracing. Cloud computing involves storage of information on a network of remote servers. The prominent advantages of cloud computing is that organizations will incur less expenses in the storage of information. Conventionally, most organizations have been storing their information on files, computers and other documents. However, with the uncertainty caused by pilferage and hacking of computers, many organizations are finding it necessary to store their information on remote servers where they are safe and can be accessed whenever necessary. Seeing the potential of cloud computing, Microsoft Corporation has put in place measures to gain a favorable share of the cloud computing business. If every organization embraces cloud computing, Microsoft’s revenue performance in the coming years will be strong. 

Lastly, one of the most important factors that makes Microsoft Corporation an ideal company to invest in is because dividends are paid quarterly. To be precise, Microsoft pays dividends of $0.42 per share quarterly Zachary & Hall (2018). That means that unlike in other companies, investors in Microsoft Corporation do not have to wait until the end of the financial year to get returns on their investments. Companies that give returns on investors’ shares after a long duration such as a year, make the investors to be uncertain of performance of the company. On the contrary, investing in a company such as Microsoft that pays dividends quarterly makes people to have confidence in the performance of the company. In regard to budgeting, Microsoft gives investors an opportunity to budget their money better than companies that give out dividends after a longer duration. Perhaps the most important thing is that people who invest in Microsoft develop the urge to buy more and more of the shares because there is an assurance of value for their money. 

Client Profile 

The client in this regard is a young person who would want to gain financial security in the future. Nevertheless, the young investor is not just a typical young person working in the corporate world. Rather, he is an ambitious young man with businesses, which he has tried to operate over a relatively long period of time. It is also important to note that the young investor is a cautious person, who only wants to invest in low-risk ventures. Even from his mode of operating his business, he only joins partnerships that do not threaten the survival of his firms. 

From the description of the client, a few elements can be gathered. First, the investor is young. Most people have the desire to build a stable financial empire. It is therefore important that they invest in ventures that do not demoralize them in terms of losing their savings or revenues which they generate from other ventures. Secondly, the client makes a considerable amount of revenue from his businesses and because he is ambitious, he would like to identify himself with reputable global brands. Thirdly, the client needs an investment that pays dividends within a short duration. The dividends are likely to motivate him to develop confidence in buying more shares. One of the crucial aspects of the client is that he has never invested in any venture before, which means that this would be his first time. The client therefore needs all relevant information related to investment in stock as well as the best choice of a venture that will motivate him. Microsoft is an ideal venture because it seems to possess all the needs of the client. Most specifically, the company pays dividends quarterly, is stable, has a strong past performance and is a renowned brand. 

Financial Ratios 

In this section, five financial ratios will be used to analyze the performance of Microsoft Corporation for the past three (3) years (2015-2017) in an attempt to establish the financial health of the company. The five financial ratios will first be tabulated before being analyzed separately. The five financial ratios include current ratio, quick ratio, cash ratio, gross margin and operating margin. It is also important to note that financial ratios are derived from Microsoft’s financial statements for the three years, which are attached in the appendix. 

Financial ratio	2015	2016	2017
Current ratio	2.47	2.35	2.48
Quick ratio	2.41	2.31	2.44
Cash ratio	1.94	1.91	2.06
Gross margin	0.65	0.62	0.62
Operating margin	0.19	0.24	0.25

Current Ratio 

According to Arkan (2016), current ratio measures the ability of a company to pay its long-term as well as short-term obligations. In order to establish the aforementioned ability, the current ratio analyzes the current total assets of a firm (both liquid and illiquid) in relation to the firm’s current total liabilities. Specifically, current ratio is derived by dividing current assets by current liabilities (Arkan, 2016). To interpret the current ratio more succinctly, a ratio of under 1 indicates that the firm’s current liabilities are higher than the current assets, a situation that implies that the company may be unable to cater for its obligations. Such a firm may be risky to invest in, in the event when its debtors decide to take legal action to compel the firm to pay its debts. Looking at Microsoft’s current ratio over the three years, ratio is above 2 in all the years, which indicates that the company is able to cater for its liabilities. The ratio thus indicates a financial health of Microsoft Corporation, making it a good investment option. 

Quick Ratio 

Quick ratio is a projection of a firm’s short-term liquidity that analyzes a firm’s capacity to cater for its short-term obligations using its most liquid assets. Since quick ratio is only concerned with the most liquid assets, it excludes inventories from current assets. To be specific, the ratio is calculated as follows: Quick ratio = (current assets-inventories)/current liabilities (Bragg, 2012). Just like the current ratio, the higher the quick ratio, the better the firm’s liquidity position. If a firm has a quick ratio that is lower than 1, it could imply that it is relying on its inventories and assets to pay for short-term liabilities. Looking at Microsoft’s quick ratio over the years, the ratio is more than 2 in all the years, signifying a healthy financial situation. 

Cash Ratio 

The cash ratio is the ratio of a firm’s total cash and other cash equivalents to its current liabilities. Consequently, this ratio is vital in the analysis of the firm’s ability to cater for its short-term debt (Bragg, 2012). If a company has a cash ratio that s less than 1, it implies that the available cash cannot cater for the company’s liabilities. Microsoft’s cash ratio improved from 1.91 in 2016 to 2.06 in 2017, signifying that the company has the ability to pay its liabilities. Just like the aforementioned ratios, there is a strong indication that Microsoft is financially healthy. 

Gross Margin 

According to Bragg (2012), Gross Margin is a firm’s total sales revenue less its cost of goods sold divided by total sales revenue. Specifically, the gross margin represents the ratio of total sales revenue that a firm retains after incurring the direct costs involved in the production of goods and services that are sold. The higher the gross margin of a company, the better because it means that for every revenue generated, the company can be able to cater for its operational costs. Microsoft has had an average of about 0.62 gross margin ratio, which implies that for every revenue dollar generated, $0.62 caters for the operational expenses. A ratio of 0.62 signifies that Microsoft has enough capacity to keep its operations running without relying on other strategies such as selling the company’s assets or borrowing from lenders. 

Operating Margin 

Operating margin is an indicator that shows how much profit a firm makes on a dollar of sales after catering for variable costs of production such as raw materials and wages, but before paying interest or tax (Staff, 2018). Specifically, this ratio is derived by dividing a firm’s operating costs by its net sales. In the last financial year (2017) of Microsoft, the ratio shows that Microsoft earns $0.25 on a dollar of sales, which is a rise from the previous years. It is a good indication that Microsoft Corporation is indeed a profitable company. Therefore, it is a good indicator of the financial health of the company. 

Risk Level of the Stock 

From the analysis of the financial ratios, there is a positive indication that there is relatively low risk involved in investing in Microsoft Corporation. In retrospect, the operating margin indicates a positive figure that is consequently on an upward trajectory. All the liquidity ratios (current ratio, quick ratio and cash ratio) portray a positive image of the company. If one of the ratios would have portrayed the company in a negative manner, it would have been a cause for apprehension, but since there is none, it is almost certain that there are negligent risks, if any, involved in investing in Microsoft. 

Nevertheless, it is important to state that Microsoft has always found itself in conflict with the law mainly because of its attempt to establish a monopoly. The EU in 2004 imposed a fine on the company because of going against the stipulated rules. However, the fine that was imposed did not affect the operations of the company adversely. Perhaps one of the prominent strategies to minimize such risks that emanate from legal proceedings is to read the company’s policy as well as follow the current news. Secondly, it is prudent to buy only a number of shares that do not affect one’s financial status should anything undesirable happen in the course of the operation of the company. 

Recommendations 

Summarily, as deduced in this analysis, Microsoft Corporation stock is one of the best stocks to invest in by individuals who have the desire to accrue a reasonable amounts of returns on their investment. Perhaps one of the most important questions that people may ask themselves is, after how long should one wait before investing in the company? Arguably, it is best to invest in the company’s stocks at the moment because the cost of shares might rise in the future. The company has been having an upward trajectory throughout the years. People who saw the potential in the company during its inception and invested in it have accumulated a lot of wealth. The reason why investing in the company as soon as presently is because it is coming up with other strategies to diversify its operations. For instance, the investment in cloud computing has a lot of potential and might boost the revenue of the company significantly. If the revenue of the company rises, the cost of its shares also has a likelihood of shooting high. Additionally, all the crucial indicators that have been analyzed give a positive image of the company; the company is not going to experience losses any time soon. Lastly, it is important to point out that investments should not mean bankruptcy. That means that the client needs to invest an amount that does not make him financially unstable. 

References 

Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A case study in emerging markets.  Finanse. Rynki Finansowe, Ubezpieczenia , (1), 79. 

Bragg, S. M. (2012).  Business ratios and formulas: a comprehensive guide  (Vol. 577). John Wiley & Sons. 

Folger, J. (2018).  Guide to Stock-Picking Strategies .  Investopedia . Retrieved 3 June 2018, from https://www.investopedia.com/university/stockpicking/ 

Staff, I. (2018).  Operating Margin .  Investopedia . Retrieved 3 June 2018, from https://www.investopedia.com/terms/o/operatingmargin.asp 

Verbeke, A. (2013).  International business strategy . Cambridge University Press. 

Zachary, G. & Hall, M. (2018). Microsoft Corporation: History, Products, & Facts   Encyclopedia. Britannica . Retrieved 3 June 2018, from https://www.britannica.com/topic/Microsoft-Corporation 

Microsoft Corp., Consolidated Income Statement
USD $ in millions
12 months ended	Jun 30, 2017	Jun 30, 2016	Jun 30, 2015	Jun 30, 2014	Jun 30, 2013	Jun 30, 2012
Product	57,190	61,502	75,956	72,948	77,849	73,723
Service and other	32,760	23,818	17,624	13,885	–	–
Revenue	89,950	85,320	93,580	86,833	77,849	73,723
Product	-15,175	-17,880	-21,410	-16,681	-20,249	-17,530
Service and other	-19,086	-14,900	-11,628	-10,397	–	–
Cost of revenue	-34,261	-32,780	-33,038	-27,078	-20,249	-17,530
Gross margin	55,689	52,540	60,542	59,755	57,600	56,193
Research and development	-13,037	-11,988	-12,046	-11,381	-10,411	-9,811
Sales and marketing	-15,539	-14,697	-15,713	-15,811	-15,276	-13,857
General and administrative	-4,481	-4,563	-4,611	-4,677	-5,149	-4,569
Goodwill impairment	–	–	-5,100	–	–	-6,193
Impairment, integration, and restructuring	-306	-1,110	-4,911	-127	–	–
Operating income	22,326	20,182	18,161	27,759	26,764	21,763
Dividends and interest income	1,387	903	766	883	677	800
Interest expense	-2,222	-1,243	-781	-597	-429	-380
Net recognized gains on investments	2,583	668	716	437	116	564
Net losses on derivatives	-510	-443	-423	-328	-196	-364
Net gains (losses) on foreign currency remeasurements	-164	-121	335	-165	-74	-117
Other, net	-251	-195	-267	-169	194	1
Other income (expense), net	823	-431	346	61	288	504
Income before income taxes	23,149	19,751	18,507	27,820	27,052	22,267
Provision for income taxes	-1,945	-2,953	-6,314	-5,746	-5,189	-5,289
Net income	21,204	16,798	12,193	22,074	21,863	16,978
Source: Microsoft Corp., Annual Reports
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Appendix