Microsoft Corporation is an American multinational company that manufactures supports, licenses and software, electronics and personal computers. The company is the largest global software maker based on revenues and remains one of the most valuable companies in the world. It was founded by Bill Gates and Paul Allien in 1975. The ratio analysis for the company involves the calculation and interpretation of financial ratios for the company to analyze and monitor its performance. Ratio analysis will be useful in understanding the financial strength as well as weaknesses of the company. Ratio analysis forms the backbone of forecasting as well as an instrument in the control process. Through ration analysis, it is possible to determine the ability for Microsoft to meet its current obligation, establish the level at which the company uses borrowed funds.
The ratio analysis for Microsoft was done using EVAL model which used the financial data for the company for five years from 2013 to 2017. The analysis involved the forecasting of growth, profitability, Dupont model, advanced Dupont model, margin analysis, turn over analysis and analysis of leverage for the years 2018-2025. Sales are expected to grow at an average rate of -0.2%. The growth rate is expected to be negative in the first four years before turning to positive values in the fifth year. Assets for the company are also projected to grow at an average rate of -0.2% with the first four years reporting negative values while the following years are expected to report positive growth. Common equity and earnings are also expected to have a similar trend. Free cash flow to investors is expected to have negative growth rates in the seven-year and a positive growth rate of 3% in 2025. The sustainable growth rate for the company in the projected period is expected to have an average of 33.5% where the highest growth is expected in later years. Annual growth rates for the company show a positive outlook for the projected years. Despite reporting negative figures in the initial years, the company shows positive growth over the period. The sustainable growth rate, for instance, indicates that the company grows from 32.7% in 2018 to 34.1% in 2025.
Delegate your assignment to our experts and they will do the rest.
Profitability shows that the company return on equity will record an average of 0.238. Similarly, the return on equity for before the non-recurring will have an average of 0.231. Return on net operating assets will have an average of 0.201 in the forecasted period. The three elements show an increase from the current values to the projected figures at the end of the period.
The return on equity under the Dupont model shows an average-valued of 0.238 for the forecasted period with 2018 reporting the lowest value of 0.232 while 2025 had 0.242. The return on using the advanced Dupont model shows an average of 0.238 with 2018 reporting the lowest value of 0.232 and 2025 showing a figure of 0.242.
Gross margin and EBITDA margin is expected to show a constant figure of 0.740 and 0.344 respectively for the period under forecast. EBIT margin will be 0.305 for the first three years before changing 0.306. The Net operating margin will also be 0.244 in the first three years before changing to 0.245 in the remaining years. The company shows high figures compared to industry averages which are good for the investors and indicates high profits for the company.
The turn over analysis which shows the net operating asset turn over, the networking capital turn over, average days to collect receivables, average inventory holding period and average days to pay payables and the PP&E turnover all show increasing values for the projected period. The company, for example, shows that it takes 83 days to collect receivables which might be too long. Similarly, it shows that the period in which the company holds its stock is 35 days is ideal given the nature of some of its products. However, the number of days can be reduced further.
The analysis of leverage which shows debt to equity ratio, FFO to total debt and CFO to total debt shows a stable figure where most of the company's operations are not financed by debt. The ratios show that Microsoft is not highly levered and therefore less risky compared to other companies in the industry. The company, for example, has a low debt to equity ratio compared to the industry.
Short-term liquidity which includes the current ratio, quick ratio, EBIT interest coverage, EBITDA interest coverage all represents a strong company position for the period under forecast. The current ratio, for example, has an average of 2.712 compared to an ideal ratio of two. However, the quick ratio has an average of 0.569 for the forecasted period compared to the ideal value of 1. The current ratio shows that Microsoft is in a position to meet the working capital needs of the company. However, it shows that most of its finances are tied in inventory which is less liquid.
