Introduction

Microsoft is one of the well known brands in IT industry. It is an American multinational company headquartered in Washington DC. Microsoft got the attention worldwide for its flagship software products like Windows operating system, Office suite, internet explorer and gaming console - Xbox. It is world’s largest software maker company by revenue and considered as one of the most valuable companies.

Microsoft made first listing of its stock on stock exchange in 1986. Since then, the price of stock has continuously been rising and in 1999, it touched at maximum of $119. Currently the stock price is hovering around $43. From January 2003, Microsoft started paying dividends and subsequently it increases the value and frequency of dividend payment.

The following table shows the key statistics of Microsoft Corp:

Valuation Measures
Market Cap (intraday) / 345.23B
Enterprise Value (Sep 11, 2015) / 285.18B
Trailing P/E (ttm, intraday) / 29.17
Forward P/E (fye Jun 30, 2017) / 14.07
PEG Ratio (5 yr expected) / 2.23
Price/Sales (ttm) / 3.7
Price/Book / 4.34
Enterprise Value/Revenue / 3.05
Beta / 0.87

Source:

The P/E is quite high at 29.17 that show Microsoft stacks are overvalued. Enterprise value/Revenue is also quite healthy and the beta of 0.87 shows that stocks are defensive. The following graph shows the dividend payment trend over past five years.

Financial performance of Microsoft Corp.

To know the performance of organization and its financial health; we conducted two major analysis – Ratio Analysis and trend Analysis.

Ratio Analysis

Ratio Analysis
2015 / 2014 / 2013
Liquidity of short-term assets / Current ratio / 2.5013 / 2.5040 / 2.7118
Cash ratio / 1.9360 / 1.8786 / 2.0585
Quick ratio / 2.4431 / 2.4457 / 2.6600
Long-term debt-paying ability / Debt ratio / 0.1578 / 0.1198 / 0.0885
Debt Equity ratio / 0.3472 / 0.2299 / 0.1596
Profitability / Net profit margin / 0.1303 / 0.2542 / 0.2808
Return on Asset (ROA) / 0.0692 / 0.1281 / 0.1535
Return on Equity (ROE) / 0.1523 / 0.2459 / 0.2769
Asset utilization/ management efficiency / Total asset turnover / 0.5310 / 0.5037 / 0.5466
Inventory turnover / 11.3846 / 10.1256 / 10.4484
Accounts receivable turnover / 5.2256 / 4.4429 / 4.4521

Table 1: Ratio Analysis

Ratio Analysis is sub divided into four parts which are discussed below:

Liquidity of short term assets

For Microsoft Corp, the current ratio was highest at 2.7118 in year 2013. In 2014, it decreases to 2.504 and also at the same level of 2.501 in 2014. The Quick ratio has the same trend. For the last two years, it is hovering around 2.44. The Cash ratio was at highest of 2.058 in 2013 then it decreases to 1.878 and further marginally increased to 1.936 in 2015. Overall, since all the three ratios are around 2.0, the liquidity position of Microsoft is in good position.

Profitability

The net profit margin has continuously decreasing in past three years. In 2013, it is 28.08% that reduces to 25.42% in 2014 and finally in 2015, it dipped to 13.03%. The same trend is also observed in other two profitability ratios - ROA and ROE. Therefore, the profitability position is company has deteriorated in current financial year and expected to be continued in near future. The possible reason may be higher COGS or other indirect expenses.

Long term debt paying ability

The debt ratio is 8.85% in 2013 that improved to 11.98% in 2014 and further rises to 15.78% in 2015. Similarly, the debt equity ratio is 15.96% in 2013 that rises to 22.99% in 2014 and finally reaches to 34.72% in 2015. Therefore, the continuous increase in debt ratio and debt equity ratio shows that the company has got overburdened with fixed obligation of meeting the debt related interest and its debt paying ability has increased. Further, since both the ratios are quite low so there is no such risk of insolvency and company can further raise the fund through issuing of debt instruments.

Management Efficiency

There is no large deviation in all the three ratios is observed in the past three years. Total asset turnover ratio hovers around 0.5310, Inventory turnover ratio is around 11 and Account receivable turnover ratio is around 5. The current year 2015 is witnessed of marginally increase in all the three ratios. Overall, the management efficiency is been consistent and healthy.

Microsoft and its competitors and Industry: an overview

The following table shows a comparative view of Microsoft Corp (MSFT) against its major competitors like Apple, Oracle and Google Inc and Industry.

MSFT / AAPL / ORCL / GOOG / Industry
Market Cap: / 346.87B / 645.12B / 163.56B / 426.55B / 297.17M
Employees: / 118,000 / 92,600 / 132,000 / 57,148 / 490
Qtrly Rev Growth (yoy): / -0.05 / 0.33 / -0.05 / 0.11 / 0.21
Revenue (ttm): / 93.58B / 224.34B / 38.23B / 69.61B / 83.94M
Gross Margin (ttm): / 0.65 / 0.4 / 0.6 / 0.62 / 0.54
EBITDA (ttm): / 33.57B / 77.88B / 16.06B / 22.62B / 4.26M
Operating Margin (ttm): / 0.3 / 0.3 / 0.37 / 0.26 / 0.07
Net Income (ttm): / 12.19B / 50.74B / 9.94B / 14.39B / N/A
EPS (ttm): / 1.48 / 8.65 / 2.21 / 21.22 / 0.03
P/E (ttm): / 29.3 / 13.09 / 17.07 / 29.32 / 29.1
PEG (5 yr expected): / 2.23 / 0.84 / 1.93 / 1.18 / 1.6
P/S (ttm): / 3.7 / 2.86 / 4.27 / 6.12 / 3.33

Table 2: Microsoft and its competitors and Industry

The market cap of Microsoft Corp is Oracle and Industry’s average but lower than Apple and Google Inc. In the terms of revenue it only comes after Apple but ahead of other competitors and Industry’s average however the quarterly growth rate is lowest and even negative for Microsoft. The P/E ratio is highest and equal to Industry’s average that shows its stocks are overvalued. Overall, Microsoft has a very good financial position among its major competitors and Industry.

Conclusion

Overall the Microsoft Corp has strong fundamentals with huge enterprise value, market cap and large asset base. The profitability and management efficiency of the Microsoft has got poor over the past three years while the liquidity position and debt paying ability of the business is almost stable and marginally improved. The trend analysis shows that the profitability. The net operating margin is almost at par of competitors and much higher than Industry’s average. EPS is higher than Industry’s average EPS but lowest among all the competitors. Cash flow position has little deteriorated in the current year but expected to improve in future. Microsoft has a good financial position among its competitors as the major key statistics are at par or equal to them. It has also shown tremendous performance against the industry.

References:

Financial Statements. Informations retrieved from:

Dividend chart. Information retrieved from:

Competitors and Industry. Information retrieved from: