TABLE OF CONTENT
| CONTENT | PAGES | |
| 1 | INTRODUCTION | 3 |
| 2 | ANALYSIS | 3 |
| 2.1 | PROFITABILITY RATIOS | 3 |
| 2.2 | LQUIDITY RATIOS | 5 |
| 2.3 | ACTIVITY RATIO | 7 |
| 2.4 | LEVERAGE RATIOS | 8 |
| 2.5 | MARKET VALUE AND DIVIDEND RATIOS | 10 |
| 3 | BONDS | 11 |
| 3.1 | BOND PRICING | 12 |
| 3.2 | FACTORS THAT AFFECT BONDS VALUATION AND PERFORMANCE IN THE SECONDARY MARKET | 12 |
| 4 | STOCKS | 13 |
| 4.1 | FACTORS THAT AFFECT STOCK VALUATION AND PERFORMANCE IN THE SECONDARY MARKET | 14 |
| 5 | RISK AND RETURN | 14 |
| 6 | CONCLUSION AND RECOMMENDATION | 15 |
| 7 | REFERENCES | 15 |
| 8 | APPENDIX | 15 |
- INTRODUCTION
This report is aimed at evaluating the financial annual reports of Microsoft Corporation in comparison to its previous year ratios as a benchmark to ascertain the company’s performance for the year 2019, as well as analysing the firm’s stock and bond value, including risk and returns.
This report would make use of trend analysis to evaluate the firm’s annual financial data that was retrieved from the company’s web page which would be attached to the appendix.
- ANALYSIS
- Profitability ratios
These are budgetary metrics of profitability that are used to determine the ability of a company to generate profit as opposed to its sales, labour costs, monetary financial capital and the interest of creditors after some period, using details from the years 2019 and 2018.
- Gross margin ratio
This ratio shows the productivity level in proportion of how the firm sells its stocks
| Formula | 2019 | 2018 |
| 2019:
Gross margin = 82933 Sales 125843
2018: Gross margin = 72007 Sales 110360
|
0.66 | 0.65 |
There is no significant change in the gross margin ratio, although there is a slight increase of 0.01
- Operating profit margin
That percentage demonstrates the degree to which the company profits from covering variable costs of production, comparable to raw products, and pay rates, prior to the appraisal issuance.
| Formula | 2019 | 2018 |
| Operating income / net sales | 42,959 / 125843 | 35058 / 110360 |
| Ratio | 0.34 | 0.32 |
The company has a slow but steady increase in its margin when compared to 2018, which is still very sustainable for the firm
- Net profit margin
It measures the amount of compensation remaining after the maximum sum of the costs had been removed from the bargain. The calculation indicates the proportion of the benefit that a company will extract from its full-scale bargaining.
| Formula | 2019 | 2018 |
| Net income / net sales | 39240 / 125843 | 16571 / 110360 |
| Ratio | 0.31 | 0.15 |
The profit margin has risen considerably, showing that the company has high prices for its products and controls it economically.
- Return on asset
This assesses how much benefit the firm can actualize from utilizing cash admirably, it gauges how proficiently the company can deal with its resources to maximise gains within a time period
| Formula | 2019 | 2018 |
| Net income / total asset | 39240 / 286,556 | 16571 / 258,848 |
| Ratio | 0.14 | 0.06 |
The increase in 2019 shows a high level of asset management by the firm, its ability to convert its assets to profit is at double rate and shows investment worthiness compared to 2018
- Return on equity
It calculates and forecasts a company’s ability to benefit from investors ‘ interest in the company.
| Formula | 2019 | 2018 |
| Net income /
Stockholder equity |
39240 / 102330 | 16571 / 82718 |
| Ratio | 0.38 | 0.20 |
The firm has a positive earnings stream as investor’s funds are adequately utilised to grow the firm and maximize profit
- Liquidity ratios
Liquidity is a term characterized as an organisation’s ability to meet its monetary debt. The liquidity proportion is then calculated to measure the capacity of an organization to pay its transitory bonds.
- Current ratio
It is a typical proportion of a company’s temporary cash flow. The percentage is used by experts to determine whether they are required to put money into a company or to lend money. The association’s capability to manage its tabs is thus calculated.
| Formula | 2019 | 2018 |
| Current assets / current liabilities | 175,552 /69,420 | 169,662 / 58,488 |
| Ratio | 2.52 | 2.90 |
The 2019 current share amounts to 2.52; it shows that the company has available 2.52 of current assets for every $1 of current liabilities. In 2018 it was a slightly higher current-account value of 2.90 per dollar of current liabilities. Throughout the year, the proportion showed slight decay.
- Quick ratio
The acid ratio is also referred to as this proportion. This proportion is driven to quantify how well an organization with its most fluid resources is able to meet its temporary commitments. Bear in mind that dynamic capital can be turned into money immediately. The overwhelming majority is incredibly elastic, with the exception of stocks, which often bring a greater commitment to money handling.
| Formula | 2019 | 2018 |
| cash & equivalents + short-term investments + Accounts receivable / current liabilities | 163343 /69,420 | 160249 / 58,488 |
| Ratio | 2.4 | 2.7 |
In 2018 it was 2.7; it went down throughout the year. Since this proportion dispenses with Inventory (the least fluid Current Asset), it gauges how well an association can meet its present commitments without falling back on the closeout of its Inventory. 163343 /69,420
- Cash ratio
This ratio shows an organization’s most fluid advantages for its present liabilities. The proportion is utilized to decide if a business can meet its momentary commitments – basically, regardless of whether it has adequate liquidity to remain in business. It is the most moderate of all the liquidity estimations.
| Cash ratio | 2019 | 2018 |
| Cash and its equivalents / current liabilities | 11356/69420 | 11946 / 58488 |
| ratio | 0.16 | 0.20 |
The company is not very liquid in cash, because it has only 0.16 to cover for every dollar of liability, and compared to the previous year, there is a decline in cash liquidity, which could be as a result of the firm investing more cash into the business for more growth.
- Activity ratios
These ratios assess how well a firm successfully employs its working resources and transfers them into deals or money; by dissecting fixed resources, inventories, and receivables, they help to evaluate the workability of a company. This reflects the financial well-being of the company as well as the use of the reports.
- Inventory turnover ratio
This ratio equates how often the company sells its stock totally in a particular period.
| Formula | 2019 | 2018 |
| Cost of goods sold / inventory | 42910 / 2063 | 38353 / 2662 |
| Ratio | 20.7 | 14.4 |
The company has an impressive turnover rate, which has increased significantly from the previous year, and shows that the company is not hoarding a lot of cash in its inventories.
- Total asset turnover ratio
This is a ratio that depicts an estimate of how proficient an organization’s asset is properly utilized to generate more income and revenue from sales to the firm.
| Formula | 2019 | 2018 |
| Total sales / total average asset | 125843 / 272702 | 110360 / 254580 |
| Ratio | 0.46 | 0.43 |
The company’s efficiency to use its assets in creating revenue has improved over the year
- Accounts receivables turnover ratio
It is utilized to quantify the compelling position of an organization at expanding credits and gathering obligations. By and large, the increase in receivables turnover is recorded; the business becomes more effective at gathering sales credit from its clients.
| Formula | 2019 | 2018 |
| Net sales / average accounts receivables | 125843 / 28002.5 | 110360 / 24456 |
| Ratio | 4.49 | 4.51 |
In 2018, the Receivable Ratio was 4.51. The slight decline in this proportion shows a significant issue in an assortment of clients. The issue might be because of free charging and assortment rehearses. Along these lines, the organization needs to make amends to its credit arrangement and fix the issue. To see the entire picture, the organization ought to likewise inspect the normal time allotment that it takes to gather its Receivables and amending the Collection Period time
- Fixed asset turnover ratio
The Ratio gauges the effectiveness of the firm in using its fixed resources. It reflects how income is generated from the business fixed resources. Dissimilar to the all-out Assets turnover proportion that spotlights on the absolute resources, fixed resources turnover proportion concentrates just on fixed resources of the business that are used
| Formula | 2019 | 2018 |
| Sales / average fixed assets | 125843 / 32968.5 | 110360 /26597 |
| Ratio | 3.81 | 4,14 |
Over the year the ratio has declined, perhaps due to the fact that the company has over-invested on fixed assets within the year, the company needs to maximize the use of its fixed assets to improve revenue.
- Leverage ratios
This shows how the activity of the business of an organization comes not from various financing types, such as stock or investment funds, but from obligation. It’s an important measure of the risk and the probability of failure of a given organization.
- Debt ratio
The obligation to resources proportion gives you the amount of your benefit base is financed with the obligation or borrowed money.
| Formula | 2019 | 2018 |
| Total liabilities / total assets | 184226 / 286556 | 176130 / 258848 |
| Ratio | 0.64 | 0.68 |
The company does not have a favourable debt ratio, as 68% of the company assets is financed with debt, even though there is a slight improvement from the previous year, it is still under 0.50
- Debt to equity ratio
Businesses are financed by either obligation or cash contributed by proprietors or a mix of both. This ratio shows the extent to which both are used to finance the company. Utilizing more debt in financing is more hazardous for the organization than utilizing value financing. As the extent of obligation financing goes up, the danger of the firm likewise goes up. That is the reason for figuring this proportion is significant.
| Formula | 2019 | 2018 |
| Total liabilities / shareholders equity | 184226 / 102330 | 176130 / 82718 |
| Ratio | 1.8 | 2.1 |
The corporation has improved on its ratio as there is a decline, but the firm has to work on managing its debts to put the firm in a more favourable position.
- Interest coverage ratio
This ratio gives estimates the proportionate measure of revenue that could be utilized to cover premium costs later on.
| Formula | 2019 | 2018 |
| Income before income taxes / income taxes | 43,688/ 4,448 | 36,474/19,903 |
| Ratio | 9.8 | 1.8 |
There is a drastic increase with the firm’s coverage ratio, as the corporation can pay its income taxes 9.8 times, unlike the previous year which was extremely low due to the 2018 income taxes reaching more than half of its income before tax.
- Market value and dividend ratios
This helps to assess the financial status of organizations that trades in the open market and can assume a job in recognizing stocks that might be exaggerated, underestimated, or valued reasonably.
- Earnings per share ratio
It measures the income per each remarkable portion of an organization’s stock. The computation of Earnings per share discloses the amount investors would get if the organization chose to disseminate the profits for a particular accounting period.
| Formula | 2019 | 2018 |
| Net Income / the number of common shares outstanding | 39240 / 7,673 | 16571 / 7700 |
| Ratio | 5.1 | 2.1 |
The more than double increase in the EPS ratio is a positive sign for investors as the company profits have improved
- Book value per share
This ratio contrasts a company’s regular investor’s value with the number of offers extraordinary. For the situation that the firm breaks up, it will amount to what each investor are entitled to.
| Formula | 2019 | 2018 |
| Total shareholder equity – preferred equity / average outstanding shares | 102330 / 7673 | 82718 / 7700 |
| Ratio | 13.33 | 10.74 |
The book value for 2018 and 2019 is extensively lower in price compared to the $159.03 in the current market. This implies that Microsoft Corporation’s stock is well respected by financial specialists since its market cost surpasses the value of the book.
- Price-earnings ratio
What the market is willing to pay for an inventory depends on its current revenue. Financial experts often use this ratio to evaluate what an honest assessment should be by anticipating future revenues per share.
| Formula | 2019 | 2018 |
| Market price per share / earnings per share | 159.03 / 5.1 | 101.57 / 2.1 |
| Ratio | 31.18 | 48.36 |
With its lower percentage, it is usually a sign of poor performance both now and in the future. This might prove to be a bad investment plan compared with the prior year
- Dividend yield ratio
This is a budgetary ratio that estimates the money profit distribution per share for regular investors.
| Formula | 2019 | 2018 |
| Cash dividend per share / market share price | 1.84 / 159.03 | 1.68 / 101.57 |
| Ratio | 0.011 | 0.016 |
The company has had a decline over the year, which is not a good look for the company from investors but considering the industry where others don’t pay dividends still makes the firm’s stocks competitive.
- BONDS
People see bonds as a moderately steady venture giving out standard pay and comprehend that it is a type of obligation utilized by organizations and the government. Nonetheless, with regards to the intricate details of bond evaluating and execution, numerous financial specialists may discover a hole in their insight.
3.1 Bonds pricing
With regards to bonds, It is valued in two ways, firstly is the underlying cost of the security – or it’s assumed worth – which is given at first in the market. This is additionally the measure of capital that would be given back to the speculator at development notwithstanding a default. Secondly identifies with the cost of the security as it exchanges the optional market. These costs are cited as a level of the bond’s presumptive worth. For instance, if the assumed worth is $1000 and the provided market cost estimate is $990, at that point the security cost is cited as 99. Also, if the market cost is $1010, the security is exchanging at a cost of 101. At the point when the bond cost is higher than it’s assumed worth, it’s depicted as exchanging including some built-in costs to standard. Then again, when the bond cost is lower than it’s assumed worth, it is said to exchange at a rebate to standard.
3.2 Factors that affect bonds valuation and performance in the secondary market
the Speculators that plans to hold their security until its development regularly don’t have to stress over the development of security costs on the auxiliary market as reimbursement of principle would be made in full when the bond is matured, except in default. However, for investors hoping to sell theirs sooner, a comprehension of the factors that influences the auxiliary market execution is vital
- FICO assessment
A FICO score can give data on the capacity of the guarantor to make intrigue instalments and reimburse a head-on an obligation, and bonds are granted FICO evaluations by evaluation officer. In the estimate of the rating company, the greater the FICO ranking, the greater the guarantor will be required to fulfil his instalment duties. Without a doubt, the cost of their bonds is rising if a bond’s FICO evaluation is minimized, it will be less attractive to financial experts and the cost will probably fall. If the bond value is reduced, it is less interesting to financial specialists.
- Economic situations
More extensive economic situations can affect bonds. For instance, if the securities exchange is rising, financial specialists ordinarily divert from bonds and into stocks. Paradoxically, when the securities exchange is experiencing an adjustment, financial specialists may look for the apparent wellbeing through bonds.
- Inflation
Bond costs generally fall when the extension is on the rise. When growth slows, there is an increase in the cost of debt. This is because the growth of your organization reduces the value you benefit from your sector. The time you start developing the bond, so to speak, is worthless in the current dollars for the amount you earned on your business.
- Interest rate
For a fact, bond prices decline as credit costs rise. When loan costs decline, security costs rise. The risk of inflation often drives domestic banks to raise their goal cost of financing. When the risk-free rate of return increases, corporate security returns also have to go up to remedy. The lower gains lead to higher expenses and make financial staggers much more vulnerable.
- STOCKS
Developments in the securities exchange can be very unpredictable and in some cases, developments in share costs can appear to be separated from monetary variables. Be that as it may, there are sure hidden variables which impact the development of offer costs and the securities exchange.
By and large, offers will be in more prominent interest when financial specialists have the possibility of procuring more profits. Along these lines factors which make firms progressively beneficial will in general reason an ascent in financial exchanges.
4.1 Factors that affect stock valuation and performance in the secondary market
- Industry performance
For similar industries, distribution prices for the companies must periodically switch pairs. This is because economic circumstances have a similar influence on companies in a similar industry. Nevertheless, the production expenses of a company, because companies are aiming for a comparable sector, would benefit from a bit of horrific news to its competitor.
- Effect of World Events
The expense of production and the financial transaction between organisations, after all, is said and finished can be affected by international events such as conflict and global chaos and cataclysmic incidents, and cultural injustice.
- Financing costs.
Lower financing expenses could make shares logically engaging for 2 reasons. Reduced advance costs assist in bolstering money related improvement making firms progressively beneficial. Moreover, reduced credit costs make shares commonly more appealing than putting aside money in a bank or holding securities. In the event there is a decline in security yield, it might urge financial specialists to invest in shares which give a reasonably better benefit.
- RISK AND RETURN
Risk is profoundly linked to return. Generally speaking, expanded quantifiable potential profits go hand in hand with the increased danger. Task explicit risk, industry-explicit hazard, aggressive hazard, global hazards, and market chance incorporate various types of hazards. Return refers both to profits or unfortunates arising from the exchange of security.
Speculation arrival is expressed as a cost and assumed to be a random attribute that requires some opportunity within a certain area. Many factors impair the kind of income that financial professionals may receive from stock exchanges.
- CONCLUSION AND RECOMMENDATION
Microsoft Corporation’s profitability ratios are positive; the firm made general increase within one year and improved its ratios, but the gross margin ratio and operating profit margin increase are minimal and for general productivity, all ratios should be improved, the company liquidity ratio has all declined over the year as it may be as a result of investing more in the company’s other assets, the activity ratio for the corporation is at a 50:50 stand, as two of the ratios has improved over the year and the other two receded, it was noted from the ratios that the company needs to improve in its debt management even though there has been slight increase compared to the previous year, the company’s stocks are overvalued and has doubled its EPS over the year.
Overall, the company is in a stable position but still needs more improvement for growth.
- REFERENCES
Will, K. (2019) Probability Ratios Definition, Corporate Finance And Accounting. Retrieved from https://www.investopedia.com/terms/p/profitabilityratios.asp
Wolski, C. (2019). Five Factors Or Events That Affect The Stock Market. Small Business – Chron.com. Retrieved from http://smallbusiness.chron.com/five-factors-events-affect-stock-market-3384.html
- APPENDIX
8.1 Income statement of Microsoft Corporation for the year 2019
| (In millions, except per share amounts) | |||||
| Year Ended June 30, | 2019 | 2018 | 2017 | ||
| Revenue: | |||||
| Product | $66,069 | $64,497 | $63,811 | ||
| Service and other | 59,774 | 45,863 | 32,760 | ||
| Total revenue | 125,843 | 110,360 | 96,571 | ||
| Cost of revenue: | |||||
| Product | 16,273 | 15,420 | 15,175 | ||
| Service and other | 26,637 | 22,933 | 19,086 | ||
| The total cost of revenue | 42,910 | 38,353 | 34,261 | ||
| Gross margin | 82,933 | 72,007 | 62,310 | ||
| Research and development | 16,876 | 14,726 | 13,037 | ||
| Sales and marketing | 18,213 | 17,469 | 15,461 | ||
| General and administrative | 4,885 | 4,754 | 4,481 | ||
| Restructuring | 0 | 0 | 306 | ||
| Operating income | 42,959 | 35,058 | 29,025 | ||
| Other income, net | 729 | 1,416 | 876 | ||
| Income before income taxes | 43,688 | 36,474 | 29,901 | ||
| Provision for income taxes | 4,448 | 19,903 | 4,412 | ||
| Net income | $39,240 | $16,571 | $25,489 | ||
| Earnings per share: | |||||
| Basic | $5.11 | $2.15 | $3.29 | ||
| Diluted | $5.06 | $2.13 | $3.25 | ||
| Weighted average shares outstanding: | |||||
| Basic | 7,673 | 7,700 | 7,746 | ||
| Diluted | 7,753 | 7,794 | 7,832 | ||
8.2 Microsoft Corporation balance sheet for the year 2019
| (In millions) | |||
| June 30, | 2019 | 2018 | |
| Assets | |||
| Current assets: | |||
| Cash and cash equivalents | $11,356 | $11,946 | |
| Short-term investments | 122,463 | 121,822 | |
| Total cash, cash equivalents, and short-term investments | 133,819 | 133,768 | |
| Accounts receivable, net of allowance for doubtful accounts of $411 and $377 | 29,524 | 26,481 | |
| Inventories | 2,063 | 2,662 | |
| Other | 10,146 | 6,751 | |
| Total current assets | 175,552 | 169,662 | |
| Property and equipment, net of accumulated depreciation of $35,330 and $29,223 | 36,477 | 29,460 | |
| Operating lease right-of-use assets | 7,379 | 6,686 | |
| Equity investments | 2,649 | 1,862 | |
| Goodwill | 42,026 | 35,683 | |
| Intangible assets, net | 7,750 | 8,053 | |
| Other long-term assets | 14,723 | 7,442 | |
| Total assets | $286,556 | $258,848 | |
| Liabilities and stockholders’ equity | |||
| Current liabilities: | |||
| Accounts payable | $9,382 | $8,617 | |
| Current portion of long-term debt | 5,516 | 3,998 | |
| Accrued compensation | 6,830 | 6,103 | |
| Short-term income taxes | 5,665 | 2,121 | |
| Short-term unearned revenue | 32,676 | 28,905 | |
| Other | 9,351 | 8,744 | |
| Total current liabilities | 69,420 | 58,488 | |
| Long-term debt | 66,662 | 72,242 | |
| Long-term income taxes | 29,612 | 30,265 | |
| Long-term unearned revenue | 4,530 | 3,815 | |
| Deferred income taxes | 233 | 541 | |
| Operating lease liabilities | 6,188 | 5,568 | |
| Other long-term liabilities | 7,581 | 5,211 | |
| Total liabilities | 184,226 | 176,130 | |
| Commitments and contingencies | |||
| Stockholders’ equity: | |||
| Common stock and paid-in capital – shares authorized 24,000; outstanding 7,643 and 7,677 | 78,520 | 71,223 | |
| Retained earnings | 24,150 | 13,682 | |
| Accumulated other comprehensive loss | (340) | (2,187) | |
| Total stockholders’ equity | 102,330 | 82,718 | |
| Total liabilities and stockholders’ equity | $286,556 | $258,848 | |
