SCHOOL OF ARCHITECTURE, BUILDING & DESIGNFOUNDATION IN NATURAL & BUILT ENVIRONMENT

July Intake 2013Semester 2

Basic Accounting (FNBE0145)Lecturer: Mr.Chang Jau Ho

Assignment: Financial Ratio Analysis

Company: Microsoft Corporation

Name Student ID No.

Lee Kim Thiam 0310710

Lim Chern Yie 0315688

Yong Seen Yee 0315883

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Table of content

Title PageCompany Background 3-4

Recent Development 5

Ratio Analysis & P/E Ratio 6-10

Investment Recommendation 11

Appendix

Appendix A: Calculation

Appendix B: Consolidated Balance Sheet

Appendix C: Consolidated Statements of Income

12-16

Reference 17

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Company Background

Microsoft is an established company in America that was founded in the year 1975. The

company was founded by Bill Gates and Paul Allen on April 4, 1975. For the years that have

gone by, the company has expanded up till this very day into the famous Microsoft

Company that everybody knows.

This company was founded by Bill Gates to develop, manufacture, license, support and sell

computer electronics, software and personal computers to the society of the world. In the

year 1980, Microsoft formed its partnership with International Business Machines

Corporation (IBM) to sell its software packages or computers that IBM has manufactured

(Crunchbase.com, 2014).

Since the 1990’s, the company has drastically diversified itself from the line of operating

system market by dominating the market and eventually ventured into hardware, producing

products such as Zune, a digital media player for music, videos, pictures and podcasts

(Crunchbase.com, 2014). Later on in the years, the renowned Xbox gaming console and the

Surface tablet series came into the company.

Years have passed and the company’s current best known software products include the

line of Microsoft Windows operating systems, Microsoft Office office suite and the Internet

Explorer web browser (Crunchbase.com, 2014). Microsoft’s more well-known hardware

products are currently the Xbox gaming console and the Microsoft Surface series of tablets.

At this point, Microsoft is the world’s largest software company in terms of revenue

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(Crunchbase.com, 2014). In addition to that, it is also one of the world’s most successful

startup companies and one of the world’s most valuable companies (Crunchbase.com,

2014). Needless to say, Microsoft is a very big company, with revenues soaring sky high

despite the fact that Apple, one of their more persistent competitors, being in the market

with them.

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Recent Development

The company has bought over a few big companies that might have expanded their

company to bigger standards. Big companies that Microsoft has bought over include Skype

Technologies and Nokia. Skype was purchased in the year 2011 at a price of 8.5 billion

dollars while Nokia was purchased at a price of 7.2 billion dollars in the year 2013

(Microsoft.com, 2014). Both these companies remain as the biggest purchases that

Microsoft has made in its history.

As of 2014, Microsoft is planning to release the most anticipated tablet, the Surface Pro 3

(Microsoft.com, 2014). They are also plans for Skype having a dubbed Skype Translator,

meaning that Skype users will be able to translate whatever they are saying in ‘real time’

over to the other party (BBC News, 2014). They are currently in second place on the Forbes’

list for ‘World’s Most Valuable Brands’ (Forbes.com, 2014).

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Profitable Stability (In Millions)

Profitability Ratios 2012 2013Return on Equity (ROE) Ration

Net ProfitAverage O /E

×100%

=1697861723

×100%

= 27.5%

Net ProfitAverage O /E

×100%

=2186372653.5

×100%

= 30.1%

Net Profit Margin (NPM) Ratio

Net ProfitNet Sales

×100%

=1697873723

×100%

= 23%

Net ProfitNet Sales

×100%

=2186377849

×100%

= 28.1%

Gross Profit Margin (GPM) Ratio

Gross ProfitNet Sales

×100%

= 5619373723

×100%

= 76.2%

Gross PrpfitNet Sales

×100%

= 5760077849

×100%

= 74%

Selling Expense Ratio (SER)

Total S .ENet Sales

×100%

= 2005073723

×100%

= 27.2%

Total S .ENet Sales

×100%

= 1526777849

×100%

= 19.6%

General Expense Ratio (GER)

TotalG .ENet Sales

×100%

= 1438073723

×100%

= 19.5%

TotalG .ENet Sales

×100%

= 1556077849

×100%

= 20%

Financial Expense Ratio (FER)

Total F . ENet Sales

×100%

= 940873723

×100%

= 12.8%

Total F . ENet Sales

×100%

= 814877849

×100%

= 10.5%

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Financial Stability (In Millions)

Stability Ratios

2012 2013

Working Capital Ratio (WCR)

Total Current AssestTotalCurrent Liabilities

= 8508432688

= 2.6 : 1

Total Current AssestTotalCurrent Liabilities

= 10146637417

= 2.7 : 1

Total Debt Ratio (TDR)

Total LiabilitiesTotal Assest

= 54908121271

×100%

= 45.3%

Total LiabilitiesTotal Assest

= 63487142431

×100%

= 44.6%

Inventory Turnover Ratio (ITR)

365days÷Cost of Good SoldAverage Inventory

= 365days÷175301255

= 26.1 days

365days÷Cost of Good SoldAverage Inventory

= 365days÷202491537.5

= 27.7 days

Debtor Turnover Ratio (DTR)

365days÷Credit Sales

Average Debtors

= 365days÷36861.515384

= 152.3 days

365day ÷Credit Sales

AverageDebtors

= 365days÷38924.516633

= 156 days

Interest Coverage Ratio (ICR)

Interest expense+Net profitInterest expense

= 17358380

= 45.7 times

Interest expense+Net profitInterest expense

= 22292429

= 52 times

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Profitable Stability

During the 2012 to 2013 periods, the Return on Equity (ROE) has increased from 27.5% to

30.1%. This means the owner is getting more return from his investment.

In addition, during the period from 2012 to 2013, the Net Profit Margin (NPM) has

increased from 23% to 28.1%. This means the business is getting better at controlling its

overall expenses.

However, from the year 2012 to 2013, the Gross Profit Margin (GPM) has decreased from

76.2% to 74%. This means the business is getting worse at controlling its COGS.

Besides that, during the period from 2012 to 2013, the Selling Expenses Ratio (SER) has

decreased from 27.2% to 19.6%. This means the business is getting better at controlling its

selling expenses.

During the 2012 to 2013 period, the General Expense Ratio (GER) has increased from 19.5%

to 20%. This means the business is getting worse at controlling its general expenses.

Other than that, the Financial Expense Ratio (FER) has decreased from 12.8% to 10.5%. This

means the business is getting better at controlling its financial expenses in the period of

2012 to 2013.

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Financial Stability

During the 2012 to 2013 period, the Working Capital Ratio (WCR) has increased from 26:1

to 27:1. This means that the business’ ability to pay current liabilities with current asset is

getting better. In addition to that, the business has satisfied the minimum requirement of

2:1.

In addition to that, during the period of 2012 to2013, the Total Debt Ratio (TDR) decreased

from 45.3% to 44.6%. This means that the business total debt has reduced. In addition to

that, it has not gone over the maximum limit of 50%.

However, during the period of 2012 to 2013, the Inventory Turnover Ratio (ITR) increased

from 26.1 days to 27.7 days. This means that the business is selling its Inventory slower.

During the 2012 to 2013 period, the Debtor Turnover Ratio (DTR) increased from 152.3

days to 156 days. This means that the business is collecting its debt slower.

Finally, during the period of 2012 to 2013, the Interest Coverage Ratio (ICR) increased from

45.7 times to 52 times. This means the business ability to pay its interest is better. In

addition, it satisfies the minimum requirement of 5 times.

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Price Earning Ratio (P/E Ratio)

Microsoft’s current share price is $40.10 per share and its Earning Per Share (EPS) is $2.67.

P/E Ratio = $ 40.10$ 2.67

= 15.02

This shows that the Price Earning Ratio (P/E Ratio) for Microsoft Corporation is 15.02. It means that an investor who invests now will have to wait 15 years to recoup his investment.

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Investment Recommendation

Based on the calculations and the information provided, we will look at the profitable and

financial stability as well as the Price Earning Ratio of Microsoft Corporation for the years

2012 and 2013. From the profitability ratio, the Return on Equity shows more return from

investments which is good. Based on the Net Profit Margin, the company is better at

controlling its expenses which is also a good thing. However, the Gross Profit Margin

indicates that they are getting worse at controlling their Costs of Goods Sold which is bad.

On the other hand, the company’s ability in controlling its selling expenses has improved

based on the Selling Expense Ratio. The General Expenses Ratio, however, shows that the

company is getting worse at controlling its selling expenses, which is bad. Besides that, the

Financial Expense Ratio shows that the company is getting better at controlling its financial

expenses.

From the Stability Ratio, the Working Capital Ratio shows that the company is getting better

at paying its current liabilities with its current assets. Its Total Debt Ratio indicates that it

has reduced debts. However, its Inventory Turnover Ratio shows that the company is selling

its inventory slower. The Debtor Turnover Ratio shows that the company is collecting its

debts slower. Nevertheless, its Interest Coverage Ratio has shown that the company is

getting better at paying its interest expenses.

In conclusion, the company is a good company to invest in. It is financially stable and is able

to make good profit at the same time. However, its Price Earning Ratio is 15 which mean

that investors will have to wait for 15 years before recouping his investments. If the investor

is not conservative and is willing to wait for 15 years, then Microsoft is a very good company

to invest in.

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Appendix2012

Average Owner Equity= 66363+57083 = 123446/2 = 61723

Average Inventories = 1137+1372 = 2509/2 = 1254.5

Average Debtors = 15780+14987 = 30767/2 = 15383.5

Selling Expenses = 13857+6193 = 20050

General Expenses = 9811+4569 = 14380

2013

Average Owner Equity= 78944+66363 = 145307/2 = 72653.5

Average Inventories = 1938+1137 = 3075/2 = 1537.5 Average Debtors = 15780+17486 = 33266/2 = 16633

Selling Expenses = 15276

General Expenses = 5149+10411

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= 15560

Income Statements for the years 2011, 2012 and 2013

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Balance Sheet for the years 2011, 2012 and 2013.

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Cash Flow Statement for the years 2011, 2012 and 2013

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Microsoft Share Price

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Reference List

Microsoft. (n.d.). CrunchBase. Retrieved May 23, 2014, from http://www.crunchbase.com/organization/microsoft

Microsoft Officially Welcomes Skype. (2011, October 13). Microsoft Officially Welcomes Skype. Retrieved May 23, 2014, from http://www.microsoft.com/en-us/news/press/2011/oct11/10-13skypepr.aspx

Microsoft to acquire Nokia's devices & services business, license Nokia's patents and mapping services. (2013, September 3). Microsoft to acquire Nokia's devices & services business, license Nokia's patents and mapping services. Retrieved May 23, 2014, from http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx

Skype to get 'real-time' translator. (2014, May 28). BBC News. Retrieved May 29, 2014, from http://www.bbc.com/news/technology-27599373#Skype

Microsoft. (2014, May 1). Forbes. Retrieved May 29, 2014, from http://www.forbes.com/companies/microsoft/

Microsoft introduces Surface Pro 3: the tablet that can replace your laptop. (2014, May 20). Microsoft introduces Surface Pro 3: the tablet that can replace your laptop. Retrieved May 29, 2014, from http://www.microsoft.com/en-us/news/press/2014/may14/05-20surfacepr.aspx

Financial Review. (n.d.). Income Statements. Retrieved May 25, 2014, from http://www.microsoft.com/investor/reports/ar13/financial-review/income-statements/index.html

Financial Review. (n.d.). Balance Sheets. Retrieved May 25, 2014, from http://www.microsoft.com/investor/reports/ar13/financial-review/balance-sheets/index.html

Financial Review. (n.d.). Cash Flows Statements. Retrieved May 25, 2014, from http://www.microsoft.com/investor/reports/ar13/financial-review/cash-flows-statements/index.html

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Quotes & Info- Yahoo! Finance. (2014, May 28). Quotes & Info- Yahoo! Finance. Retrieved May 29, 2014, from http://finance.yahoo.com/q?d=t&s=MSFT

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