Microsoft Corporation Finance Paper
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Microsoft Corporation (MSFT)
Company Overview
Formed in 1975, Microsoft started by selling a BASIC interpreter which quickly established a reputation for excellence. As the popularity of Microsoft BASIC grew, other manufacturers adopted Microsoft BASICs syntax to maintain compatibility with existing Microsoft BASIC implementations. Because of this feedback loop, Microsoft BASIC became a de facto standard, and the company cornered the market. Later, it tried (unsuccessfully) to extend their grip on the home computer market by designing the MSX home computer standard.
In late 1980, International Business Machines needed an operating system for its new home computer, the IBM PC. Microsoft subsequently purchased all rights to QDOS for $10,000, and renamed it MS-DOS (for Microsoft Disk Operating System). It was released as IBM PC-DOS 1.0 with the introduction of the PC in 1981. In contracting with IBM, however, Microsoft had retained the rights to license the software to other computer vendors as MS-DOS.
The now highly profitable and cash rich Microsoft diversified into a wide variety of software products including: compilers and interpreters for programming languages and word processors, spreadsheets and other office software some of these products were successful, and some were not. By the turn of the millennium, many of Microsofts software products dominated the market in their respective categories.
Microsoft has devoted huge amounts of effort to marketing in developing their products and services, as well as to the integration of their software products with one another in an attempt to create a seamless and consistent computing environment for the user.
Analysis
Trend Analysis
Liquidity Ratios:
Current Ratio – For the last three years was growing from 3.56 in 2001 to 3.81 in 2002 to 4.22 in 2003. The reason of grow is increased in Assets. Even though Liability was growing, Asset grow was more significant.
Quick Ratio – Constant grow for the last three years. From 3.56 in 2001 to 3.76 in 2002 to 4.17 in 2003. The reason of grow is constant increase in Current Assets.
Cash ratio – Big drop (from .35 to .087) in year 2002. In 2003 the rate grew from .087 to .460. The reason of drop in 2002 is decreased in Cash and big increase in Liabilities. The increase in 2003 occurs because of big increase in Cash and slight increase in Liabilities.
Asset Management Ratios
Total Asset Turnover – Dropped from .64 in 2001 to .58 in 2002 to .55 in 2003. The reason is big increase in Total Assets.
Account Receivables Turnover – Dropped in 2002 from 4.5 to 3.92 in 2001. Because of big increase in 2002 in Accounts Receivables. Grew in 2003 to 4.18 from 3.92 in 2002. Because of big increase in Sales.
Inventory Turnover – There was no inventory reported in 2001. Grew from 7.71 in 2002 to 8.88 in 2003. The reason is increase in Cost of Good Sold and decrease in Inventory.
Debt Management Ratios
Debt/Equity Ratio – Increased from 0.235 in 2001 to .244 in 2002 to .30 in 2003. The reason is constant increase of Total Debt.
Total Debt ratio – Increased from .202 in 2001 to .228 in 2002 to .233 in 2003. The reason is constant grow in Total Assets even though total equity was increasing too.
Equity Multiplier – Constant increase from 1.25 in 2001 to 1.297 in 2002 and 1.30 in 2003. The reason was companys increase in total assets.
Profitability Ratios
Profit margin – Slight decrease from .29 in 2001 to .28 in 2002. Because of big increase in sales. And slight increase from .28 to .31 in 2003 – because of big increase in Net Sales.
ROA – Decrease in 2002 from .124 in 2001 to .1158. The reason is decrease in Net Income. In 2003 ratio grew to .1256 from .1158. The reason is big increase in Net Income.
ROE – Decrease in 2002 from .155 in 2001 to .15. Main reason was decrease in Net income. And Increase in 2003 form .15 to .163 – because of big increase in net Income.
Market Value Ratios
Book Value per Share – Constant increase for 3 years from 4.49 to 4.87 to 5.66 – the reason for increase was Common Equity grow.
P/E Ratio – Constant decrease from 47.8 to 36.67 to 29.81.
Market-to book ratio – Constant decrease from 7.55 in 2001 to 5.30 on 2002 to 4.84 in 2003. The reason for decrease was proce per share decrease in 2002 and big Book value per share ratio increase in 2003.
II. Industry Comparison:
Valuation Ratios
P/E Ratio – The Company has Lower ratio than Industry
P/E High for last 5 years – Company has Higher ration than Industry.(very slightly higher)
P/E Low for last 5 years – Higher than industry average. This company has better ration than average for this industry.
Beta – Lower ratio than industry. Risk is lower but return/loss is lower too.
Dividends
Dividend yield – Higher than Industry. Better dividends on stocks than average.
Dividends