Financial Statement Analysis of Microsoft

Rania Elhossary

Abu Dhabi University, Email: 1073959@students.adu.ac.ae

Supervised by:

Professor Haitham Nobanee

Abstract

The objective of this study is to conduct a financial statement analysis by examining Microsoft’s

financial performance from 2016 to 2019, using financial ratios such as liquidity, activity, debt,

and profitability ratios. The result of Microsoft’s ratio analysis illustrates that the firm manages

its finances efficiently with respect to its creditors, shareholders, and the company itself, in

addition, it has great potential to prosper. Therefore, it is recommended to invest in Microsoft.

Introduction

I. A brief overview of Microsoft Corporation

Microsoft Corporation is one of the largest technology companies in the world. The company

was established in 1975, under the leadership of Bill Gates and Paul Allen. Although the

company is immersed in various types of technology, its main focus is software, particularly its

operating system known as Microsoft Windows. Microsoft’s innovative and cutting-edge

technology may have contributed to its success, with outstanding annual performance and

growth throughout the years (History, 2020). Furthermore, Microsoft’s sustainability initiatives

such as corporate social responsibility and reduced carbon emission strategies, have also aided

the firm to enhance its financial performance (Microsoft, n.d.). This idea is supported by various

studies, research findings indicate that sustainable practices may positively impact financial

growth and mitigate risks (Al Nuaimi and Nobanee, 2019; Almarar and Nobanee, 2020).

II. A brief overview of Ratio Analysis

Ratio analysis is the process of using a firm’s financial statements to produce financial ratios.

Which are then utilized to compare with other competing firms’ ratios as benchmarks. The Ratio

analysis technique can be used for the past or present financial data, to attain benchmarks that aid

firms to gain insight into whether their performance is normal or abnormal, in respect to other

companies in the same industry (Nissim & Penman, 1999).

Ratio analysis comprises of 4 main types of analysis: liquidity, activity, debt, and profitability

ratios. Liquidity ratios indicate whether the firm would be able to meet its short-term

commitments as planned. Overall, firms with high liquidity are more likely to pay their

obligations when they are due, and the risk of insolvency is reduced. Lower liquidity can be an

early sign of serious cash flow issues and possible bankruptcy (Alkaabi and Nobanee,2019). An
adequate amount of liquidity is desired to run the day to day operations smoothly. The extent of

liquidity required is dependent on the size of the firm, its access to short-term financial

resources, and the industry it operates in. Liquidity ratios consist of three types: Current, quick,

and cash ratios (Zutter & Smart, 2019).

Activity ratios gauge the degree of efficiency sustained during the firm’s usage and

management of their Assets. The main areas taken into consideration when evaluating a firm’s

activity ratios are inventory, receivables, and revenue management. The organization is deemed

efficient if the company is able to produce revenue promptly when utilizing their assets. The

activity ratios include but are not limited to Inventory, receivable, and total asset turnover

(Franklin, Graybeal & Cooper, 2019).

Debt Ratios are a leverage assessment tool aimed to evaluate a firm’s capability to pay off

debt. These Ratios are inclusive of Debt and times interest earned ratios. Debt ratios contrast

between generated income and obligatory fixed expenses (such as rent), they are often referred to

as coverage ratios. They assist financial analysts to assess and determine if the organization can

cover their payments as planned. Usually, Creditors prefer high debt ratios, however, incredibly

high ratios may imply that the firm's financial management is not utilizing its resources fully and

can generate higher revenues by borrowing additional funds. On the contrary, lower debt ratios

may suggest that the organization is less likely to pay its liabilities on time and fully. In the case

where firms are incapable of fulfilling their payments, their lenders might pursue instant

repayment. Hence, bankruptcy often occurs in this case (Zutter & Smart, 2019). In addition,

sustainable financial management strategies can be utilized to avoid such cases, as they may take

into account the previous circumstances and the risk of insolvency. Therefore, sustainable

financial management strategies provide an adequate approach to avoid and adapt to such

situations, in turn reducing the possibility of bankruptcy (Alfalahi & Nobanee, 2019).
  Profitability ratios are financial measures employed by investors and analysts to assess the

ability of a firm to produce income with respect to its earnings, operating expenses, stockholders'

equity, and balance sheet assets during a particular time frame. They illustrate the efficiency of

the firm’s usage of assets to generate profits and value to stockholders. Companies often seek

high ratio values, as it demonstrates great performance by producing high amounts of cash flow,

income, and sales (Franklin, Graybeal & Cooper, 2019).

Data and Methodology

The following table contains Microsoft’s financial data from 2016 to 2019, the data was

retrieved from the firm’s income and balance sheet for the four year period.

Table 1: Financial Data (Microsoft)

Item/Year 2019 2018 2017 2016

Current Assets 175,552,000 169,662,000 159,851,000 139,660,000
Current Liabilities 69,420,000 58,488,000 64,527,000 59,357,000
Inventories 2,063,000 2,662,000 2,181,000 2,251,000
Cash 133,819,000 133,768,000 132,981,000 113,240,000
Receivables 29,524,000 26,481,000 19,792,000 18,277,000
Total Assets 286,556,000 258,848,000 241,086,000 193,694,000
Total Liabilities 184,226,000 176,130,000 168,692,000 121,697,000
Total Equity 102,330,000 82,718,000 72,394,000 71,997,000
Sales 125,843,000 110,360,000 89,950,000 85,320,000

Cost of Goods Sold 42,910,000 38,353,000 34,261,000 32,780,000

EBIT 42,959,000 35,058,000 22,632,000 21,292,000
Interest 2,686,000 2,733,000 2,222,000 1,243,000
Net Income 39,240,000 16,571,000 21,204,000 16,798,000

All Numbers in thousands, Source: Yahoo Finance

Results and Discussion

 Table 2: Liquidity Ratios of Microsoft

Year Equations 2019 2018 2017 2016

Current Ratio Current Assets 2.53 2.91 2.48 2.36

Current Liabilities

Quick Ratio Current Assets- Inventory 2.50 2.86 2.45 2.32

Current Liabilities

Cash Ratio Cash 1.93 2.29 2.06 1.91

Current Liabilities

Liquidity ratios

I. Current Ratio 

Current Ratio: compares the company's current assets to its current liabilities and is

usually used to measure the short term financial states and it severs as an indicator whether

the firm can pay its dues on time (Bint-Tariq et al, 2020).

Figure 1: Current Ratio of Microsoft Corp.

Microsoft's Current Ratio 2016-2019

3.50

3.00 2.91

2.53 2.48
2.50 2.36
Current Ratio

2.00

1.50

1.00

0.50

0.00
2019 2018 2017 2016

Year
Microsoft’s current ratio increased by 2.48 times from 2016 ( 2.36) to 2017 (2.48), 2.91 times

from 2017 to 2018, and decreased by 2.53 times from 2018 to 2019. The overall increase in

current ratio from 2016 to 2018 can be explained by the significant increase of over

$30,000,000,000 in current assets and a decrease in current liabilities by $869,000,000. The

decline in the current ratio from 2018 to 2019 is most likely due to a substantial increase in

current liabilities by 5,890,000,000. Throughout 2016 to 2019, Microsoft's current ratios are over

2.0, meaning that each current liability is covered by two current assets, and their ratios are

overall adequate given that they operate in the volatile technology industry.

II. Quick ratio

Quick or the acid-test ratio is a financial metric computed to show which of the

organization’s cash, cash equivalents, or other assets can be rapidly converted to immediate

cash that is available to use. These assets often include but are not limited to cash, marketable

securities, and accounts receivable (Corporate Finance Institute, n.d.)

Microsoft's Quick Ratio 2016-2019

3.00 2.86

2.50 2.45
2.50 2.32

2.00
Quick Ratio

1.50

1.00

0.50

0.00
2019 2018 2017 2016

Year

Figure 2: Quick Ratio of Microsoft Cor

 Microsoft's Cash Ratio 2016-2019
2.40

2.30 2.29

2.20

2.10
Cash Ratio

2.06

2.00
1.93
1.91
1.90

1.80

1.70
2019 2018 2017 2016
Year

Figure 3: Cash Ratio of Microsoft Corp.

Microsoft’s quick ratio increased by 2.45 times from 2016 to 2017, 2.86 times from 2017 to

2018, and declined by 2.5 times from 2018 to 2019. The trend of the rise in the quick ratio

values from 2016 to 2019, can be justified by the considerable increase in current assets,

which amount to 29,591,000 USD (excluding inventory). Notably cash and receivables

surged by 20,528,000, and 8,204,000 respectively. From 2018 to 2019, the quick ratio was

reduced by 2.53 times, primarily due to the significant rise in current liabilities

10,931,998,000 USD. Therefore, Microsoft’s quick ratio reassures creditors that it would be

able to fulfill their short-term obligations.

III. Cash Ratio

 The cash ratio mainly considers the assets with the highest liquidity, which are cash and cash

equivalents. The ratio demonstrates the firm’s ability to meet its short term liabilities

(Investopedia, n.d.).

The cash ratio of Microsoft rose by 2.06 times from 2016 to 2017 (1.91), peaked at 2018, as

Microsoft has 2.29 times in comparison to 2017 with 2.06 times. However, it witnessed a

steep decline, where it was reduced to 1.93 times in 2019 relative to the previous year. The

change in the value of the cash ratio from 2016 to 2018, is most likely contributed to the rise

in the amount of available cash, as it increased by 20,528,000,000 USD. In addition to the

decline in current liabilities ($10,063,000,000)

2. Activity Ratios

Table 3: Activity Ratios of Microsoft Corp.

Ratio/Year Equations 2019 2018 2017 2016

Inventory
Turnover Cost of goods sold 45.83 31.15 33.02 24.74
Inventory
Receivable
Turnover Sales
4.26 4.17 4.54 4.67
Account Receivable

Total Asset
Turnover Sales
0.44 0.43 0.37 0.44
Total Assets

I. Inventory turnover
 Inventory turnover is used as a financial metric to measure the firm’s capability to sell its

inventory or the speed of inventory sold within a particular time frame. This ratio is a marker of

the quantity of inventory the company has sold at various time periods annually (Hasanaj &

Kuqi, 2019).

Figure 4: Inventory Turnover of Microsoft Corp.

Microsoft's Inventory Turnover 2016-2019

25.00

20.80
20.00

15.71
Inventory turnover

15.00 14.41 14.56

10.00

5.00

0.00
2019 2018 2017 2016

Year

Microsoft’s inventory turnover rose by 15.71 times in 2017 from 14.56 times in 2016. During

2018, the ratio declined to 14.41 than the previous year. However, in 2019, it surged to 20.80

times than in 2018 (14.41). Thus, 2017 and 2019 were more efficient years than in 2016 and

2018, as there was an increase of 1.15 and 16.39 times respectively. Higher efficiency in 2017

and 2019 might be a result of the increase in the costs of goods sold. Where each year’s cost of

goods sold increased by $1,481,000,000 and $4,577,000,000 respectively. Furthermore, in 2019,

the inventory decreased by 599,000,000 USD.

II. Receivables Turnover

This ratio is a metric of the organization's ability to collect its due payments from the buyers for

previous sales. High ratio values indicate that receivables are collected faster, which is beneficial

to the (Bint-Tariq et al, 2020).

Figure 5: Receivables Turnover of Microsoft Corp.

Microsofts Receivable Turnover 2016-2019

4.80

4.70 4.67

4.60 4.54
4.50
Recievable Turnover

4.40

4.30
4.26

4.20 4.17

4.10

4.00

3.90
2019 2018 2017 2016

Year

The receivable turnover in 2017 was 4.54 times less than in 2016 as it was 4.67 times. In 2018,

the ratio fell to 4.17 times, which was sustainably lower than in 2017 (4.54 times). On the

contrary, the ratio recovered from 4.17 times in 2018 to 4.26 times in 2019. Hence, 2019 was a

better year for Microsoft than 2018 and from 2016 to 2018, the ratio was worse as it was

continually declining, reaching its lowest value of the four years in 2018.

III. Total Asset Turnover

This ratio is a measure of the company's ability to utilize all of its assets to generate sales.

Income achieved from assets is often computed yearly (Bint-Tariq et al, 2020). Higher total
assets turnover implies that the firm has higher financial efficiency when using its assets for its

operations (Zutter & Smart, 2019).

Figure 6: Total Asset Turnover of Microsoft Corp.

Microsoft's Total Asset Turnover 2016-2019

0.44 0.44

0.43
Total Asset Turnover

0.37

2019 2018 Year 2017 2016

Microsoft's total asset turnover slowed down by 0.37 times in 2017 in contrast to 2016 where it

was 0.44 times. Total asset turnover increased from 2017 by 0.43 times in 2018 and 2019, the

ratio was 0.44 times higher than it was in 2019. In exception to 2017, Microsoft’s assets

management seems to improve over the years and total assets are most likely utilized efficiently

with respect to generating revenues. In addition, the firm’s sales and total assets had surged by

48% in the last four years.

3. Debt Ratios

Table 4: Debt Ratios of Microsoft Corp.

Ratio/Year Equations 2019 2018 2017 2016

Debt Ratio Total Liabilities 0.64 0.68 0.70 0.63

 Total Assets

Times EBIT 15.99 12.83 10.19 17.13

Interest Interest
Earned
Ratio

I. Debt Ratio

This ratio represents the capability of the firm to fulfill its long term obligations, it

provides valuable insight for the creditors on the security of whether their funds would be

returned. A high debt ratio indicates that the company is borrowing more funds to

operate (Zutter & Smart, 2019).

Figure 7: Debt Ratio Over Total Assets of Microsoft Corp.

Microsoft's Debt Ratio 2016-2019

0.72

0.70
0.70
0.68
0.68

0.66
Debt Ratio

0.64
0.64
0.63

0.62

0.60

0.58
2019 2018 2017 2016

Year

The Debt Ratio of Microsoft was 0.7 in 2017, inclining from 0.63 in 2016. In 2018, the ratio

decreased slightly from 2017 to 0.68, then it declined further to 0.64 in 2019. The Debt Ratio

over the last for years implies that over 60% of their assets were financed by debt. The increase
in the debt ratio in 2017 may suggest that the firm was taking on more risks to generate higher

revenues. Microsoft’s debt ratio over the years appears to be sufficient to satisfy the creditors and

shareholders.

II. Times Interest Earned Ratio

Times interest earned ratio or interest coverage ratio measures the company’s

ability to cover its contractual interest payments. The higher the ratio the more likely the

firm can cover its interest commitments (Zutter & Smart, 2019).

Figure 8: Times Interest Earned Ratio of Microsoft Corp.

Microsoft's Times Interest Earned Ratio 2016-2019

18.00 17.13
15.99
16.00

14.00
12.83
Times Interest Earned Ratio

12.00
10.19
10.00

8.00

6.00

4.00

2.00

0.00
2019 2018 2017 2016

Years

In 2017, Microsoft’s times interest earned ratio declined to 10.19 times from 17.13 times, then

continually increased in 2018 and 2019 by 12.83 and 15.99 times respectively. The year 2019

has the best coverage out of all the four years. In addition, the firm has a great times interest ratio

in all for years and we can assume that the firm was able to cover all of its interest payments. A

possible explanation to Microsoft's high-interest coverage ability, is its high earnings before
 interest and tax, as it increased by over 50% in the last for years, from 21,292,000,000 in 2016 to

42,959,000,000 in 2019.

4. Profitability Ratios

Table 5: Profitability Ratios of Microsoft Corp.

Ratio/Year Equation 2019 2018 2017 2016

Return on Net Income 0.38 0.20 0.29 0.23

Equity Total Equity
Return on Net Income 0.14 0.06 0.09 0.09
Assets Total Assets
Profit Margin Net Income 0.31 0.15 0.24 0.20
Sales

1. Return on equity

This ratio can be utilized to establish whether it would be beneficial to invest in the

firm, it is one of the most important markers for the investors to decide if the company is

a good investment. A higher return on equity suggests that the firm adequately manages

its equity financing (Bint-Tariq et al, 2020).

Figure 9: Return on Equity of Microsoft Corp

 Microsoft's Return on Equity 2016-2019
0.45
0.38
0.40

0.35
0.29
0.30
Return on Equity

0.25 0.23
0.20
0.20

0.15

0.10

0.05

0.00
2019 2018 2017 2016
Year

The return on equity of Microsoft increased from 23% in 2017 to 29% in 2018. The ratio
declined from 29% in 2017 to 20% in 2018. Furthermore, in the year 2019, there was a steep
incline from 2018, as the ratio almost doubled, from 20% in 2018 to 38% in 2019. The previous
results show that Microsoft produces returns that satisfy its investors.

2. Return on Total Assets

Return on total assets is a marker of efficiency utilized to assess the company’s usage of

assets to increase earning. The higher the rate of return on assets the more likely that the

firm is managing its assets in a manner that maximizes revenue (Bint-Tariq et al, 2020)

Figure 10: Return on Total Assets of Microsoft Corp.

Return on Total Assets

0.16
0.14
0.14
Return on Total Assets

0.12
0.10 0.09 0.09
0.08
0.06
0.06
0.04
0.02
0.00
2019 2018 2017 2016
Year
Microsoft’s return on total assets was maintained at 9% from 2016 to 2017, however, it declined

by 3% in 2018, reaching 6%. In 2019, the ratio surged and doubled from the previous year to

14%. Moreover, Microsoft's profit margin was maintained between 2016 to 2017, declined

shortly by 3% in 2018, and peaked in 2019 at 14% with an increase of 8%. Thus, Microsoft

appears to efficiently use assets to generate revenue.

3. Profit Margin

This ratio represents the remainder of the earnings from sales after deducting all costs

and expenses, which include but are not limited to dividends, interest, and taxes. A high-

profit margin is in favor of the company (Zutter & Smart, 2019).

Figure 11: Profit Margin of Microsoft Corp.

Microsoft's Profit Margin 2016-2019

0.35
0.31
0.30

0.25 0.24
Profit Margin

0.20
0.20
0.15
0.15

0.10

0.05

0.00
2019 2018 2017 2016
Year

Microsoft’s profit margin from 2016 to 2017 increased from 20% to 24%, however, it decreased

to 15% in 2018. On the contrary, the ratio increased by 16% in 2019, where the ratio reached its

highest value of 31% over the last four years. Factors contributing to the changes in profit

margin during the four year period is the changes in net income, as it increased from 2016 to
 2019 (with the exception of 2018 ), where net income fell by 4,633,000,000 from the previous

year.

Conclusion

By thoroughly analyzing Microsoft’s liquidity, activity, debt, and profitability ratios. We

recommend investing in Microsoft. The reasons that led to this decision are the following:

Microsoft’s liquidity ratios imply that the firm is likely able to cover all of its obligations and is

at low risk of bankruptcy, due to enhanced current and cash ratio overall. Its activity ratios

appear to be sufficient, with adequate receivable turnover, high inventory turnover, and the

company's total asset turnover displays their efficacy in managing total asset usage to generate

sales. In addition, its debt ratios imply that its debt management is adequate, as its debt ratio is

over 60%. The debt ratio indicates that they would likely be able to cover all debt acquired when

due and its times interest earned ratio is incredibly high verifying that it is able to provide

interest payments when required. Regarding the firm's profitability ratio, the profit margin and

return on equity ratio and assets have improved over the 4 year period reaching their peaks in

2019 at 28%, 14%, and 31% correspondingly. Microsoft appears to manage its finances

effectively and shows promising potential for substantial growth in the future.

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