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Evaluation of Corporate Performance

Its Server and Tools division offers server software, training to developers, cloud-based services. Its Business division offers Microsoft Office and related products. The company markets its products and services across most part of the world. Income Statements (all figures in millions) Year ended June 30, 2011 2012 2013 2014 (projected) Revenue $ 69,943 73,723 77,849 85,634 Cost of Revenue $ 15,577 17,530 20,249 22,274 Gross Profit $ 54,366 56,193 57,600 63,360 Total operating expense $ 27,205 34,430 30,836 33,920 Income before income tax $ 28,071 22,267 27,052 29,940 Provision for income tax $ 4,921 5,289 5,189 5,689 Net income $ 23,150 16,978 21,863 24,251 Figures for the year ended 2014 has been arrived at by projecting 10% growth on revenues and cost of revenues. Income tax provision has been made in the same percentage as made in the current year to arrive at the net income after tax. Ratio Analysis Liquidity Ratios Liquidity of the company can be denoted by several kinds such as current ratio, quick ratio, cash ratio, and cash conversion cycle. a. Current Ratio is given as Current Assets/Current Liabilities For the year ended 2013, Microsoft’s current Ratio = 101,466/37,417 = 2.71 b. Quick Ratio This is also known as the acid-test ratio. This takes into account the most liquid current assets to cover current liabilities. Inventory and less liquid current assets that cannot be converted to cash quickly are eliminated while calculating this ratio. This informs more liquid status of the company. Quick Ratio = (Cash & Equivalents + Accounts Receivable + Short-term Investments)/ Current Liabilities = (3804 + 17,486+73,218)/37,417 = 2.52 Financial Leverage c. The debt-equity ratio is one of the popular financial leverage ratios that provides information regarding the company's leverage state. This is given as = total liability/shareholder's equity = 63,487/78,944 = 0.8 This indicates that for every single dollar of share holder’s equity, there is 0.8 dollar of debt. d. Debt Ratio Debt ratio is defined as total liabilities/total assets For Microsoft, it is calculated as 63,487/142,431= 0.45 In other words, 45% of the assets of Microsoft have been created from debt funds. Asset Management The return on assets employed in the company will provide information about how assets are used to generate return for shareholders. e. Return on Total Assets It is defined as Net Profit/ total assets employed = 21,863/142,431 =15.34% However, to understand how efficiently current assets are managed in enhancing shareholder’s wealth, it would be appropriate to find return on current assets. f. Return on Current Assets It can be given as net profit/current assets = 21,863/101,466 = 21.55% Profitability There are several measures of profitability and in this paper we calculate net profit margin and profitability against shareholder’s equity. g. Net Profit Margin is given as: Net profit/ revenue = 21,863/77,849 = 28% h. Profitability on shareholders’ fund It can be given as net profit/ total equity = 21,863/78,944 = 27.7% Market Value The market value of the firm can be given by its market capitalization. i. Market Capitalization of Microsoft = No. of shares ? price/share = 8,328 ? 35.52 = $295.8 Billions j. Market Multiples (P/E) It will be interesting to understand P/E ratio in details. It is important to note that the closing price of any stock keeps fluctuating on daily ...Show more

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Evaluation of Corporate Performance (Microsoft Corp) Introduction Microsoft Corporation (Microsoft) is in the business of developing, licensing, marketing and supporting software and hardware devices worldwide. The company began its operations a way back in 1975 as a small vendor to IBM…
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