Company Analysis from an Employee Perspective - Essay Example

Financial Analysis of Microsoft Corporation Introduction The objective of this report is to analyse the financial positions and thereby the potential of Microsoft Inc in the near future as a potential employee of the concern. Company Background Microsoft Corp is well known globally as a company that is engaged in license and support of a wide variety of software production. Its products include operating systems for smartphones and computers, phones, servers, and such other intelligent devices. Amongst services, Microsoft provides serve, productivity and business solution applications, software development and server and desktop management tools, online advertising and video games (Microsoft, 2013). Historical performance With the release of its Windows phone in 2011, Microsoft has been gradually rebranding itself. It recently launched the Windows 8, an OS that shall support personal computers as well as tablets. In June 2012, the company release Microsoft Surface, its first Microsoft hardware based computer. To compete with Gmail, Microsoft release Outlook.com, a webmail service in July 2013. It also acquired Yammer in the same year, a social network website and Windows 8 Phone. Anticipating demand, Microsoft also increased the number of its outlets in 2012. In July 2013, the company announced reorganization of its PC business while in September; it announced the takeover of Nokia Inc (Microsoft, 2013). Financial Ratio Analysis Current ratio: This particular ratio is of interest to the potential employee to help determine how the company manages to covers its expenses. Current Assets/Current Liabilities - 101,466/37,417 = 2.71 The concern has high current ratio. This means that the company is not utilising its cash reserves efficiently and not leveraging on short term debt. Microsoft is holding an enormous cash balance that is an asset not producing anything. This lowers the overall return on the assets and thereby increases the cost of capital. Microsoft has been consistently working on high cash and this indicates a lazy behaviour of the company. Ideal current ratio is 2:1 Current Ration for the year 2012 was at 2.60. We observe that not much of a change has happened over the past year. The firm has had high cash reserves in the past year as well to the tune of 51% of the total assets. Maintaining high cash persistently reflect poor strategic planning and management (Business Ferret, 2011). Return on Assets: Return on Assets helps to determine the percentage of profits a company is making to finance all of its assets. This ratio also judges the efficiency of management to utilise company’s assets to generate enough profits. This kind of judgement on management strength is of keen interest to possible employees. Net Income after tax / Total assets = (21,863/142,431) * 100 = 15.31% The company has been consistently showing strong and healthy return on assets. However, ROA for 2013 shows a rise from 14.77 to 15.31%. For software companies, high ROA is a good indication because these companies do not need much of cash for their assets. However, for Microsoft, high denominator is due to high amount of cash holdings. This is not a very good sign. ROA, when adjusted with cash, stands at 33.4%. Such high cash contributes towards holding down the stock value year on year (Lermack, 2003). Return on assets, for the year of 2012 stood at 14.77%. A rise from the 2012 figures has come from a rise in profits and a rise in assets base. The asset base, however, has seen a rise primarily due to increased equity investments and rise in other long term assets. The company does not need equity holdings in a scenario when its debt-equity situation is dismal. It should focus on more of leveraging opportunities. Debt-Equity Ratio The ratio helps to determine how well the debt structure is contributing to financing of assets of the company. If employees see a bad debt structure continuing for several years, the company is not expanding its operations as desired and might face a slowdown. Total Debt/Total Equity =63,487/ 142,431 = 0.44 It might be difficult to believe but Microsoft is not utilising its leverage opportunities to expand businesses. It is relying primarily on equity to finance its assets. The capital structure needs improvement by and large. Inefficient capital structure combined with too much cash holding would gradually lead to a decline in the ROA. With falling returns, job losses are bound to come. The debt equity ratio for the 2012 was at 0.16, which is lower than what is it at present. Management has realised the need for utilising leverage opportunities and thereby, is investing in new projects, products and growth opportunities. This is a positive change and Microsoft’s, recent product launches and business acquisition are live examples of future expansion plans (Morningstar, 2013). Net Margin % This particular ratio reflects how much return does every single dollar spent earns and gets converted to profits. For a strong company, it can begin from 15% and onwards. Profit after taxes / Sales = 21,863/77,849 = 28.09% Apparently, the figure for Net Margin looks good for Microsoft Corp. This growth is also in line with competitor net margin figures (Apple: 21.67%, Google: 21.40%) but Oracle seems to be leading the way by a net margin of 29.38%. Microsoft has been fluctuating with huge variation in net margin. In 2011 it stood at 33% while it 2012, it fell down to 23%. This kind of inconsistent growth does not win the trust of either shareholders or possible stakeholders, like potential employees. Net margin for the year 2012 stood at 23.03%, a figure slightly lower than net margin for 2013. The increase in net margin reflects that Microsoft has been able to drive up its sales. There is a huge demand for its Surface Pro PC, which is presently facing supply shortages. Higher sales have also reflected in increase profits, which in turn have driven up the net margin figures (Morningstar, 2013). Competition Microsoft is running in a situation where it is facing serious competition in software areas and a huge slump in demand for personal computers, its core area, due to presence of innovative substitutes. Competitors like Apple and Google have an already established market positions in the software world and have been successful in launching their operating systems in mobile and computer markets, an area where Microsoft has just begun. It also faces a gradual but strong shift in consumer needs and preferences. People now want more of tablets and smartphones than standalone personal computers. The company has a huge reserve of cash and could beat its competitors by growing through consolidations. It has already taken over Nokia, showing a beginning. It also has had a huge brand loyalty and good financial performance. These are areas where it can continue focus to retain investor confidence. Microsoft is yet to tap an unexplored area of cloud computing which could drastically improve company performance (Market Consensus, 2013). Economic issues For a foreign company, exchange rates could account for a major part of economic risks. Microsoft Corporation has a wide geographical presence and operates in about 100 countries spread over almost every part of the world. Exchange rate volatility could have a significant impact of its financial performance. It gets a large part of its revenue from sales internationally and therefore if foreign currency fluctuates, a very large part of sales revenue could be affected. Company earnings, asset values and cash flows, all are affected by currency risk. Foreign transactions like purchase and sale of assets and market borrowings could be seriously impacted by exchange rates (Global Data, 2013). Strategic issues Surface Pro, Microsoft’s very own hardware based computer has had a very good demand. It is reportedly facing supply shortages. The challenge for Microsoft has been more on creating laptop replacements. The company has taken to the task of making expansion through a series of acquisitions. Acquisition of MFA (multifactor authentication) shall help in developing its cloud computing services. It recognises the strength cloud computing has and the possible impacts it can make on Microsoft’s competitive position and thereby has also acquired StorSimple Inc. that would add on to advance Cloud OS version of Microsoft. Yammer acquisition is also directed to integrate an enterprise level social networking into cloud computing. Hence we observe that acquisitions are not random. They have been planned carefully and directed towards specific motives (Strategic Management Insight, 2013). Conclusion A company like Microsoft is not an easy one to knock off for any employee. It has been around strong for long. On analysing the financials, it is observed that the company is lagging much behind of its competitors in terms of innovation but on the brighter side, the company continues to have a strong management. It is not that the company lacks on strategies. They are moving forwards, the results of which are yet to be seen. The company has good plans but there is a huge room for making improvements. Reference List Business Ferret. 2011. Microsoft Financial Analysis – Destroying Value with Too Much Cash. [online]. Available at: < http://thebusinessferret.com/microsoft-financial-analysis-destroying-value-with-too-much-cash> [Accessed 11 November 2013]. Global Data. 2013. Microsoft Corporation - Financial and Strategic Analysis Review. [online]. Available at: < http://callisto.ggsrv.com/imgsrv/FastFetch/UBER1/68489_GDTC22599FSA> [Accessed 11 November 2013]. Lermack, H. B., 2003. Financial Analysis. [online] Available at: http://faculty.philau.edu/lermackh/financial_analysis.htm [Accessed 1 November 2013]. Market Consensus. 2013. Is MSFT a Good Buy? [online]. Available at: < http://www.marketconsensus.com/news/msft-good-buy-2013-microsoft-stock-analysis-buy-sell-or-hold> [Accessed 11 November 2013]. Microsoft. 2013. Annual Report-2013. [pdf]. Microsoft Corporation. Available at: < www.microsoft.com/investor/reports/ar13/index.html> [Accessed 11 November 2013]. Morningstar. 2013. Microsoft Stock Performance. [online]. Available at: < http://financials.morningstar.com/ratios/r.html?t=MSFT®ion=USA&culture=en-US> [Accessed 11 November 2013]. Strategic Management Insight. 2013. SWOT Analysis of Microsoft. [online]. Available at: < http://www.strategicmanagementinsight.com/swot-analyses/microsoft-swot-analysis.html> [Accessed 11 November 2013]. Read More