Katie Otten

Microsoft Financial Report Analysis

Through analysis of Microsoft's financial information, a potential
investor can make reasonable conclusions regarding the expectations
of profitably of Microsoft by utilizing three major concepts of financial
statement analysis: liquidity and efficiency, solvency, profitability.
Using basic accounting analysis of Microsofts 2011 Annual Report,
Microsoft shows to be a sound investment for a potential investor.

Liquidity & Efficiency

Liquidity refers to the availability of resources to meet short-term
cash requirements.1 The due dates of obligations and the market cycle
of products directly affect liquidity. By examining Microsoft's liquidity
the investor can get a better understanding of the amount of resources
needed for Microsoft to conduct and remain in business. Efficiency
explains effective utilization of assets. Microsofts efficient use of
assets allows management to enter into strategic partnerships and
acquisitions. For example, Microsoft purchased Skype during the 2011
fiscal year. Incorporating Skypes technology into existing Microsoft
technology makes it easier for users to communicate using any of
Microsoft supported platforms (which includes Xbox, phones, and
traditional PCs). Microsofts continued growth greatly depends of their
ability to efficiently manage all assets in a manner that allows
management to take advantage of any lucrative opportunities in the
market. Also Microsoft must be able to afford to continuously fund their
research and development of new technologies. These high profits are
necessary due to the high cost of software development. During this
past year, Microsoft has integrated many of their own new
technologies into their own offices and lowered their tax expenses to
help increase profits2.
A sufficient amount of working capital is necessary to pay any
current debts, purchase materials for inventory, and take advantage of
cash discounts. For the 2011 year Microsoft's current working capital
equals $46, 144 million, which suffices for this market. To make sure
Microsoft does not have any liquidity issues calculating their current
ratio will indicate how easily Microsoft can pay back their short-term
debts through utilizing their short-term assets. Having a current ratio
greater then 1 suggests that the company is healthy enough to pay
1 Fundamental Accounting Principles Accounting textbook.
2 Bloombergs Business Weeks analysis of Microsoft and Industry
Averages

Katie Otten
back their obligations when due. Microsoft's current ratio equals 2.60,
which proves Microsoft owns enough liquid assets to meet all current
obligations. Microsofts current ratio equals the industry average,
which is indicative of effective management of assets.2
Microsoft continues leading the technology sector through their
innovation of products, investing in strategic partnerships and
acquisitions, and smart investments in the future. Throughout the 2011
fiscal year, Microsoft benefited from businesses increasing their
demand of Microsoft's products, which includes the successful launch
of Kinect for Xbox 360, and the introduction of the Windows Phone.
Microsoft continues to successfully meet and exceed consumers
expectations, which insures a high demand for their products. Microsoft
expects to grow more from targeting smart devices, cloud computing,
and making interacting with technological devices as intuitive as
possible for users.
Further analysis of their acid test ratio equaling 1.8 shows that
Microsoft can easily turn their current assets into cash to pay off any
outstanding debts. Their balance sheet shows a healthy relationship
between accounts receivable, inventories and current assets.

Solvency
Solvency denotes a company's long run financial proficiency and
its capacity to cover long-term obligations. 3 The process of analyzing
Microsoft's solvency involves examining the companies investing,
financing, and operating costs. Most importantly when evaluating
solvency one must examine a companies capital structure, which
refers to financing sources. Analysis should focus on Microsofts ability
to meet its obligations and to provide security through the assets
Microsoft owns for its investors. The debt and equity ratio helps prove
this ability.
$ in millions

2011

Total liabilities

51,62
1
57,08
3
108,7
04

Total equity
Total liabilities
and equity

Ratio
s
47.5
%
52.5
%
100
%

3 Fundamental Accounting Principles Accounting textbook.

Katie Otten

Because Microsoft has more equity than debt in its capital structure
there is a decreased amount of risk for investors; inversely Microsoft is
more dependent on shareholders. Dependency on shareholders, could
turn into a disadvantage should management and shareholders no
longer agree on major decisions. Currently over 98% of all
shareholders have reelected all current board members. This indicates
the over all approval rating the shareholders have in regards to the
management and governance of Microsoft.
Microsofts debt to equity ratio equals .90.
Profitability
One of the most important aspects of a business is the ability to
turn a profit. If a business cannot prove profitable then all other
analysis is negated. Profitability refers to a companys capability to
produce a satisfactory return on an investment. 4
If a company is utilizing resources efficiently then profitability can be
expressed in two calculations, profit margin and return on assets. Profit
margin is a relationship between net income and net sales. Microsofts
profit margin for 2011 is 33.10%, which is increased from 27.42% in
2010. Its expected for Microsoft to continue to earn profits due to the
high demand for its products as an industry leader.
Returns on total assets are another indication of efficient
operations. Microsofts return on total assets equals 15%, which is an
increase of 3%. While Microsofts returns are not as high as some
newer tech companies this is explained because Microsoft is a
developed company. The returns are not as high but are much more
consistent and have a lower risk. Emerging companies may have
greater return but have much higher risk.
Many commentators have said that Microsoft is an example of a
company that is recession proof; that no matter what state the
economy is, Microsoft continues making profits. However, through
analyzing Microsofts financial information and the behavior of
management, a potential investor has definitive evidence supporting
Microsoft as a sound investment.

4 Fundamental Accounting Principles Accounting textbook.

Katie Otten

Works Cited
"Microsoft Anaylsis." MICROSOFT CORP (MSFT:NASDAQ GS): Financial
Ratios -. Bloomberg's Business Week. Web. 18 Apr. 2012.
<http://investing.businessweek.com/research/stocks/financials/r
atios.asp?ticker=MSFT:US>.
Wild, John J., Ken W. Shaw, and Barbara Chiappetta. "Chapter 17."
Fundamental Accounting Principles. Boston: McGraw-Hill Irwin,
2009. Print.