Financial Analysis

Project
MICROSOFT
KELSEY EWELL
ACCT 2410

Introduction
Microsoft is a multinational technology company and it is located in Redmond,
Washington. Microsoft was created by Paul Allen and Bill Gates in 1975. Microsoft
develops licenses, computer software, electronics, and personal computers. It is best
known for its software products like Microsoft Windows, Microsoft Office, Internet
Explorer, and Xbox. This analysis will determine if Microsoft would be a good company
to invest in. The analysis will cover liquidity, efficiency, solvency, profitability, and
investment potential. The conclusion will go over if Microsoft is a good company to
invest in and if you should invest in debt or equity.

Following the analysis is Appendix A which will show Microsofts financial statements for
2015 and then 2014. These financial statements will include the income statements,
comprehensive income statements, balance sheets, cash flows statements, and
stockholders equity statements. Next in Appendix B Microsofts ratio analysis is
provided for 2015 and 2014 and in Appendix C the Mergent Intellect has been provided
and there are small differences due to differing ratio criteria.

Liquidity
Microsofts working capital did increase in 2015 from 2014 by 6,233 million. This means
that there are more funds to cover debt than there was the previous year. However, the
current ratio is the same for both years of 2.50 showing that the company is able to pay
its current liabilities. Large ratios means that the company is not efficiently investing
excess assets. The cash ratio shows a decrease from the prior year meaning that

1|Page

actual cash decreased and that they have less cash and cash equivalents available to
pay current liabilities. The acid-test also decreased from the prior year and Microsoft
slightly relies on its inventory, however; it has a high ratio so it is able to pay its liabilities
if they came due. Compared to the industry Microsoft is higher than the industrial
average in the acid-test and current ratio.

Efficiency
35
30
25
20
15
10
5
0

31.16
30.72
19.92

18.32

11.88
11.72
0.65 0.69 0.8

Microsoft 2015

Microsoft 2014

Industry

Microsoft has generally

stayed constant between 2015 and 2014 with slight variations. In 2015 the inventory
turnover increased which means that they now spend less time selling its inventory than
the previous year. Its gross profit did decrease in 2015 which could be due to the fact
that Microsoft experienced some reconstruction that year. Microsoft did increase its
accounts receivable turnover meaning that it now collects more receivables in 2015
than it did in 2014 and it took about 6 days less than it had previously. Compared to the
industry, Microsoft has a lower inventory turnover, meaning that the sales of its
inventory is not where it should be compared to the industry. It also has a higher days
sales in receivable ratio meaning that it takes longer to collect receivables. Microsoft
2|Page

also has a lower gross profit percentage meaning that most of the sales goes to cost of
goods sold.

Solvency
When it comes to debt Microsoft has more liabilities as it does equity but it has almost
twice as much assets. With a debt to equity ratio of 1.2 means that there is twice as
much liabilities and the ratio increased from last year by .1, this could be because
Microsoft had more short term debt in 2015 than 2014 by $2,985. It could also be due
to having long term debt coming due of $2,499 or the fact that equity decreased by
$9,701 which was due to a lower retained earnings most likely caused from higher
amount of dividends paid in 2015. The times-interest-earned ratio did decrease in 2015
from 2014 however, Microsoft still has the ability to cover its interest expense. Microsoft
is about the same as the industry when it comes to the debt to equity ratio and they are
better equipped to cover any interest compared to the industry.

Profitability
When you compare Microsoft with the profitability it had last year you can tell that they
Rate of
Rate of
Profitabilit Profit Margin Return on
Asset
Return on
Earnings
y
%
Assets
Turnover
Equity
Per Share
2014
25.42%
14.40%
0.5516
0.3254
$2.66
2015
13.03%
7.44%
0.5369
0.1782
$1.50

have decreased in all aspects which you are able to view in the following table. The
ratios show that because of the reconstruction in 2015 the net income decreased by
$9,881. The reconstruction cost was not in 2014 and even though revenue did increase
3|Page

in 2015 it was not enough to cover the extra cost. The profit margin percent shows a
fifty percent decrease from one year to the next which means that for every dollar of net
sales, Microsoft is not earning as much net income as they could have. The rate of
return on total assets also decreased by fifty percent meaning that in 2015 they were
not as efficient at using assets to earn income. However, there was only a slight
decrease in the asset turnover meaning that that are still able to generate sales with
average total assets. Earnings per share shows that compared to 2014 Microsoft has
less net income for each of its outstanding common stock and the rate of return on
stockholders equity shows how equity is being used to invest into Microsoft.

Investment Potential
90.00%

83.22%

80.00%
70.00%
60.00%

51.67%

50.00%

40.14%

42.11%

Dividend Yield

Dividend Payout

40.00%
29.63%
30.00%
15.68%
20.00%
10.00%
0.00%
Price/Earnings Ratio

Microsoft 2015

Microsoft 2014

When you take into

account Microsofts investment potential, it shows that it increased in 2015 compared to
2014, the chart provided shows this increase. The price/earnings ratio shows the value
the stock market palaces on Microsofts earnings and as you can see in 2015 it
increased by 13.95%. The dividend yield show that in 2015 Microsoft payed out more
dividends to its stockholders then it did in 2014 by 11.53%. This is also shown in the
4|Page

dividend payout ratio which shows the amount of declared dividend per share related to
the earnings per share in Microsoft.

Conclusion
Microsofts financial ratios show that the company has either slightly improved, stayed
the same, and that it has even declined. The decrease has mainly been due to the
restructuring in 2015 to restructure the phone hardware for better focus and align
resources. Microsoft is able to meet short term liabilities even though the company did
slightly decrease its ability to pay current liabilities with just cash and equivalents.
Inventory turnover and accounts receivable turnover improved slightly compared to
2014, meaning that the company can sell its inventory at a faster rate but they came
short when compared to the industry. Microsoft became more debt heavy compared to
the previous year most likely due to long term debt becoming due in 2015. There was
also a decrease in the ability to pay interest expense, however compared to the industry
Microsoft is still better able to pay interest. Profitability did significantly decrease
compared to the previous year. This is largely due to the restructuring costs that were
in 2015 and not in 2014. In 2015 the value of the company increased than the prior
year as well as more dividends were paid out.

The many different technology industries are always growing with Microsoft being a big
player in most of the different types of technology. With the restructure they were
getting rid of the phone hardware because it was a declining industry for them. This can
mean that in the years to come Microsoft may show more profits and increased ratios.

5|Page

Also with one of the few technology companies to give out dividends; it gives it more of
an appeal than its competitors. All in all, Microsoft would be a good company to invest
in their stockholders equity; due to the increase in dividends from year to year.

6|Page

APPENDIX A: FINANCIAL STATEMENTS

2015
INCOME STATEMENTS

(In millions, except per share amounts)

Year Ended June 30,

2015

Revenue
$

93,58
0

2014

86,83
3

2013

77,84
9

Cost of revenue
33,038

27,078

20,385

60,542

59,755

57,464

12,046

11,381

10,411

15,713

15,811

15,276

4,611

4,677

5,013

10,011

127

18,161

27,759

26,764

346

61

288

18,507

27,820

27,052

6,314

5,746

5,189

$ 12,193

$ 22,074

$ 21,863

1.49

2.66

2.61

1.48

2.63

2.58

Gross margin
Research and development
Sales and marketing
General and administrative
Impairment, integration, and restructuring

Operating income
Other income, net

Income before income taxes

Provision for income taxes

Net income

Earnings per share:

Basic
Diluted

7|Page

(In millions, except per share amounts)

Weighted average shares outstanding:

Basic
8,177

8,299

8,375

8,254

8,399

8,470

Diluted
Cash dividends declared per common share
$

1.24

1.12

0.92

COMPREHENSIVE INCOME STATEMENTS

(In millions)

Year Ended June 30,

2015

Net income
$

2014

12,19
3 $

22,07
4 $

559

(35)

2013

21,86
3

Other comprehensive income (loss):

Net unrealized gains (losses) on derivatives (net of tax effects of $20,
$(4), and $(14))
(26)

Net unrealized gains (losses) on investments (net of tax effects of

$(197), $936, and $195)
(362)

1,737

(1,383)

263

(1,186)

1,965

363

Translation adjustments and other (net of tax effects of $16, $12, and
$(8))
(16)

Other comprehensive income (loss)

321

Comprehensive income
$ 11,007 $ 24,039 $ 22,184

8|Page

BALANCE SHEETS

(In millions)

June 30,
2015

2014

Assets
Current assets:
Cash and cash equivalents
$

5,595

8,669

Short-term investments (including securities loaned of $75 and $541)

90,931

77,040

96,526

85,709

17,908

19,544

2,902

2,660

1,915

1,941

5,461

4,392

124,712

114,246

14,731

13,011

12,053

14,597

16,939

20,127

4,835

6,981

2,953

3,422

$ 176,223

$ 172,384

Total cash, cash equivalents, and short-term investments

Accounts receivable, net of allowance for doubtful accounts of $335 and
$301
Inventories
Deferred income taxes
Other

Total current assets

Property and equipment, net of accumulated depreciation of $17,606 and
$14,793
Equity and other investments
Goodwill
Intangible assets, net
Other long-term assets

Total assets

Liabilities and stockholders equity

9|Page

(In millions)

Current liabilities:
Accounts payable
$

6,591

7,432

Short-term debt
4,985

2,000

2,499

5,096

4,797

606

782

23,223

23,150

92

558

6,766

6,906

49,858

45,625

27,808

20,645

2,095

2,008

2,835

2,728

13,544

11,594

96,140

82,600

68,465

68,366

9,096

17,710

2,522

3,708

80,083

89,784

Current portion of long-term debt

Accrued compensation
Income taxes
Short-term unearned revenue
Securities lending payable
Other

Total current liabilities

Long-term debt
Long-term unearned revenue
Deferred income taxes
Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders equity:
Common stock and paid-in capital shares authorized 24,000; outstanding
8,027 and 8,239
Retained earnings
Accumulated other comprehensive income

Total stockholders equity

10 | P a g e

(In millions)

Total liabilities and stockholders equity

$ 176,223

11 | P a g e

$ 172,384

CASH FLOWS STATEMENTS

(In millions)

Year Ended June 30,

2015

2014

2013

Operations
Net income
$

12,19
3

22,07
4

21,86
3

Adjustments to reconcile net income to net cash from

operations:
Goodwill and asset impairments
7,498

5,957

5,212

3,755

2,574

2,446

2,406

Depreciation, amortization, and other

Stock-based compensation expense
Net recognized losses (gains) on investments and derivatives
(443)

(109)

80

(588)

(271)

(209)

224

(331)

(19)

Excess tax benefits from stock-based compensation

Deferred income taxes
Deferral of unearned revenue
45,072

44,325

44,253

(44,920)

(41,739)

(41,921)

1,456

(1,120)

(1,807)

(272)

(161)

(802)

62

(29)

(129)

346

(628)

(478)

(1,054)

473

537

(624)

1,075

146

1,014

1,158

Recognition of unearned revenue

Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other long-term assets
Accounts payable
Other current liabilities
Other long-term liabilities
1,599
12 | P a g e

(In millions)

Net cash from operations

29,080

32,231

28,833

4,481

500

10,680

10,350

4,883

(1,500)

(3,888)

Financing
Proceeds from issuance of short-term debt, maturities of 90
days or less, net
Proceeds from issuance of debt
Repayments of debt
(1,346)

Common stock issued

634

607

931

Common stock repurchased

(14,443)

(7,316)

(5,360)

(9,882)

(8,879)

(7,455)

Common stock cash dividends paid

Excess tax benefits from stock-based compensation
588

271

209

362

(39)

(10)

(9,080)

(8,394)

(8,148)

(5,944)

(5,485)

(4,257)

(3,723)

(5,937)

(1,584)

(98,729)

(72,690)

(75,396)

15,013

5,272

5,130

70,848

60,094

52,464

Other

Net cash used in financing

Investing
Additions to property and equipment
Acquisition of companies, net of cash acquired, and purchases
of intangible and other assets
Purchases of investments
Maturities of investments
Sales of investments
Securities lending payable
(466)

(87)

(168)

(23,001)

(18,833)

(23,811)

(73)

(139)

(8)

Net cash used in investing

Effect of exchange rates on cash and cash equivalents

13 | P a g e

(In millions)

Net change in cash and cash equivalents

(3,074)

4,865

(3,134)

8,669

3,804

6,938

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

$

5,595

8,669

3,804

STOCKHOLDERS EQUITY STATEMENTS

(In millions)

Year Ended June 30,

2015

2014

68,366 $

67,306 $

634

607

2013

Common stock and paid-in capital

Balance, beginning of period
$

65,797

Common stock issued

920

Common stock repurchased

(3,700)

(2,328)

(2,014)

2,574

2,446

2,406

588

272

190

63

68,465

68,366

67,306

17,710

9,895

12,193

22,074

21,863

(10,063)

(9,271)

(7,694)

(10,744)

(4,988)

(3,418)

Stock-based compensation expense

Stock-based compensation income tax benefits
Other, net

Balance, end of period

Retained earnings
Balance, beginning of period
(856)

Net income
Common stock cash dividends
Common stock repurchased

14 | P a g e

(In millions)

Balance, end of period

9,096

17,710

9,895

3,708

1,743

1,422

(1,186)

1,965

321

2,522

3,708

1,743

Accumulated other comprehensive income

Balance, beginning of period
Other comprehensive income (loss)

Balance, end of period

Total stockholders equity

$

15 | P a g e

80,083 $

89,784 $

78,944

2014
INCOME STATEMENTS

(In millions, except per share amounts)

Year Ended June 30,

2014

2013

2012

86,833

$ 77,849

26,934

20,249

17,530

59,899

57,600

56,193

11,381

10,411

9,811

15,811

15,276

13,857

4,821

5,149

4,569

6,193

127

27,759

26,764

21,763

61

288

504

27,820

27,052

22,267

5,746

5,189

5,289

Revenue
$

$
3

73,72

Cost of revenue

Gross margin

Research and development

Sales and marketing

General and administrative

Goodwill impairment

Integration and restructuring

Operating income

Other income, net

Income before income taxes

Provision for income taxes

16 | P a g e

(In millions, except per share amounts)

Net income
$

22,074

$ 21,863

$ 16,978

2.66

2.61

2.02

2.63

2.58

2.00

Earnings per share:

Basic

Diluted

Weighted average shares outstanding:

Basic
8,299

8,375

8,396

8,399

8,470

8,506

Diluted

Cash dividends declared per common share

$

1.12

0.92

0.80

COMPREHENSIVE INCOME STATEMENTS

(In millions)

Year Ended June 30,

2014

2013

2012

22,07

$ 21,86
3

$ 16,97
8

Net income
$
4
Other comprehensive income (loss):
Net unrealized gains (losses) on derivatives (net of tax effects of $(4), $(14),
and $137)

(35
)

17 | P a g e

(26
)

255

(In millions)

Net unrealized gains (losses) on investments (net of tax effects of $936, $195,
and $(210))

(390
1,737

363

Translation adjustments and other (net of tax effects of $12, $(8), and $(165))
(16
263

(306
)

Other comprehensive income (loss)

(441
1,965

321

$ 24,039

$ 22,184

Comprehensive income

18 | P a g e

$ 16,537

BALANCE SHEETS

(In millions)

June 30,
2014

2013

Assets
Current assets:
Cash and cash equivalents
$

8,669

3,804

Short-term investments (including securities loaned of $541 and $579)

77,040

73,218

85,709

77,022

19,544

17,486

2,660

1,938

1,941

1,632

4,392

3,388

114,246

101,466

13,011

9,991

14,597

10,844

20,127

14,655

6,981

3,083

Total cash, cash equivalents, and short-term investments

Accounts receivable, net of allowance for doubtful accounts of $301 and $336

Inventories

Deferred income taxes

Other

Total current assets

Property and equipment, net of accumulated depreciation of $14,793 and $12,513

Equity and other investments

Goodwill

Intangible assets, net

19 | P a g e

(In millions)

Other long-term assets

3,422

2,392

Total assets
$ 172,384

$
1

142,43

4,828

Liabilities and stockholders equity

Current liabilities:
Accounts payable
7,432

Short-term debt
2,000

2,999

4,797

4,117

782

592

23,150

20,639

558

645

6,906

3,597

45,625

37,417

20,645

12,601

Current portion of long-term debt

Accrued compensation

Income taxes

Short-term unearned revenue

Securities lending payable

Other

Total current liabilities

Long-term debt

20 | P a g e

(In millions)

Long-term unearned revenue

2,008

1,760

2,728

1,709

11,594

10,000

82,600

63,487

68,366

67,306

17,710

9,895

3,708

1,743

89,784

78,944

$ 172,384

$ 142,431

Deferred income taxes

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders equity:
Common stock and paid-in capital shares authorized 24,000; outstanding 8,239 and
8,328
Retained earnings

Accumulated other comprehensive income

Total stockholders equity

Total liabilities and stockholders equity

21 | P a g e

CASH FLOWS STATEMENTS

(In millions)

Year Ended June 30,

2014

2013

2012

21,863

$ 16,978

6,193

5,212

3,755

2,967

2,446

2,406

2,244

Operations
Net income
$

22,074

Adjustments to reconcile net income to net cash from operations:

Goodwill impairment

Depreciation, amortization, and other

Stock-based compensation expense

Net recognized losses (gains) on investments and derivatives

(109

(200

80

Excess tax benefits from stock-based compensation

(271
)

(209
)

(93
)

Deferred income taxes

(331
)

(19
)

954

Deferral of unearned revenue

44,325

44,253

36,104

Recognition of unearned revenue

(41,739
)

22 | P a g e

(41,921
)

(33,347
)

(In millions)

Changes in operating assets and liabilities:

Accounts receivable
(1,120
)

(1,807
)

(1,156
)

Inventories
(161
)

(802
)

184

Other current assets

(29
)

(129
)

493

Other long-term assets

(628
)

(478
)

(248
)

Accounts payable
(31
473

537

1,075

146

410

1,014

1,158

174

32,231

28,833

31,626

500

10,350

4,883

Other current liabilities

Other long-term liabilities

Net cash from operations

Financing
Proceeds from issuance of short-term debt, maturities of 90 days or less, net

Proceeds from issuance of debt

Repayments of debt
(3,888
)

(1,346
)

Common stock issued

607

23 | P a g e

931

1,913

(In millions)

Common stock repurchased

(7,316
)

(5,360
)

(5,029
)

Common stock cash dividends paid

(8,879
)

(7,455
)

(6,385
)

Excess tax benefits from stock-based compensation

271

209

93

Other
(39
)

(10
)

Net cash used in financing

(8,394
)

(8,148
)

(9,408
)

Investing
Additions to property and equipment
(5,485
)
Acquisition of companies, net of cash acquired, and purchases of intangible
and other assets

(4,257
)

(5,937
)

(2,305
)

(1,584
)

(10,112
)

Purchases of investments
(72,690
)

(75,396
)

(57,250
)

Maturities of investments
5,272

5,130

15,575

60,094

52,464

29,700

Sales of investments

Securities lending payable

(87
)

24 | P a g e

(168
)

(394
)

(In millions)

Net cash used in investing

(18,833
)

(23,811
)

(24,786
)

Effect of exchange rates on cash and cash equivalents

(139
)

(8
)

(104
)

Net change in cash and cash equivalents

(3,134
4,865

(2,672
)

Cash and cash equivalents, beginning of period

3,804

6,938

9,610

Cash and cash equivalents, end of period

$

25 | P a g e

8,669

3,804

6,938

STOCKHOLDERS EQUITY STATEMENTS

(In millions)

Year Ended June 30,

2014

2013

2012

Common stock and paid-in capital

Balance, beginning of period
$

67,306

65,797

63,415

Common stock issued

607

920

1,924

Common stock repurchased

(2,328
)

(2,014
)

(1,714
)

Stock-based compensation expense

2,446

2,406

2,244

272

190

63

68,366

67,306

65,797

Stock-based compensation income tax benefits (deficiencies)

(75
)

Other, net

Balance, end of period

Retained earnings (deficit)

Balance, beginning of period
(856
9,895

(8,195
)

Net income
22,074

21,863

16,978

Common stock cash dividends

(9,271
)

26 | P a g e

(7,694
)

(6,721
)

(In millions)

Common stock repurchased

(4,988
)

(3,418
)

(2,918
)

Balance, end of period

(856
17,710

9,895

1,743

1,422

1,965

321

3,708

1,743

Accumulated other comprehensive income

Balance, beginning of period
1,863

Other comprehensive income (loss)

(441
)

Balance, end of period

1,422

Total stockholders equity

$

27 | P a g e

89,784

78,944

66,363

APPENDIX B: RATIO ANALYSIS

Liquidity:
Working Capital
Current Ratio
Cash Ratio
Acid-Test Ratio
Efficiency:
Inventory Turnover
Days Sales in Inventory
Gross Profit Percentage
Accounts Receivable Turnover Ratio
Days Sales in Receivables
Solvency:
Debt Ratio
Debt to Equity Ratio
Times-Interest-Earned Ratio
Profitability:
Profit Margin Ratio
Rate of Return on Total Assets
Asset Turnover Ratio
Rate of Return on Common Stockholders Equity
Earnings Per Share
Investment Potential:
Price/Earnings Ratio
Dividend Yield
Dividend Payout

28 | P a g e

2015
74,854
2.50
11.22%
2.295

2014
68,621
2.50
19.00%
2.307

11.88
30.72
64.7%
3.84
95.11

11.72
31.16
69.0%
3.59
101.55

.5456
1.2005
24.70

.4792
.9200
47.60

13.03%
7.44%
.5369
.1782
1.50

25.42%
14.40%
.5516
.3254
2.66

29.63%
51.67%
.8322

15.68%
40.14%
.4211

APPENDIX C: MERGENT INTELLECT

Amount (USD)
Profitability Ratios
Gross Margin
Operating Margin
EBITDA Margin %
Calculated Tax Rate %
Profit Margin (TTM)
Valuation Ratios
Price/Earnings (TTM)
Price/Book (TTM)
Price/Cash Flow(TTM)
Liquidity Indicators
Quick Ratio
Current Ratio
Net Current Assets as % of Total
Assets
Free Cash Flow per Share
Revenue to Assets

29 | P a g e

2015

2014

2013

2012

2011

64.7
19.41
24.17
34.12
13.03

68.98
31.97
35.62
20.65
25.42

73.99
34.38
37.77
19.18
28.08

76.22
29.52
32.62
23.75
23.03

77.73
38.83
42.13
17.53
33.1

29.63
4.43
12.41

15.68
3.83
10.74

13.24
3.64
10.03

15.19
3.86
8.14

9.52
3.82
8.18

2.3
2.5

2.31
2.5

2.53
2.71

2.41
2.6

2.35
2.6

42.48
2.83
0.53

39.81
3.22
0.5

44.97
2.93
0.55

43.21
3.48
0.61

42.45
2.9
0.64