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SCHOOL OF ARCHITECTURE, BUILDING & DESIGN
FOUNDATION IN NATURAL & BUILT ENVIRONMENT
July Intake 2013
Semester 2
Basic Accounting (FNBE0145)
Lecturer: Mr.Chang Jau Ho
Assignment: Financial Ratio Analysis
Company: Microsoft Corporation
Name Student ID No.
Lee Kim Thiam 0310710
Lim Chern Yie 0315688
Yong Seen Yee 0315883
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Table of content
Title Page Company Background 3-4
Recent Development 5
Ratio Analysis & P/E Ratio 6-10
Investment Recommendation 11
Appendix
Appendix A: Calculation
Appendix B: Consolidated Balance Sheet
Appendix C: Consolidated Statements of Income
12-16
Reference 17
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Company Background
Microsoft is an established company in America that was founded in the year 1975. The
company was founded by Bill Gates and Paul Allen on April 4, 1975. For the years that have
gone by, the company has expanded up till this very day into the famous Microsoft
Company that everybody knows.
This company was founded by Bill Gates to develop, manufacture, license, support and sell
computer electronics, software and personal computers to the society of the world. In the
year 1980, Microsoft formed its partnership with International Business Machines
Corporation (IBM) to sell its software packages or computers that IBM has manufactured
(Crunchbase.com, 2014).
Since the 1990’s, the company has drastically diversified itself from the line of operating
system market by dominating the market and eventually ventured into hardware, producing
products such as Zune, a digital media player for music, videos, pictures and podcasts
(Crunchbase.com, 2014). Later on in the years, the renowned Xbox gaming console and the
Surface tablet series came into the company.
Years have passed and the company’s current best known software products include the
line of Microsoft Windows operating systems, Microsoft Office office suite and the Internet
Explorer web browser (Crunchbase.com, 2014). Microsoft’s more well-known hardware
products are currently the Xbox gaming console and the Microsoft Surface series of tablets.
At this point, Microsoft is the world’s largest software company in terms of revenue
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(Crunchbase.com, 2014). In addition to that, it is also one of the world’s most successful
startup companies and one of the world’s most valuable companies (Crunchbase.com, 2014).
Needless to say, Microsoft is a very big company, with revenues soaring sky high despite the
fact that Apple, one of their more persistent competitors, being in the market with them.
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Recent Development
The company has bought over a few big companies that might have expanded their
company to bigger standards. Big companies that Microsoft has bought over include Skype
Technologies and Nokia. Skype was purchased in the year 2011 at a price of 8.5 billion
dollars while Nokia was purchased at a price of 7.2 billion dollars in the year 2013
(Microsoft.com, 2014). Both these companies remain as the biggest purchases that
Microsoft has made in its history.
As of 2014, Microsoft is planning to release the most anticipated tablet, the Surface Pro 3
(Microsoft.com, 2014). They are also plans for Skype having a dubbed Skype Translator,
meaning that Skype users will be able to translate whatever they are saying in ‘real time’
over to the other party (BBC News, 2014). They are currently in second place on the Forbes’
list for ‘World’s Most Valuable Brands’ (Forbes.com, 2014).
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Profitable Stability (In Millions)
Profitability Ratios 2012 2013 Return on Equity (ROE) Ration
Net Profit
Average O/E× 100%
= 16978
61723× 100%
= 27.5%
Net Profit
Average O/E× 100%
= 21863
72653.5 × 100%
= 30.1%
Net Profit Margin (NPM) Ratio
Net Profit
Net Sales× 100%
= 16978
73723× 100%
= 23%
Net Profit
Net Sales× 100%
= 21863
77849× 100%
= 28.1%
Gross Profit Margin (GPM) Ratio
Gross Profit
Net Sales× 100%
= 56193
73723× 100%
= 76.2%
Gross Prpfit
Net Sales× 100%
= 57600
77849× 100%
= 74%
Selling Expense Ratio (SER)
Total S. E
Net Sales× 100%
= 20050
73723× 100%
= 27.2%
Total S. E
Net Sales× 100%
= 15267
77849× 100%
= 19.6%
General Expense Ratio (GER)
Total G. E
Net Sales× 100%
= 14380
73723× 100%
= 19.5%
Total G. E
Net Sales× 100%
= 15560
77849× 100%
= 20%
Financial Expense Ratio (FER)
Total F. E
Net Sales× 100%
= 9408
73723× 100%
= 12.8%
Total F. E
Net Sales× 100%
= 8148
77849× 100%
= 10.5%
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Financial Stability (In Millions)
Stability Ratios
2012 2013
Working Capital Ratio (WCR)
Total Current Assest
Total Current Liabilities
= 85084
32688
= 2.6 : 1
Total Current Assest
Total Current Liabilities
= 101466
37417
= 2.7 : 1
Total Debt Ratio (TDR)
Total Liabilities
Total Assest
= 54908
121271× 100%
= 45.3%
Total Liabilities
Total Assest
= 63487
142431× 100%
= 44.6%
Inventory Turnover Ratio (ITR)
365 days ÷Cost of Good Sold
Average Inventory
= 365 days ÷17530
1255
= 26.1 days
365 days ÷Cost of Good Sold
Average Inventory
= 365 days ÷20249
1537.5
= 27.7 days
Debtor Turnover Ratio (DTR)
365 days ÷Credit Sales
Average Debtors
= 365 days ÷36861.5
15384
= 152.3 days
365 day ÷Credit Sales
Average Debtors
= 365 days ÷38924.5
16633
= 156 days
Interest Coverage Ratio (ICR)
Interest expense + Net profit
Interest expense
= 17358
380
= 45.7 times
Interest expense + Net profit
Interest expense
= 22292
429
= 52 times
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Profitable Stability
During the 2012 to 2013 periods, the Return on Equity (ROE) has increased from 27.5% to
30.1%. This means the owner is getting more return from his investment.
In addition, during the period from 2012 to 2013, the Net Profit Margin (NPM) has
increased from 23% to 28.1%. This means the business is getting better at controlling its
overall expenses.
However, from the year 2012 to 2013, the Gross Profit Margin (GPM) has decreased from
76.2% to 74%. This means the business is getting worse at controlling its COGS.
Besides that, during the period from 2012 to 2013, the Selling Expenses Ratio (SER) has
decreased from 27.2% to 19.6%. This means the business is getting better at controlling its
selling expenses.
During the 2012 to 2013 period, the General Expense Ratio (GER) has increased from 19.5%
to 20%. This means the business is getting worse at controlling its general expenses.
Other than that, the Financial Expense Ratio (FER) has decreased from 12.8% to 10.5%. This
means the business is getting better at controlling its financial expenses in the period of
2012 to 2013.
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Financial Stability
During the 2012 to 2013 period, the Working Capital Ratio (WCR) has increased from 26:1
to 27:1. This means that the business’ ability to pay current liabilities with current asset is
getting better. In addition to that, the business has satisfied the minimum requirement of
2:1.
In addition to that, during the period of 2012 to2013, the Total Debt Ratio (TDR) decreased
from 45.3% to 44.6%. This means that the business total debt has reduced. In addition to
that, it has not gone over the maximum limit of 50%.
However, during the period of 2012 to 2013, the Inventory Turnover Ratio (ITR) increased
from 26.1 days to 27.7 days. This means that the business is selling its Inventory slower.
During the 2012 to 2013 period, the Debtor Turnover Ratio (DTR) increased from 152.3
days to 156 days. This means that the business is collecting its debt slower.
Finally, during the period of 2012 to 2013, the Interest Coverage Ratio (ICR) increased from
45.7 times to 52 times. This means the business ability to pay its interest is better. In
addition, it satisfies the minimum requirement of 5 times.
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Price Earning Ratio (P/E Ratio)
Microsoft’s current share price is $40.10 per share and its Earning Per Share (EPS) is $2.67.
P/E Ratio = $40.10
$2.67
= 15.02
This shows that the Price Earning Ratio (P/E Ratio) for Microsoft Corporation is 15.02. It
means that an investor who invests now will have to wait 15 years to recoup his investment.
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Investment Recommendation
Based on the calculations and the information provided, we will look at the profitable and
financial stability as well as the Price Earning Ratio of Microsoft Corporation for the years
2012 and 2013. From the profitability ratio, the Return on Equity shows more return from
investments which is good. Based on the Net Profit Margin, the company is better at
controlling its expenses which is also a good thing. However, the Gross Profit Margin
indicates that they are getting worse at controlling their Costs of Goods Sold which is bad.
On the other hand, the company’s ability in controlling its selling expenses has improved
based on the Selling Expense Ratio. The General Expenses Ratio, however, shows that the
company is getting worse at controlling its selling expenses, which is bad. Besides that, the
Financial Expense Ratio shows that the company is getting better at controlling its financial
expenses.
From the Stability Ratio, the Working Capital Ratio shows that the company is getting better
at paying its current liabilities with its current assets. Its Total Debt Ratio indicates that it
has reduced debts. However, its Inventory Turnover Ratio shows that the company is selling
its inventory slower. The Debtor Turnover Ratio shows that the company is collecting its
debts slower. Nevertheless, its Interest Coverage Ratio has shown that the company is
getting better at paying its interest expenses.
In conclusion, the company is a good company to invest in. It is financially stable and is able
to make good profit at the same time. However, its Price Earning Ratio is 15 which mean
that investors will have to wait for 15 years before recouping his investments. If the investor
is not conservative and is willing to wait for 15 years, then Microsoft is a very good company
to invest in.
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Appendix 2012
Average Owner Equity= 66363+57083
= 123446/2
= 61723
Average Inventories = 1137+1372
= 2509/2
= 1254.5
Average Debtors = 15780+14987
= 30767/2
= 15383.5
Selling Expenses = 13857+6193
= 20050
General Expenses = 9811+4569
= 14380
2013
Average Owner Equity= 78944+66363
= 145307/2
= 72653.5
Average Inventories = 1938+1137
= 3075/2
= 1537.5
Average Debtors = 15780+17486
= 33266/2
= 16633
Selling Expenses = 15276
General Expenses = 5149+10411
= 15560
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Income Statements for the years 2011, 2012 and 2013
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Balance Sheet for the years 2011, 2012 and 2013.
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Cash Flow Statement for the years 2011, 2012 and 2013
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Microsoft Share Price
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Reference List
Microsoft. (n.d.). CrunchBase. Retrieved May 23, 2014, from
http://www.crunchbase.com/organization/microsoft
Microsoft Officially Welcomes Skype. (2011, October 13). Microsoft Officially Welcomes Skype.
Retrieved May 23, 2014, from http://www.microsoft.com/en-us/news/press/2011/oct11/10-
13skypepr.aspx
Microsoft to acquire Nokia's devices & services business, license Nokia's patents and mapping
services. (2013, September 3). Microsoft to acquire Nokia's devices & services business, license
Nokia's patents and mapping services. Retrieved May 23, 2014, from
http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx
Skype to get 'real-time' translator. (2014, May 28). BBC News. Retrieved May 29, 2014, from
http://www.bbc.com/news/technology-27599373#Skype
Microsoft. (2014, May 1). Forbes. Retrieved May 29, 2014, from
http://www.forbes.com/companies/microsoft/
Microsoft introduces Surface Pro 3: the tablet that can replace your laptop. (2014, May
20). Microsoft introduces Surface Pro 3: the tablet that can replace your laptop. Retrieved May
29, 2014, from http://www.microsoft.com/en-us/news/press/2014/may14/05-20surfacepr.aspx
Financial Review. (n.d.). Income Statements. Retrieved May 25, 2014, from
http://www.microsoft.com/investor/reports/ar13/financial-review/income-statements/index.html
Financial Review. (n.d.). Balance Sheets. Retrieved May 25, 2014, from
http://www.microsoft.com/investor/reports/ar13/financial-review/balance-sheets/index.html
Financial Review. (n.d.). Cash Flows Statements. Retrieved May 25, 2014, from
http://www.microsoft.com/investor/reports/ar13/financial-review/cash-flows-statements/index.html
Quotes & Info- Yahoo! Finance. (2014, May 28). Quotes & Info- Yahoo! Finance. Retrieved May
29, 2014, from http://finance.yahoo.com/q?d=t&s=MSFT