The company taken for analysis is: Microsoft Corporation. The company has a history as follows: The revenue comes from developing a wide range of software products and services for all types of computing devices. The software products include operating systems like the Windows Series for personal computers, servers, and many other business solutions applications. The company also sells some hardware and gaming products like Xbox 360 gaming and even digital music and internet services like Bing, Windows Live, Microsoft Office Web Apps, and also the recent online advertising through the adCenter platform. Microsoft has consistently remained the top company in the industry with stake holder support seen through the higher value of the stock and ratings.
Did the company perform well? Why or why not?
To manage a portfolio it is necessary to look at the cash flow situation, and the profitability of the company and the ratios that are indicative of the company's financial health. Thus from the balance sheet it must be possible to find the liquidity and the profitability ratios and the state of the company in the market and the profit and loss and the future leverage factors must be gleaned to find the possible course of the company in the future. (Brentani, 2004)
The analysis of multiple ratios and the presentations from the balance sheet shows that the company has been doing well. The ratios are used for comparison of one company with another and also the comparison of the company's performance on a year to year basis. Using the ratios and the results of the balance sheets for 2010 and the half yearly statement for 2011, it can be shown that the company is progressing well. In 2008 the total assets was $69,597 and this rose to 86,113 by the first quarter of 2011. The net income is shown to have increased from 12,599 in 2008 to 18,760 by 2011. (Microsoft Corporation, 2010) It also shows that the growth of the company is possible in future.
What do the company's financial statements tell?
The general results as summed up by the company in the statement goes to show that the revenue increased from $60,420 in 2008 to 62,484 in 2010 while there was a fall of revenue in 2010 to 58,437 and the difference is estimated at -- 3%. (Ballmer, 2010) The differences from 2008 to 2011 has been upward but not in a steady manner. The percentage of change and the net asset position seen at the last balance sheet & documents shows that revenue increased mainly due to strong sales of Windows 7, for the year 2010, and this could be related to the market demand for the PC. The expenditure increases to about 3% more. This signifies that with the attempt to sell more the profitability deceases by the expenditure on marketing and increase in the administrative expenses of $304 million said to have gone up by 8% is blamed on many factors like a bad contract with Yahoo! (Nasdaq MSFT Company Financials, 2011)
The worst is the cost on revenue that went up to $240 million of about 2%, and the failure of the Xbox 360 console with component costs have been disproportionate which shows that costs and reductions in other costs is imperative. The growth of the company is just calculated to be about 3% based on its net profit for three years 2008-2011. This is arrived at by taking the overall gain for the three years and creating the percent value of the gains and finding the average. (Microsoft Corporation, 2010)
Thus the three percent growth is arrived at. Some other calculations like the earnings per share will show that the company repurchased some shares of about 380 million shares in 2010. This created the stockholders' equity at $46,175 in 2010 as opposed to $40,104 and in the periods in between the equity value was at the 3100 range shows that during the period the company was in financial difficulty. However the change in the figures towards a better rise show that the company is now picking up and going on to gather back its market share and financial liquidity. Cash flow from operations increased $5.0 billion, and cash used for financing increased to $5.8 billion. Cash used for financing decreased to $5.5 billion
The 'Profitability Ratios' that we can calculate is the profit margin is calculated as follows: Profit margin = net income / revenue based on this the percentage value for the years 2008, 2009, 2010 and 2011 (2 quarters show that)
2008: 542,000/14,569,000 =0.037202279
2009: 915,000 / 14,569,000 = 0.062804585
2010 25,013,000 / 23,150,000 =1.080475162
2011 28,071,000 / 14,569,000 =1.926762304 figures as per NASDQ (2011) collectively
The possible danger an investor ought to look for in this analysis is the continuous decrease in the profit margin. This is the important ratio for the investor and it shows if the company is profitable throughout. (Elmerraji, 2006) This shows a variable pattern. In 2008 the return was very less. Microsoft attributes it to the slump in the PC segment. It shows that the company is now making profit and breaking even.
What do the company's financial statements NOT tell you?
The turnover represents better business and the total asset turnover is an indicator of the stability of the company. This is obtained by dividing the net sales by the total assets. (Gibson, 2010) If this is done for the company it shows an increase of over 3% between 2008-2010 and over 4.5% in 2010-2011. However these figures may paint a rosy picture of the company but there are some more considerations for the investor that is not found in these figures. For example, the software turnover is completely dependent on the hard ware -- PC, laptop etc. And the changes in those markets cannot be gauged by the information provided by the financials. Will the market be steady? The second aspect is the competition and the position of Microsoft in the market. It is not known from these data. Further it is not possible to gauge the extent of the failure and consequent erosion of the profit in some of the ventures like Xbox and Bing and whether these are holding down the profits. Also it is not known how far the company can keep up with the demands of the future. These are the subjects of speculation and non-financial investigations.
Does the company's share price reflect the company's true value?
The value of the share can be based on the EPS which is the best indicator so far as the shares are concerned. While the fundamental analysis of the company will show the future possibility the actual benefit to the investor is shown by the PE ratio and the Earnings per Share or the EPS. As on 06/2011 for the company were 2.65. For the fiscal year 06/2012, the consensus mean EPS is 2.77, (Microsoft Corporation, 2011b) and the future projections as given by NASDAQ see table 1 appendix shows that the share prices are near about the company's true value. Like wise the PEG ratio is the Price Earnings ratio which would also show these features. (Microsoft Corporation, 2011a) Therefore it can be concluded that the stock price in this case indicate the status of the company.
Would you consider buying the company's shares? Why or why not?
Yes, the shares are quite a good investment for a long-term investment. Considering that Microsoft is still the giant in software and in future there will not be a company or event that can dislodge it from the position it now holds in the market, and the fact that the company has consistently given dividends (Microsoft Corporation, 2011b) and that the e price to earnings -- P/E ratio is quite in the range where investments…