Discounting and present value in financial analysis

Accounting and Corporate Finance

Is Microsoft more or less risky to the point-of-view of investors than two competitors (Google and Oracle)?

In assessing the relative level of investment risk in Microsoft relative to Google and Oracle, a series of financial analyses have been completed. Asset Management, Debt Management, Liquidity Indicators, and Profitability Rations have been calculated based on the accumulated Securities and Exchange Commission (SEC, 2007, et.al.) filings by each company compared in the analysis. Appendix 1 includes the results of financial ratio analysis for each of these companies for the years 2002 through 2006. The five years' analysis of these companies yields insights into the relative level of risk of investing in each of these respective companies. In addition to extensive financial ratio analysis, financial analysts who track Microsoft were also researched for their perspective on the relative level of risk in investing in this company. A recent report (Barnicle and Coss, 2007) provides insights into how Microsoft's latest operating system, Vista, is expected to have significant adoption in companies which have 5,000 employees or more (Page 2). To date, Vista has not performed to financial analyst expectations, and the assessment from PacificCrest signals a turn-around in demand for one of Microsoft's most visible product introductions of recent years. All this relates to risk in investing in Microsoft, as product introductions are the most critical revenue source for this company.

Assessing the relative risk of Microsoft as an investment begins with an assessment of profitability across each of the companies profiled. Return on Equity (ROE) Microsoft has grown from 15% from FY2002 to 31.42%in FY2006, more than doubling in value. Conversely ROE for Google has slipped from 57.29% for FY2002 sliding to 18.06% for FY2006. For Oracle, ROE has also slid from 36.5% for FY2003 to 25.26% in FY2007. From this specific financial ratio it is clear that Microsoft is performing significantly above their competitors in terms of managing the long-term value of shareholder's equity. Another critical profitability ratio, Return on Assets (ROA), Microsoft again shows exceptionally strong performance relative to Google and Oracle. For FY2002, Microsoft deliver 11.52% on asset utilization, rising to 18.1% for FY2006. Google's ROA was 34.74% for FY2002 dropping to 1.66% in FY2006. For Oracle, ROA also dropped, from 20.85% in FY2003 to 12.36% in FY2007. Oracle's many acquisitions during these years has significantly dropped ROA. Oracle acquired PeopleSoft, Siebel Systems, Retek, and several smaller software companies, which has also diluted their Return on Equity (ROE) as well.