This is a brief DuPont analysis on Microsoft. Microsoft is in an industry that makes it more difficult to apply DuPont analysis averages to determine its financial health. Microsoft obviously operates much differently than many brick and motor business such as retail establishments. However, when compared to companies in similar industries then this can help identify different aspects to the company and the industry. For example, Apple's profit margin is roughly 24% while MS was calculated to be only 22%. While the difference is only a couple of percent, both MS and Apple have billions in assets and revenues so 2% makes a rather large difference.
Microsoft DuPont
DuPont Analysis of Microsoft
DuPont Analysis Overview
The DuPont Analysis is a type of analysis that provides a more detailed look at a company's Return on Equity (ROE) by breaking it into three main components. The three components are profit margin, asset turnover and a leverage factor. By separating the ROE into these smaller categories, investors can quickly identify how effectively or efficiently a company is using their resources. If any of the three categories is performing poorly then this can lower the overall figure. To calculate a firm's ROE through Du Pont analysis, multiply the profit margin (net income divided by sales), asset turnover (sales divided by assets) and leverage factor (total assets divided by shareholders' equity) together - the higher the result, the higher the return on equity.
Microsoft's Profit Margin
Profit Margin = net income / total revenues
Income Statement
Revenue (ttm): 72.93B
Net Income: 15.46B
Profit Margin
15.46 / 72.93 = 22%
Microsoft's Asset Turnover
Asset turnover = revenue / assets
Revenue (ttm): 72.93B
Assets: 343.30B
Asset turnover = 72.93 / 556.71 = 13.1%
Microsoft's Financial Leverage
Financial Leverage = Assets / Equity
Assets: 68.10B
Equity: 72.58B
Financial Leverage = .94
Summary
Profit Margin = 22%
Asset turnover = 22.7
Financial Leverage = .94
Microsoft is in an industry that makes it more difficult to apply DuPont analysis averages to determine its financial health. Microsoft obviously operates much differently than many brick and motor business such as retail establishments. However, when compared to companies in similar industries then this can help identify different aspects to the company and the industry. For example, Apple's profit margin is roughly 24% while MS was calculated to be only 22%. While the difference is only a couple of percent, both MS and Apple have billions in assets and revenues so 2% makes a rather large difference. However, the largest difference between MS and Apple would be in regard to return on assets. Apple is currently making over 21% on their assets while Microsoft is only making 13.1% on their assets. Therefore, Microsoft must find a strategy to make their assets more productive if it wishes to keep pace with its industry leaders.
There are many potential strategies that Microsoft can pursue. Microsoft has diversified its product line-up gradually for many years. The company has the most popular operating system, the most popular office productivity software suite, and Microsoft has entered many new markets as well. Apple's success relative to Microsoft has come from their ability to enter the hardware arena. Microsoft has had moderate success in this area with some of its products such as the Xbox -- one market that Apple does not compete in. However, Apple has dominated the smartphone segment while Microsoft has only offered an operating system.
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