SCHOOL OF ARCHITECTURE, BUILDING & DESIGN

Research Unit for Modern Architecture Studies in Southeast Asia

Foundation of Natural Build Environments (FNBE)

Basic Accounting FNBE 0145

Financial Ratio Analysis:

MICROSOFT

Group Members: Jake Sia Chyi Sern 0314396

Yap Yong Xing 0314715

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Table of Content

CONTENT PAGE

Cover page 1

Table of Content 2

Brief History of Business 3

Ratio Analysis of Business 4

Investment Recommendation 6

Appendix 7

Reference 12

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Brief History of Microsoft

Microsoft was founded by Bill Gates who was born on Oct28 1955. Even in his early school days, Bill Gates was already the top student in his class especially for maths and science. At the age of 13, he was introduced to computers. Together with his friend Paul Allen, they eventually skip classes just to find out more about computers by reading books and soon enough, they also started writing programs.

It was at the age of 13 that he claimed the title as one of the youngest programmer in the world and was hired by a company. But the company never paid them, seeing as they were just kids the company allowed them to use the computer anytime they want. When Bill Gates finished his schooling days, he enrolled into Harvard University where he went full time into the computer world. Around this time, they were already quite well-known in the city and were frequently hired to do fix bugs and to write programmes.

At the age of 20, Gates and Allen were ready to start their own company. They were able to arrange a meeting with Altair 8800, a popular electronics company. After that, they worked very hard into producing a programme for the meeting. During the meeting, the programme worked flawlessly. This made them famous. Their business kept spreading around the world and in 1981, they changed the name to Microsoft Inc. Eventually the market was glooming at around 1995. That was when Gates came up with a Microsoft browser for the internet and in a year’s time he published Internet Explorer to the market.

Then again by the end of 2000, Microsoft became the monopoly in the computer industry all because of the product called Microsoft Windows namely, Windows 98 and Windows 2000 and followed by Windows XP, Windows Vista and Windows 7 in 2009. Recently in 2012 and 2013 Microsoft launched Windows 8 which features apps and tiles. They also launched Windows 8.1 shortly afterwards, which advances the Windows 8 vision by providing cloud connectivity on various devices, plus some additional enhancements.

In 2012, Microsoft have received various awards such as ‘No. 1 Highest-Paying Company for Millennials, Millennial Branding and PayScale, Inc.’ and ‘Human Rights Campaign's (HRC) 2013 Corporate Equality Index rating’.

Recently in 2013, Microsoft once again managed to have received various awards such as ‘No. 1 on 12th Annual “Top 50 Employers” in Workforce Diversity for Engineering & IT Professionals Magazine’ and ‘Best Multinational Workplace in Europe for 6th consecutive year, Great Place to Work Institute’.

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Ratio Analysis on the Business Based on the Year 2012 & 2013

Profitability Ratios 2012 2013 Interpretation Return on Equity (ROE)

16978/72653.5 x 100=23.4%

21863/72653.5 x 100=30.1%

During the period 2012 to 2013 the ROE has increased from 23.4% to 30.1%. This means the owner is getting a higher return on his capital this year.

Net Profit Margin (NPM)

16978/73723 x 100=23.0%

21863/77849 x 100=28.1%

During the period 2012 to 2013 the NPM has increased from 23.0% to 28.1%. This means the business is getting better in controlling expenses.

Gross Profit Margin (GPM)

56193/73723 x 100=76.2%

57600/77849 x 100=74.0%

During the period 2012 to 2013 the GPM has decreased from 76.2% to 74.0%. This means the business is getting worse in controlling its cost of goods sold expenses.

Selling Expense Ratio (SER)

13857/73723 x 100=18.8%

15276/77849 x 100=19.6%

During the period 2012 to 2013 the SER has increased from 18.8% to 19.6%. This means the owner is getting worse in controlling the selling expenses.

General Expense Ratio (GER)

4569/73723 x 100=6.2%

5149/77849 x 100=6.6%

During the period 2012 to 2013 the GER has increased from 6.2% to 6.6%. This means the owner is getting worse in controlling the general expenses.

Financial Expense Ratio (FER)

9811/73723 x 100=13.3%

10411/77849 x 100=13.4%

During the period 2012 to 2013 the FER has increased from 13.3% to 13.4%. This means the business is getting worse in controlling the financial expenses.

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Stability Ratios 2012 2013 InterpretationWorking Capital 85084/32688

=2.60:1101466/37417=2.71:1

During the period 2012 to 2013 the WCR has increased from 2.60:1 to 2.71:1. This means the business' ability to pay off current liability is getting better .It satisfies the minimum 2:1 ratio

Total Debt 54908/121271 x 100=45.3%

63487/142431 x 100=44.6%

During the period 2012 to 2013 the TDR has decreased from 45.3% to 44.6%. This means the business' total debt level has gone down and is below 50%.

Stock Turnover 365÷(17530/1537.5)=32.0 days

365÷(20249/1537.5)=27.7days

During the period 2012 to 2013 the ITR has decreased from 32.0 days to 27.7 days . This means that the business is selling its stocks faster.

Debtor Turnover 365÷(36861.5/3126.5)=31.0days

365÷(38924.5/3126.5)=29.3days

During the period 2012 to 2013 the DTR has decreased from 31days to 29.3days. This means that the business is getting its debts faster.

Interest Coverage (380+16978)÷380=45.7times

(429+21863)÷42952.0times

During the period 2012 to 2013 the ICR has increased from 45.7 times to 52.0 times .This means the business has the ability to pay back the interest is better. It satisfies the minimum 5 times requirement.

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Share Price Earnings Ratio

Price/Earnings or P/E ratio

=Current share price/Earnings per share

=36.17/2.68

=13.49

With a P/E ratio of 13.49, Microsoft will have a fair amount of investors because they just have to wait for 13.49 years to claim their share.

Investment Recommendation

Profitability:

Based on the profitability ratio, we found that Microsoft is not doing so well in controlling its profitability ratios namely, the Gross Profit Margin (GPM), Selling Expense Ratio (SER), General Expense Ratio (GPM) and Financial Expense Ratio (FER).

Stability:

Based on the stability ratio, we found that Microsoft is doing very well in controlling its stability ratio with every area facing improvement from 2012 to 2013.

Price:

Based on the P/E ratio, we found that Microsoft has 13.49. This means that any investor will have to wait for 13.49 years to reclaim his share. We recommend investors to invest in Microsoft.

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Appendix

Income Statements

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(In millions, except per share amounts)

Year Ended June 30,          2013

         2012

         2011

Revenue $77,849  $73,723  $69,943

Cost of revenue 20,249  17,530  15,577

Gross profit 57,600  56,193  54,366

Operating expenses:        

Research and development 10,411  9,811  9,043

Sales and marketing 15,276  13,857  13,940

General and administrative 5,149  4,569  4,222

Goodwill impairment 0  6,193  0

Total operating expenses 30,836  34,430  27,205

Operating income 26,764  21,763  27,161

Other income 288  504  910

Income before income taxes 27,052  22,267  28,071

Provision for income taxes 5,189  5,289  4,921

Net income $21,863  $16,978  $23,150

Earnings per share:        

Basic $2.61  $2.02  $2.73

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Diluted $2.58  $2.00  $2.69

Weighted average shares outstanding:         

Basic 8,375   8,396  8,490

Diluted 8,470   8,506  8,593

Cash dividends declared per common share $0.92   $0.80  $0.64

See accompanying notes.

COMPREHENSIVE INCOME STATEMENTS

(In millions)

Year Ended June 30, 2013   2012   2011

Net income $21,863  $16,978  $23,150

Other comprehensive income (loss):        

Net unrealized gains (losses) on derivatives (net of tax effects of $(14), $137, and $(338)) (26)

 255

 (627)

Net unrealized gains (losses) on investments (net of tax effects of $195, $(210), and $567) 363

 (390)

 1,054

Translation adjustments and other (net of tax effects of $(8), $(165), and $205) (16)

 (306)

 381

Other comprehensive income (loss) 321  (441)  808

Comprehensive income $22,184  $16,537  $23,95

Balance Sheets

(In millions)      

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June 30, 2013  2012

Assets     

Current assets:     

Cash and cash equivalents $ 3,804  $ 6,938

Short-term investments (including securities loaned of $579 and $785) 73,218  56,102

Total cash, cash equivalents, and short-term investments 77,022  63,040

Accounts receivable, net of allowance for doubtful accounts of $336 and $389

17,486  15,780

Inventories 1,938  1,137

Deferred income taxes 1,632  2,035

Other 3,388  3,092

Total current assets 101,466  85,084

Property and equipment, net of accumulated depreciation of $12,513 and $10,962

9,991  8,269

Equity and other investments 10,844  9,776

Goodwill 14,655  13,452

Intangible assets, net 3,083  3,170

Other long-term assets 2,392  1,520

Total assets $ 142,431

  $ 121,271

Liabilities and stockholders' equity     

Current liabilities:     

Accounts payable $ 4,828  $ 4,175

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Current portion of long-term debt 2,999  1,231

Accrued compensation 4,117  3,875

Income taxes 592  789

Short-term unearned revenue 20,639  18,653

Securities lending payable 645  814

Other 3,597  3,151

Total current liabilities 37,417  32,688

Long-term debt 12,601  10,713

Long-term unearned revenue 1,760  1,406

Deferred income taxes 1,709  1,893

Other long-term liabilities 10,000  8,208

Total liabilities 63,487  54,908

Commitments and contingencies     

Stockholders' equity:     

Common stock and paid-in capital – shares authorized 24,000; outstanding 8,328and 8,381 67,306

 65,797

Retained earnings (deficit) 9,895  (856)

Accumulated other comprehensive income 1,743  1,422

Total stockholders' equity 78,944  66,363

Total liabilities and stockholders' equity  $ 142,431

   $ 121,271

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Reference

Microsoft.com.

Income Statements

In-text: (Microsoft.com, 2014)

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Bibliography: Microsoft.com. (2014). Income statements. [online] Retrieved from:

http://www.microsoft.com/investor/reports/ar13/financial-review/income-statements/index.html [Accessed: 22

Jan 2014].

Microsoft.com.

Balance Sheets

In-text: (Microsoft.com, 2014)

Bibliography: Microsoft.com. (2014). Balance sheets. [online] Retrieved from:

http://www.microsoft.com/investor/reports/ar13/financial-review/balance-sheets/index.html [Accessed: 22

Jan 2014].

windows.microsoft.com.

A history of Windows - Microsoft Windows

In-text: (windows.microsoft.com, n.d.)

Bibliography: windows.microsoft.com. (n.d.). A history of windows - microsoft windows. [online] Retrieved

from: http://windows.microsoft.com/en-us/windows/history#T1=era8 [Accessed: 13 Jan 2014].

Google.com.

microsoft current share price - Google Search

In-text: (Google.com, 2014)

Bibliography: Google.com. (2014). Microsoft current share price - google search. [online] Retrieved from:

https://www.google.com/search?

q=microsoft+current+share+price&oq=microsoft+&aqs=chrome.0.69i59j69i57j69i60l2j69i59l2.2870j0j8&sour

ceid=chrome&espv=210&es_sm=122&ie=UTF-8 [Accessed: 22 Jan 2014].

Microsoft.com.

Awards and Recognition

In-text: (Microsoft.com, 2014)

Bibliography: Microsoft.com. (2014). Awards and recognition. [online] Retrieved from:

http://www.microsoft.com/en-us/diversity/programs/awards.aspx### [Accessed: 24 Jan 2014].

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