This paper tries to conduct a comparative portfolio analysis for Microsoft Corporation, based on the most recent Annual 10-K Filings made by the company to the Securities & Exchange Commission for FY2011. The base year chosen is FY2010, so as to allow for a clear comparative depiction of both current & historical performance. The analysis, based on the study of the Income Statement, Balance Sheet, Statement of Cash Flows, & Statement of Changes in Stockholders’ Equity, quantifies the annual performance using the most important accounting ratios that provide a summarized diagnosis of the overall current financial health of the software giant, and a prognosis of its future financial growth. Some of the ratios used include the current ratio, debt-equity ratio, and the P/E ratio, among others, most of which, though do point towards a sound financial health, but, simultaneously also indicate low profit margin being faced currently, due to a high leverage position, which though at a macro-level is not sufficient to label the company as an unprofitable venture, or indicate an alarming or a crisis-laden situation but definitely demands management’s attention.
Comparative Analysis of Microsoft Corporation’s Portfolio
Microsoft’s Balance Sheet for FY2011 reveals working capital increase of 56.2% from FY2010, indicative of both its efficiency and short-term financial health, making it an attractive investment destination for conservative investors. A 59% jump in net quick assets during the same comparative period also verifies the adequacy of this figure, projecting Bill Gates’ brainchild as a well-positioned company fully capable of meeting its current liabilities. However, a surprise spike up of debt-equity ratio by 4% FY2011, signals a high leverage position for Microsoft indicating excess debt-dependency for every dollar invested by stockholders, despite having cash balances, that make up 70% of its current assets and almost 50% of total assets for FY2011.
However, without insider information the implications of such large cash amounts cannot be commented upon, except that besides signifying a sound financial position and funding any contingent future needs, it could also invite scrupulous and unproductive decisions by the senior management, like diversification into an unrelated and risky business, that might backfire in the future. Further, a glance through the income statement, indicates a shrinking gross & operating profit margin, despite the overall bottom-line in the form of net profit margin minimally increasing by 3% from the previous year. Even the current P/E ratio of 9.52 has declined from 11 last year, which as per industry standards, reflects the ability of a business to generate profits in the future, and therefore, forms the basis for investment decisions of most of the investors, though, it is also equally true that a historical P/E figure is just a guide, and not a guarantee of projected future performance.
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Yahoo Finance. Microsoft Corporation (MSFT) – NasdaqGS [Data file]. Retrieved from http://finance.yahoo.com/q/hp?s=MSFT&a=05&b=30&c=2010&d=05&e=30&f=2010&g=d
Yahoo Finance. Microsoft Corporation (MSFT) – NasdaqGS [Data file]. Retrieved from http://finance.yahoo.com/q/hp?s=MSFT&a=05&b=30&c=2011&d=05&e=30&f=2011&g=d