April 14, 2022

From Microsoft’s financial statements, the company’s working capital is $95,749,000. Its current ratio is 2.08, while its’ debt ratio is 0.57. The earnings per share were 8.12, while the price-earnings ratio was 33.27. The stock price was acquired from the company’s stock price in June 2021. The total asset turnover ratio was 0.50, and the financial leverage was 2.35. Meanwhile, the net profit margin was 36.45%, and the return on assets was 0.18. Finally, the return on equity was 0.43.

            A year before, Microsoft had a working capital of $109,605,000 (current assets of $181,915,000 minus current liabilities of $72,310,000). Its current ratio is 2.52, while its’ debt ratio is 0.61. The earnings per share were 5.82, while the price-earnings ratio was 35.45. The stock price was acquired from the company’s stock price in June 2020. The total asset turnover ratio was 0.47, and the financial leverage was 2.55. Meanwhile, the net profit margin was 30.96%, and the return on assets was 0.15. Finally, the return on equity was 0.37.

            The official numbers for Microsoft are different because of how it is calculated. For example, average over periods are used, and the net income is annualized, resulting in different numbers.

            The table below summarizes these differences visually:

            Microsoft is currently financially healthy. A working capital of $95M means that the company can pay all of its’ bills or short-term obligations, and a high working capital also says that the company is efficient and liquid (Bloomenthal, 2021). This liquidity is further supported by the company’s current ratio above 1.0 and its’ debt ratio below 0.6. Additionally, Microsoft has decreased its debt ratio from 0.61 to 0.57, indicating that the company has paid off some of its’ asset financings. The company’s earnings per share have also increased, indicating the company has become more profitable. However, the price-earnings ratio has dropped because of the decrease in the weighted average shares outstanding and the decrease in company stocks’ market price.

            Financial statements are often enough to determine a business’s financial health. Microsoft has provided these statements. However, investors might still want to keep an eye on the company’s reputation and plans, as each move may either increase or decrease the company’s stock prices. For example, Microsoft stock prices decreased after it announced buying Activision (Kenwell, 2022). Other than this, no other additional information is needed.

Investing in a corporate bond is considered less risky than investing in a stock. Corporate bonds are “a type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate” (Chen, 2020). By investing in bonds, the business can grow its’ money steadily. However, there are occasions other businesses cannot pay back and may default. Therefore, it is essential to take note of a business’s corporate bond ratings through the “three U.S. rating agencies: Standard & Poor’s Global Ratings, Moody’s Investor Services, and Fitch Ratings” (Chen, 2020). For Microsoft, it could be an excellent way to raise money, provided that the company does its’ research before lending out to another business. Buying Microsoft bonds is an excellent move for investors to diversify their portfolios.

The third financial option is to invest $30 million in bonds. The business is from China and assembles computer components. The business has been caught using child labor in the past but claims it has stopped this practice. The bond this business is offering is a 10-year, 8% coupon, priced at a discount of $95 and a discount rate of 9%. This Chinese business is already ethically risky. If there is no verifiable information on whether the business still uses child labor, the company should not invest. The NPV of the bond is negative $425,297, while the coupon rate is 8% and the discount rate is 9%. This difference means that the bond has less value than the new bonds issued in the market.

Additionally, Microsoft can consider this company’s corporate bond ratings and financial statement, especially the company’s working capital. Before investing in this company, several questions are the following: “can this company pay its’ bills, including debt payments, in the short-term?” “How is this company doing through the years?” “What is this company’s liquidity, and what is the company’s general liquidity trend?”

            Capital equipment “is an article of nonexpendable, tangible property with a useful life of more than one year, and an acquisition cost of $5,000 or more per unit. The $5,000 value threshold includes the item itself, expenditures necessary to put the item in place, and ancillary charges such as taxes, duty, protective in-transit insurance, freight, and installation costs” (Princeton University, 2022). In Microsoft’s case, office furniture, vehicles, database systems, factory equipment, and the like are capital equipment. These items are necessary for Microsoft to be able to manage its’ system, manufacture products, and provide service.

The second financial option is leasing $25 million in equipment. The current equipment is efficient but is not sustainable and uses much electricity and creates a lot of wasted material. The assumptions from the lease are an annual cash flow of $4 million generated with equipment, a discount rate of 12%, and a 15-year useful life with no salvage value. Depending on the type of lease, the amount of $25 million in equipment may affect the company’s liquidity. For example, $25 million as a capital lease is essentially an asset, and the costs incurred in owning the asset are listed in the company’s liabilities, affecting the company’s liquidity. “Capital lease is in substance an installment purchase by the lessee” (Finance & Accounting Videos by Dr C, 2015). However, operating leases are like renting equipment. It does not add to a company’s assets or liabilities, but a lease can only be considered an operating lease if it is short-term and involves an ownership transfer.

A capital lease is “considered a purchase of an asset…entitling a renter to the temporary use of an asset…and is treated…as if it were actually owned by the lessee and is recorded on the balance sheet as such” (Hayes, 2021). The whole lease obligation of a capital lease will be reflected on the company’s balance sheet. While capital leases have advantages, these leases may make the company less favorable to lenders, as certain agreements of some leases may restrict borrowing or tie the company down to obligations. If possible, management may consider operating leases, as these leases do not affect the balance sheet and may keep the debt-to-equity ratios low (Tardi, 2021).

            The first financial option is the purchase of a $10 million building. The business wants to become more sustainable and environment friendly. Thus, it wants to invest in a building that is LEED-certified. However, the site houses a large, inactive gas station that sold gasoline and diesel fuel with four large fuel tanks and a leftover sizable repair facility that was last used 50 years ago. The previous owner tried to bring the site to LEED standards but failed because of the lack of funds. The current assumptions from this option are a $10 million cash purchase, generation of additional net profits after tax of $1.25 million per year, 20 years of the expected useful life of the building, salvage value of $1.5 million, and a discount rate of 10%. Immediately, the site’s clean-up seems time-consuming and risky for the company funds and as an investment. The cash purchase does not sound like a great move, as cash is liquid, and having less of it on hand may affect the company’s working capital and liquidity.

Additionally, there are several cheaper ways to implement sustainability in the company’s existing buildings. A few examples would be installing solar panels and LED lighting. According to Senseware (2015), a building does not have to be new to be efficient. Several retrofit methods for sustainability include real-time visibility of energy consumption, water efficiency, continuous HVAC commissioning, green roofs, indoor air quality, operations, maintenance optimization, load curtailment programs, space utilization management, virtual building automation system (BAS), and public visibility and engagement (Senseware, 2015).

Microsoft finances its’ operation through bonds, stocks, customers’ subscriptions, and product and service revenues. Additionally, the company has been successful because of its’ constant development of products, regardless of whether it is software or hardware. Microsoft also continues to acquire different companies such as Github and Activision. The company has also made its software a staple in every business. A concrete example is that every business and university uses Microsoft Office Word products. Finally, “part of their success has been their resilience and ability to respond to changing technologies, market demands, and business opportunities” (Ullman, 2018).

Short-term financing is often done to increase the working capital of a company. Short-term financing is a debt due in less than one year, taken to generate cash for the business and cover operating expenses, and is done through online loans, lines of credit, and invoice financing (Thakur, 2019). In addition, short-term financing is an integral part of working capital management. As stated in a previous paragraph, working capital management ensures that a company stays liquid as it acquires inventory through debt and sells the receivables back to its banker (Deutsche Bank, 2013). Microsoft’s working capital for this year is lower than the previous year, but its debt ratio also decreased. Currently, the company can make payments on its bills and short-term payables. However, if the company needs an extra cushion for any emergency, it can always take out a short-term loan.

Based on Microsoft’s trends and financial statements, the company will continue to do so in the future. Microsoft is currently financially healthy. A working capital of $95M means that the company can pay all of its’ bills or short-term obligations, and a high working capital also says that the company is efficient and liquid (Bloomenthal, 2021). Moreover, Microsoft’s numbers may fluctuate a bit each year, but the trend for the company remains upward. If one only looks at the company’s net income, it has continually increased in the last five years. The company is also doing well in terms of risk levels. As a result, the company’s total debt to equity has continued to lower in the past five years, currently at 0.41. The company’s return to assets has increased over the past five years, currently at 19.3 as of June 2021. Even the company’s receivable turnover has increased over the past five years. All these numbers indicate that the company manages its finances and risks well and will continue to do so in the future.

The second financial option of leasing $25 million in equipment seems to be the most ethical and beneficial to the company. It also aligns with Microsoft’s pledge to climate, being environment-friendly, and fair. The first option is risky as it involves a site’s clean-up, which may incur more expenses and is not justifiable when there are other alternatives to making a building sustainable. The third option of investing in bonds with a Chinese business that has used child labor in the past is also risky. If the allegations are still valid, they can cause damage to the company’s reputation and misalignment to the company’s pledge to society and the planet. 

References

Bloomenthal, A. (2021, May 3). What Does High Working Capital Say About A Company? Investopedia. https://www.investopedia.com/ask/answers/102815/what-does-high-working-capital-say-about-companys-financial-prospects.asp#:~:text=Understanding%20High%20Working%20Capital,the%20more%20efficiently%20it%20functions.

Chen, J. (2020, November 29). What Is a Corporate Bond? Investopedia. https://www.investopedia.com/terms/c/corporatebond.asp

Deutsche Bank. (2013). Working Capital Management explained. [YouTube Video]. In YouTube. https://www.youtube.com/watch?v=bHK77lbdyWA

Finance & Accounting Videos by Dr C. (2015). Operating vs Capital Lease [YouTube Video]. In YouTube. https://www.youtube.com/watch?v=U4aJlzp82Qs

‌Hayes, A. (2021, August 25). Capital Lease. Investopedia. https://www.investopedia.com/terms/c/capitallease.asp

Kenwell, B. (2022, January 18). Microsoft Stock Alert: Trading Shares After Activision Acquisition. TheStreet; TheStreet. https://www.thestreet.com/investing/trading-microsoft-msft-stock-acquisition-blizzard-acquisition

Mergent Online - As Reported : Microsoft Corporation. (2021). Snhu.edu. https://www-mergentonline-com.ezproxy.snhu.edu/companyfinancials.php?pagetype=asreported&compnumber=46247&period=Annuals&range=5

Princeton University. (2022). Capital Equipment. Finance and Treasury. https://finance.princeton.edu/buying-paying/buy-supplies-and-equipment/capital-equipment#:~:text=Capital%20equipment%20is%20an%20article,the%20item%20in%20place%3B%20and

Senseware. (2015). Top 10 Retrofit Methods for Sustainable Buildings. Senseware.co. https://blog.senseware.co/top-10-retrofit-methods-for-sustainable-buildings

Tardi, C. (2021, September 5). What Is an Operating Lease? Investopedia. https://www.investopedia.com/terms/o/operatinglease.asp#toc-what-is-an-operating-lease

Thakur, M. (2019, June 14). Short Term Financing. WallStreetMojo. https://www.wallstreetmojo.com/short-term-financing/

The Finance Storyteller. (2020). Working capital management [YouTube Video]. In YouTube. https://www.youtube.com/watch?v=c5iigcEppZw

Ullman, D. (2018, January 11). Why is Microsoft so successful? Computerworld. https://www.computerworld.com/article/3247650/why-is-microsoft-so-successful.html#:~:text=Founded%20in%201975%2C%20they%20are,market%20demands%2C%20and%20business%20opportunities.